Retirement fund members who invested in more aggressive portfolios delivering poor returns during certain market cycles may be tempted to make emotional, short-term decisions.
Financial advisers play a key role in helping members to avoid hasty portfolio changes that reduce the probability of reaching their long-term retirement goals.
Many South Africans face a bleak retirement because they are either not saving enough, are following an inappropriate investment strategy or making knee-jerk decisions when markets are under pressure.
One way of increasing retirement savings is to target returns that are well above inflation. Aggressive portfolios typically target inflation plus 7percent over seven-year rolling periods. Our modelling shows it’s necessary to invest up to 85percent of the assets in local and global equities and property in order to generate the required return.
With this, however, comes learning to live with the short-term volatility associated with these assets.
While these growth assets may be volatile, they are an essential part of the asset mix needed to deliver inflation-beating returns.
Historical performance shows they usually outperform inflation by a good margin over the long term. However, over the short term, aggressively-constructed portfolios can deliver very low, or even negative, returns.
Professional financial advice is critical in helping members to understand the implications of moving their assets between portfolios when disappointed by short-term returns.
If members stay invested, there is a good chance they will recover the lost value. However, selling means there is no chance the loss will be recouped.
Members’ retirement fund savings are often invested into many listed companies, which are unlikely to do as well as what we would see when the economy is doing well.
This would certainly have a negative impact on their retirement investments, especially if the low economic growth becomes a long-term trend.
Retirement fund trustees, asset managers and asset consultants would ensure that investments are well diversified to achieve the long-term goals to soften the blow of these short-term fluctuations.
Outcome-based investing doesn’t focus only on the inflation-plus targets of the various portfolios, but also on the volatility of the journey. Solutions are crafted by considering members’ needs and risk tolerance, defining a goal (usually an inflation-plus objective) and an appropriate time frame to achieve the objective.
Finally, while it’s important for members to have a solid long-term investment strategy, which often means riding out the market “ups and downs”, it’s also important to regularly review this strategy with a financial adviser.
This is particularly important as members approach retirement. Members should work closely with their financial adviser to align their investment strategy before retirement with their strategy during retirement.
Financial advisers need to remind members in aggressive portfolios that, despite market volatility and poor short-term returns, members need to keep calm and stay the course.
Nashalin Portrag is the head of FundsAtWork at Momentum Corporate.
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