This retirement threat is also one of the hardest to manage

Poor returns at the wrong time can upset your plans.
Considerable exposure to stocks is necessary for most investors, but the downside of market volatility needs to be managed. Picture: Shutterstock

Any retirement plan has to make a number of assumptions. One of those is the long-term return you can expect from your investments.

As people are living longer, and generally not saving enough, the returns they need to earn on their money are also quite high. This means that most investors, both before and after retirement, need to keep a large exposure to the stock market. That is, after all, where the best long-term returns can be earned.

Read: How should you invest after retirement?

This does, however, introduce a problem: the stock market is inherently volatile in the short-term, and returns from equities don’t come in a straight line. This means plans that assume a certain yearly return can be disrupted if periods of particularly poor returns happen at inopportune times. This is true both before and after retirement.

It’s all in the timing

The graph below illustrates what happens in the case of two investors, both of whom save 10% of their salary for 40 years, with increases of 3% per annum. For investor A, there is a big market drop ten years after they start. For investor B, the same drop happens ten years before retirement.

Source: Schroders (click to enlarge)

The difference is substantial. The large drawdown shortly before retirement has a much bigger impact.

“If something bad happens in those last ten years before someone retires, the chances are they are not going to have enough time to make up that difference,” explains Lesley-Ann Morgan, head of multi-asset strategy at Schroders.

A similar problem presents itself after retirement. A large loss early on can have a lasting impact.

The graph below shows how three investors, each starting with $100 000 and drawing $9 000 per year, see their money depleting at different rates because of the sequence in which their returns are generated. In all three cases, the average return is 7% per year, but having a large drawdown before a large increase means the capital depletes far more quickly than if the sequence is reversed.

Source: Schroders (click to enlarge)

The problem this poses, of course, is that investors have no control over the stock market. They also have no way of accurately predicting future returns. So how can they manage this risk?

The importance of diversification

“Having a wider variety of asset classes in your portfolio helps,” says Morgan.

“Equities are not always the hero or the villain. There are different asset classes you can invest in to protect a portfolio or get growth.”

This diversification is crucial in any portfolio. Both before and after retirement, investors must have exposure to growth assets like stocks, but they need to manage the risk by also considering all of the tools available to them, including bonds, listed property, cash, preference shares and commodities.

Just diversifying into different asset classes is not, however, sufficient on its own. This is because when there is a serious dip in the market, it can happen that all asset classes fall, leaving investors essentially unprotected.

“A problem with multi-asset funds is that when you have a market event like Nenegate [the firing of former finance minister Nhlanhla Nene, which could have pushed South Africa over the edge], the correlation of all assets tends to spike,” explains Len Jordaan, head of ETF (exchange traded fund) distribution at Absa. “Those kinds of portfolios may provide you with very poor diversification when you need it the most.”

Seeking alternatives

This highlights the need for alternative strategies. One option is hedge funds, which have the benefit of being able to take short positions on the market. This means that if prices go down, they can actually benefit, and therefore lower the risk on the downside.

Read: There’s more to diversification than going offshore

Another is structured products that provide some degree of capital protection. These allow investors to enjoy exposure to the performance of the stock market, but at much lower risk.

Read: SA structured products deliver mixed results

A third option is targeted volatility funds, which mainly hold stocks, but will switch to cash when market volatility increases beyond a certain limit.

Read: What are targeted volatility funds?

“There is a 90% correlation between spikes in volatility and equity drawdowns,” explains Jordaan. “So these products capture most of the upside of the equity market, but protect you by moving into cash when that volatility kicks in and you would be realising losses.”

These different strategies will suit different individuals, depending on their requirements. Investors should therefore fully apprise themselves of how they work, what they are trying to achieve and the outcomes that they can expect.

“Finding the right solution for the right market is part of the answer, but as an individual you also need to make sure that you understand what you have bought,” says Morgan.

“You also need to appreciate that having hard downside protection is an insurance policy and, like any insurance policy, you have to pay a premium. So you need to understand the impact on the return.”



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I trust that the owners of Moneyweb didn’t hand over any cash for this nonsense?
Good Lord, I was in primary school and I could already see that the future was totally unpredictable and now in my 73rd year I’m reading some ‘insight’ from a financial expert nogal that the future is…wait for it folks:-Unpredictable. Wow!
Shouldn’t this financial person be nominated for the Nobel in Economics or something?
Maybe he’s handing out Financial Planning for new retirees? One has to smile..or maybe cry?

Thanks for article the Patrick. I guess the message here, although missed by some, is that there are risks in investing that can, and should, be managed. Multi-asset is one, although this strategy may be flawed at times. Target volatility is new way of looking at things.

If that was your only take away from the article, then I can see why you are disappointed. Maybe read a bit harder? Or bless us with some of your own work.

There is a far, far, far bigger risk for residents of African socialist republics led by liberation movements than a mere 20% drop in the markets. In 1980, just before independence, a Rhodesian dollar was at parity with the pound sterling.

Parity. Let that sink in. 1 Rhodesian dollar = 1 pound.

So there you were, a new Zimbabwean, thinking your pension would be OK. The day you retired, after the year 2000, a trillion Zim dollars were worth all of 40 US cents. Your pension was less than worthless.

The above is the real risk here in Africa.

I agree,again, without discussing above in highly financial or technical terms, my view for retirees are simple, the pot you invest to draw an income from will be containing the 4 basic elements of cash, bonds, property and equities, you need to determine how much I come (interest and dividends) this portfolio actually return and only draw on that income, leaving the growth assets in totality and only transfer portion to bonds and cash in upmarket? Retirees who can not follow this haven’t saved enough and their draw down rates are too high for sustainability, that is, any draw dow more than 3.5% is too high?

@ Invictus.

Considering that the ANC is repeating all the errors that led to the total collapse of Zimbabwe, (no lessons learn) with the benefit of hindsight what should or could one have done for protection in Zim. Kruggerrands? Property? Stay but get all of one’s money out? Leave with all your money? Would appreciate your comments.

Pensions are never a good investment even in sane countries. Never buy into the investment schemes of any company, buy their shares.

I’ve always tried to live on the principal of being an expat, whereever you are. I.e earn money in one place, separate that from where you invest. Your investments should be spread out across geographies, currencies and preferably liquid (like equities). If you need to leave a country/city, all you lose is that potential job income stream and little else.

In the current day, you also now have the potential to be both digital in your work and mostly location independent as well as the speed with which you can move funds around globably is unprecedented in my mind (not referring to digital currency, but you can move USD and Euros quickly and get paid quickly too)


I would say the first step would be to get your investments out of SA, before exchange controls come into play like they just did this weekend in Argentina (another country worth watching to see where SA could be going).

Then as a step two, get a Plan B ready, in terms of look at getting a visa or residency for another country should you feel the sudden need to get on a plane.

So in essence have a plan in place to get your money and yourself (and family) out if the time comes.

As Frans Cronje said in his book, “You can’t say you didn’t see it coming” and it’s each person’s responsibility to be well informed in different news sources and educate oneself as to how to manage your resources in any possible scenario that might play out.

In order to manage the SEQUENCE OF RETURN RISK, target assets that aim to achieve high growth with low volatility both towards retirement and during the short-term after retirement.

How typical that the industry solution to any problem is always some expensive product (coupled with “speak to your adviser”): hedge funds, structured products, targeted volatility funds in this case.

Most people draw a monthly not an annual income from their investments in retirement, which lessens the ‘event risk’ mentioned above, and the volatility impact. Call it dollar-cost averaging in the draw-down phase.

Also, if the risk is a big market draw-down around retirement age (when you have maximum savings), then the SIMPLE and CHEAP way to reduce this would be by following a de-risking glide path in the five years pre-retirement (into a low or medium equity portfolio) and reversing this in the early years after retirement.

These types of articles are so far from reality its quite sickening. If you are putting together a future pension at age 18 what does a youngster know about the different classes of investments. Further as an 18 year old why have any funds in cash and bonds – when the objective is capital growth so that they can decide when they can retire “comfortably”. To minimize risk maybe it would be best to invest these funds into a couple of ETF which cover the market. Maybe Moneyweb should do a few articles on current pensioners and map their mistakes and successes so that your readers get a wider perspective of this grim reaper called retirement


Alternatively KISS (keep it simple stupid) buy a KR every month 1/4 – 1/2 or 1oz, whatever you can afford while earning an income then cash them in 1 at time during retirement. 100% safe and guaranteed to grow in value with rand/cost averaging built in. No broker fees, no scams, no bank charges, no BS, no transfer fees …. Politicians always screw up, inflation is always running, currency depreciation is a constant.
Negatives you say?
No interest – that’s taxable and traceable
Capital gains tax? Find the solution.

Krugerrands aren’t great. I was always afraid of them being stolen, or misplaced. And I’m not a fan of cash either. Plus when you need to move countries you’re lugging a bag of gold, not practical at all. And there is definitely a fee on gold coins – it’s called the spread, and when demand is low, you might not even find a reasonable buyer.


Sorry, but I have to point out to you that nothing, and I mean nothing in the economy or investment space (or in life for that matter) is 100% safe and guaranteed, that’s an absolutely ridiculous statement / claim to make.

Is gold or Krugerrands a viable option as a store of value? Yes sure, but the guarantee that you are talking about does not exist, except if you’re trying to sell a Ponzi scheme, and even then it’s a lie.

South Africans, it seems to me, have an unreasonable love affair with gold, especially coins. This most likely has a foundation on when we were, once upon a time, a significant gold producer. Those days are long gone and will not be coming back. You don’t see that affection for silver or other precious metals, but you will see this in silver-producing countries such as the Americas.

Get over gold. It’s not that great an investment. Get over the irrational SA bias for it.

Most well managed funds recover within 2 years from a market crash.

If you draw a pension from an income fund during retirement, and the income fund can outlast the dip then you should be well positioned for the recovery and subsequent growth.

End of comments.





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