Investors: learn the art of patience
THE RISK OF NOT TAKING ENOUGH RISK Trying to time the market is a mug’s game.
For retirees in living annuities (LAs), the three years to mid-2017 was a very tough period. A conservative balanced-type strategy delivered roughly 6% per annum over the period and 4% over one year. Inflation likely ate away at portfolios even before drawdowns were accounted for. Why subject yourself to the volatility in share exposure, if you can do better investing in a money market or income-type fund, many asked?
Elize Botha of Old Mutual Unit Trusts says following the axing of former Finance Minister Pravin Gordhan in March, the firm saw a lot of activity across its unit trust book and significant outflows. “We actually saw an uptick and across our book we saw people just switching.”
She says switching didn’t only involve moves to money market or income-based funds – sometimes investors deemed sitting in cash “safer”.
But after three years of muted returns, and despite on-going warnings that investors had to adjust their return expectations, a Coronation survey showed the average investor’s return expectations for its income and growth funds were broadly in line with the expectation for long-term growth funds, which take on significantly more risk.
“In reaction, many frustrated investors across the industry have moved their savings away from income-and-growth funds which have exposure to shares. An estimated R20 billion has been withdrawn over the past year, and a lot of the money has ended up in more conservative options, including managed income funds and cash deposits,” Coronation’s Pieter Koekemoer writes in the Corrospondent. David Gluckman at Sanlam Employee Benefits says financial advisors assisting LA policyholders would have had lots of complaints, as retirees saw their capital eroded in a muted return environment. Projections of how long retirees’ capital would last would have been revised downwards in many instances.
A reduction in a retirement fund’s capital value is an immediate problem post-retirement, he says. It’s compounded by the average replacement ratio (portion of your final salary before retirement that you can sustainably replace in retirement) being around 30%.
While LAs are good products for the right clients, bad market conditions in early retirement significantly increase a retiree’s chances of running out of money.
But patience is a virtue. Fast-forward four months and by end October, investors who remained invested in the same conservative balanced fund-type strategy would have seen returns recover to roughly 11% over one year and 8% per annum over three years.
Botha says investors are missing out on significant opportunities by reacting nervously and switching to more conservative portfolios.
“But the silent killer to any wealth is inflation…. The longevity factor is becoming real and it is going to be an increasing issue,” she says.
Even in retirement a portion of an investor’s capital still needs exposure to growth assets if they want to ensure the money lasts, she says.