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The best investment strategy in a low-return environment

Control the things you can.

The last three years have been pretty tough for South African investors. Over this period, only a handful of balanced funds have managed to produce double-digit annualised returns.

Most multi-asset high-equity unit trusts have grown their clients’ money by between 7% and 9% per year since October 2014. This is not very exciting when money market funds have been able to deliver 7.5% over the same time.

This is the ‘low-return environment’ in which local investors now find themselves. After a few years of outstanding returns between 2009 and the middle of 2014, the subsequent period has delivered far less.

It is natural for investors in this climate to be asking what they could, or should, be doing about it. What strategies should they be employing to ensure that they don’t miss their goals, particularly when it comes to funding their retirement.

Speaking at an Old Mututal Corporate Consultants panel discussion in Cape Town, consultant Thabisile Simelane said that the first, and most important, thing for investors is not to panic.

“There is always a perception that when something like this happens, you must do something,” she said. “That is not necessarily right. Sometimes just not doing anything is an action.”

If you have a good plan in place, you need to trust its ability to deliver. Things might not look good over the short term, but saving for retirement is not a two- or three-year process. It’s far longer than that.

“As long as you have a well-diversified portfolio run by investment professionals, I think you can sit back and bear in mind that in a multi-asset class portfolio there will always be a possibility that you will get returns lower than cash over the short term,” Simelane said. “But the best thing to do is stomach the under performance because in the long run it pays off.”

Manage what is in your control

This doesn’t, however, mean that there is nothing investors can do to improve their chances of meeting their long-term goals.

“This is an opportune time to consider that your retirement savings are made up of two things: the contributions you make, and the returns you get,” said Old Mutual consultant Chinell Bermosky.

If your expected returns are lower, you can therefore mitigate this by increasing your contributions.

“If you save 15% of your money for 30 years you are going to have saved five or six annual salaries by the time you retire,” explained consultant Martin Poole. “To have enough for a reasonable retirement, you need to have something like 15 annual salaries. You reach that if, over the 30 years of saving your 15%, you also achieve returns of inflation plus 5%. But if your return is only inflation plus 3% you will end up with more like 10 annual salaries.”

The best way to ensure that a lower-return environment doesn’t derail your retirement plan is therefore to manage that part of the equation that you can control – how much you contribute.

“Putting in more now not only helps fill that hole, but you also get the tax break,” Poole pointed out. “And if you’re wrong about low returns, you don’t lose anything. You get even more. It’s an opportune time to pay yourself.”

Bermosky added that investors shouldn’t underestimate the importance of the tax benefit of making additional retirement fund contributions.

“If you are saving towards retirement, that money comes off before you are taxed,” she explained. “So, depending on your tax bracket, saving an extra R1 000 may only mean a R600 reduction in your take-home pay.”

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the s&p 500 is up 40% in a year! for gawd sake get yr rands off-shore while you can!

So if you are in the 39% or 41% tax bracket and investing in something like a 10X retirement fund (which have delivered over 12% year to date), then you beat the S&P500?

I wish we could get the offshore commentators to stay offshore. Especially ones who try to call SA a nanny state while living in one of the biggest nanny states (You never did address that post of mine in response to yours).

What is wrong with you? Posting outright lies on a public forum.
The S&P 500 is not up 40% in a year. It is up 21% in Rands and 18% in USD. The JSE top 40 is up 19% in Rands and 16% in USD this past year.
Rather go scare the Japanese with your brand of hysteria – their stock market is “only” up 14% in USD this year, and their economy is performing the best it has in 3 decades.
FYI the Rand has lost 2% against the USD in the last 12 months – less than the inflation differential.

The “Consultants” forget to mention there is something else you can control: Fees. Find out exactly what the costs are and move to a cheaper platform. From experience I know they will never utter a word along those lines, but will probably encourage you to put in even more, because “the market is down” and it is a good time to buy cheap. Sounds familiar? Best investment strategy: Educate yourself and get rid of the middle men.

And before anyone thinks reducing fees are only about passive vs managed, think again. Maybe your financial advisor has you on some life insurers or others platform and you’re paying a 0.6% (or whatever) platform fee and you’re just invested in AG and Coro balanced funds in there. Maybe just move the funds directly to AG or Coro and pay NO (or less) platform fee, more money for your investment to grow with.

Actually the consultants did talk about fees at the function and it is not their fault that it wasn’t mentioned in the article.

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