SAVINGS MONTH FEATURE
31 July 2019
NASHALIN PORTRAG Head: FundsAtWork, Momentum Corporate
Avoiding portfolio changes will help retirement outcomes
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etirement fund members 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 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 they make knee-jerk decisions when markets are under pressure. One way of increasing retirement savings is targeting returns that are well above inflation. Aggressive portfolios typically target inflation plus 7% over seven-year rolling periods. Our modelling shows it’s necessary to invest up to 85% of the assets in local and global equities and property to generate the targeted 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. Members invested in these types of portfolios need to take comfort in the fact that the portfolio is highly likely to recover and deliver inflationbeating returns over the long term. However, members often overreact and make an emotional decision to move their assets to another portfolio. Professional financial advice is critical in helping members 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. Also, selling and ‘locking in losses’ means having to re-enter the market with an investment that has decreased in value. Global research over many years
shows that investors who stick to a carefully-constructed, long-term investment strategy and avoid kneejerk decisions when returns in the short term are poor, outperform investors who make too many changes based on short-term market volatility. Members’ retirement fund savings are often invested into many listed companies that 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. The average retirement fund member will therefore have to invest more to reach their goal of a comfortable retirement. However, if a retirement fund follows an outcome-based investment strategy, the fund would make provisions for short-term fluctuations in investment values. 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 shortterm 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 timeframe to achieve the objective. The approach improves the probability of the portfolio delivering on its ultimate objective and members achieving their desired retirement outcome. 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.
24 WWW.MONEYMARKETING.CO.ZA
Savings Month: Beware of these online savings scams In the spirit of Savings Month, Phiko Peter, client relationship manager at Allan Gray, warns investors to be aware of digitally-driven investment scams.
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esearchers claim that technology make us prone to seeking instant gratification. This impatience is extended to investing: We want great and immediate returns. This makes us more susceptible to fraudsters who sell get-rich-quick schemes using online channels. The new age pyramid scheme Traditional pyramid schemes have been given a digital makeover. These schemes are administered on messaging platforms like WhatsApp, and promise ever-higher returns as you sign more people up. With a reported 1.5 billion active users at the start of 2019, WhatsApp has proven useful for con artists, who can encourage recruitment with relative anonymity. The money-flipping scam Money-flipping scams have ripped off local investors through social networks and promise to compound your money over a short period. Victims are convinced to send funds to a scammer who promises excellent returns. These investment opportunities are often sold as forex trading, binary options or offshore property opportunities. A scammer will create a social media profile showcasing a luxurious lifestyle, thus positioning themselves as a successful and legitimate investor. Scammers may even supply detailed investment reports. Once an investor requests a withdrawal, they are met with delays or asked for more money to release the funds. This escalates until the scammer deletes their account and ceases all contact.
It happens to the best of us The New York Times bestselling author, psychologist and speaker at the upcoming Allan Gray Investment Summit 2019, Maria Konnikova, believes that anyone is vulnerable, “It’s not who you are, but where you happen to be at this particular moment in your life.” Consumers facing financial strife are most vulnerable. Konnikova offers a simple tip: If someone is manipulating your emotions to get some cash, that is absolutely a con artist. Scam-proof your investment approach There are a few red flags to look out for with new investments: • An investment that requires you to recruit new investors to realise the return on your investment is a pyramid scheme. Be wary of tiered investments that classify investors or have multiple levels (e.g. bronze, silver, gold, platinum and diamond). • If you don’t understand how an investment product generates returns, you should be cautious. • Fraudsters want to create a sense of urgency to limit the amount of time you spend researching the potential investment. Anything sold as a “oncein-a-lifetime opportunity” should be avoided. • Consider the investment manager’s experience. Scammers will promise great returns without a real track record. • If the investment is not registered with a financial body, like the Financial Sector Conduct Authority, it is not regulated. You should also contact financial bodies to verify the registration of any financial entity that is relatively new or not well established. • If it seems too good to be true, then it probably is. Trust your gut. Investors can fall prey to scammers because they do not have a solid financial plan. An independent financial adviser can explore your unique set of circumstances and will implement a tailored long-term investment strategy to help you reach your financial goals. Allan Gray will be presenting at the Allan Gray Investment Summit in Johannesburg and Cape Town in July 2019. To book tickets, visit www.investmentsummit.co.za
Phiko Peter, Client Relationship Manager, Allan Gray
