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.”