You need a long-term strat­egy to cope in these tough times

You should not as­sume that the best way to pro­tect your wealth from the ef­fects of credit rat­ing down­grades and the eco­nomic down­turn is to rush into cash. re­ports

Weekend Argus (Saturday Edition) - - FRONT PAGE -

AS AN in­vestor, you are prob­a­bly strug­gling to di­gest the flow of po­lit­i­cal and eco­nomic de­vel­op­ments, both lo­cally and in­ter­na­tion­ally, and have re­cently had to grap­ple with the news that South Africa’s gross do­mes­tic prod­uct con­tracted 0.7% in the first quar­ter of this year, which saw the coun­try slip into its sec­ond re­ces­sion in eight years. Add to this the news of the re­cent Moody’s down­grade of South African debt, and you are prob­a­bly won­der­ing about the health of your in­vest­ments.

Dave Mohr, the chief in­vest­ment strate­gist at Old Mu­tual Multi- Man­agers, of­fers some in­sight into the fi­nan­cial land­scape in­vestors find them­selves in­hab­it­ing.

“Af­ter the first bout of rat­ings down­grades in April, ev­ery­body ex­pected two things to hap­pen: the rand would col­lapse and in­ter­est rates would rise. How­ever, we’ve now suf­fered mul­ti­ple down­grades, and none of these things has oc­curred,” Mohr says.

“Suf­fer­ing a down­grade there­fore doesn’t nec­es­sar­ily mean lo­cal in­vest­ment mar­kets will col­lapse. This is very much de­pen­dent on mar­ket ex­pec­ta­tions – a down­grade would have likely al­ready been priced into the mar­kets be­fore it took place – and the broader global cir­cum­stances, which are pos­i­tive for emerg­ing mar­kets. In­vestors must there­fore be care­ful not to base their in­vest­ment strat­egy solely on the ef­fects of a down­grade.”

Fran­cois le Roux, an ac­cred­ited Cer­ti­fied Fi­nan­cial Plan­ner at Pri­vate Wealth Man­age­ment, a di­vi­sion of Old Mu­tual Wealth, says all in­vestors have cause to be con­cerned, but some will be more af­fected than oth­ers. The strug­gling econ­omy and the down­grades will not af­fect all in­vestors equally – it de­pends where you are in­vested and for how long.

Le Roux says: “In­vest­ing is not a one-size-fits-all ap­proach, and a strat­egy that ap­plies to, say, a younger in­vestor who is sit­ting on a sub­stan­tial amount of hard­earned af­ter-tax cash would not ap­ply to a typ­i­cal re­tiree.”

Le Roux says if you have a large amount of af­ter-tax cash and want to in­vest for the long term, you would be ill-ad­vised to keep that money in a lowrisk in­vest­ment, such as a fixed de­posit or money-mar­ket fund. The same goes for a young work­ing man or woman who is sav­ing for re­tire­ment, who may want to know whether he or she is ac­cu­mu­lat­ing re­tire­ment cap­i­tal at a steady enough pace.

He says many clients are com­plain­ing about the low re­turns on higher-risk eq­uity-dom­i­nated in­vest­ments, say­ing their money would be bet­ter off in the bank. But long-term in­vestors need to look past the cur­rent mar­ket malaise, be­cause they have time on their side, and “the one thing we know is that you need to in­cur risk for in­fla­tion-beating re­sults”.

You can­not stay in­vested in cash for too long, be­cause the “sums sim­ply do not add up”, Le Roux says.

Even if you are in the high-net­worth cat­e­gory, with suf­fi­cient put away for your re­tire­ment and with money left over, there may still be room for tak­ing on some in­vest­ment risk, for which your heirs will be grate­ful.


Re­tirees have the great­est cause for con­cern in times of mar­ket volatil­ity, Le Roux says, wor­ry­ing about the ef­fects on their re­tire­ment cap­i­tal and ul­ti­mately their in­come.

Pen­sion­ers re­ly­ing on an in­come from liv­ing an­nu­ities may have to ad­just to the cur­rent low- re­turn en­vi­ron­ment, but must be sure that they don’t de­rail what may be an in­vest­ment strat­egy specif­i­cally de­signed to weather neg­a­tive mar­ket con­di­tions. You must ask your­self, he sug­gests, whether it is the strat­egy that’s wrong, or whether it is the mar­kets. Nor­mally, it would be the lat­ter.

A fi­nan­cial plan­ner can help you in this sit­u­a­tion by look­ing at your draw­down strat­egy.

A so-called dy­namic strat­egy would see you ad­just­ing your draw­down (what you with­draw an­nu­ally from your sav­ings as in­come) in line with mar­ket con­di­tions, in which case you might have to go with­out an an­nual in­fla­tion- linked es­ca­la­tion to your in­come, or even con­sider tight­en­ing your belt and ac­cept­ing a slight drop in in­come.

If you are draw­ing down a re­al­is­tic 4% to 5% of your re­tire­ment cap­i­tal a year (which could need fur­ther ad­just­ment in line with your gen­der and age, and how much cap­i­tal you have) and you are in­vested in a typ­i­cal bal­anced re­tire­ment port­fo­lio, the con­sen­sus opin­ion is that you are un­likely to suf­fer cap­i­tal loss over the long term, Le Roux says. He says fur­ther guid­ance on draw­downs can be taken from the ta­ble is­sued by the As­so­ci­a­tion for Sav­ings & In­vest­ment SA, sug­gest­ing safe draw­down rates in var­i­ous sce­nar­ios.

But what if there is a fur­ther down­grade or mar­kets con­tinue con­tract­ing? If the out­look is for on­go­ing low re­turns, your plan­ner may have to re­model your in­vest­ment strat­egy.

If things start look­ing re­ally nasty, he says, an op­tion may be to switch a por­tion or all of your re­tire­ment cap­i­tal to a guar­an­teed life an­nu­ity. This re­moves the in­vest­ment risk and guar­an­tees a life-long in­come, but comes with other re­stric­tions, which calls for in­put from your plan­ner.

“You, the in­vestor, need to de­ter­mine what monthly in­come you re­quire to sus­tain your stan­dard of liv­ing over time. Once you have es­tab­lished a clear in­come goal, you will ap­pre­ci­ate that your cap­i­tal needs to gen­er­ate a cer­tain min­i­mum re­turn to fund your life­style, cor­re­spond­ing to the in­vest­ment risk you need to take. You can then be guided in how to con­struct a port­fo­lio with an ap­pro­pri­ate as­set al­lo­ca­tion to de­liver this re­turn over time, us­ing strate­gies that target a spe­cific re­turn above in­fla­tion. Only once an in­vestor has ar­rived at this point in our ad­vice-led process, can we start look­ing at the level of in­vest­ment risk they are pre­pared to in­cur and make the nec­es­sary ad­just­ments to com­plete the process.”

While un­cer­tainty in the lo­cal en­vi­ron­ment re­mains, and emo­tions run high as a re­sult, Le Roux says that, in­stead of com­pound­ing the prob­lem by con­sid­er­ing switch­ing to “safer” in­vest­ments, you should be clear about your long-term fi­nan­cial strat­egy and un­der­stand what you need to achieve your goals.

“A sound fi­nan­cial plan­ning process can go a long way to bring more cer­tainty to the equa­tion. An ac­cred­ited fi­nan­cial plan­ner will as­sist in find­ing the most ap­pro­pri­ate, tai­lored in­vest­ment strat­egy to match your in­come needs, while also keep­ing risk tol­er­ance in mind.”

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