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How do you invest with only nine years to retirement?

Reader’s question answered.

CAPE TOWN – In this advice column Robin Gibson from Hardvard House answers a question from a reader who only has a short period to save before retirement.

Q: I am 56 and have not had much luck in business, but I have cleared a lot of debt recently and have about R350 000 sitting at Liberty growing at their interest rate. I believe it is a product I could draw down, but then what or where do I put it for maximum return as it is not a lot in today’s terms? I could also put away R7 000 per month as a saving now but into what and where?

Given that you are 56, I am going to assume that you are targeting 65 as your earliest retirement date. Accordingly you have a minimum period of nine years before you will require this capital to generate some form of income.

It is also entirely possible, given current trends, that you may continue to work beyond 65. This would further increase the time that you can invest to build a wealth pool.

If we ignore all the product names and marketing hype, there are really only four investment classes: cash, bonds, property and equity. With each you have some trade-off between risk and growth.

In addition, we must assume that your intended goal is a return greater than inflation (what is known as ‘real return’). So let’s evaluate these asset classes with this in mind.

Using ten year rolling periods between 1960 and 2011, the following table shows the average annual real returns of each asset class:

Asset Class

Best 10 years

Worst 10 years


5.4% (1995-2004)

-3.9% (1973-1982)


11.6% (1995-2004)

-6.6% (1974-1983)


21.1% (1977-1986)

1.7% (1969-1978)

Source: JP Morgan

*Listed Property does not have the same market history to draw on, and is thus excluded

Clearly a story starts to emerge and I would note a couple of points

Volatility in equity is higher than cash and bonds, although it offers the highest returns. Conversely, while cash and bonds are no guarantee of real return, they do offer lower volatility.

It’s important to be aware that rising inflation is an enemy to cash and bond returns as it will erode them more quickly. These asset classes do well in times of reducing interest rates, such as between 1994 and 2010, but suffer in periods of rising interest rates, such as between 1960 and 1993.

All in all, equities generally offer the best opportunity to grow real wealth through all market cycles.

So what does this mean for you, and how should you look to proceed?

In essence I would suggest using the following table as a guideline:

  Inflation + 2% Inflation + 4% Inflation + 6%
Asset Mix Largely Cash Interest Compounded Mixture of Cash, Bonds Property and Equity Mixture of Equity and Listed Property
Total Invested over 9 years (R 350,000 + R 7,000pm)

R 1,106,000

R 1,106,000

R 1,106,000

Future Value expressed as  Current Purchasing Power


R 1,409,555

R 1,598,974

Pro’s Low capital volatility risk Real wealth growth potential Excellent real wealth growth potential
Con’s Poor real wealth growth Medium capital volatility risk High capital volatility risk

What this shows is the trade-off between risk and real return. Ultimately the investor should select and expect a return that suits his personal risk profile.

What would my choice of vehicle be? I would recommend a collective investment scheme (unit trust) and would suggest you consider the following categories for the various targeted returns:

Inflation + 2% : Money Market / Income Funds / Multi – Asset Income Sectors
Inflation + 4% : Multi Asset – Medium Equity Sector
Inflation + 6% : General Equity Sector

It is also not a bad idea to mix these categories a little bit with the lump sum to manage your risk, for instance putting R50 000 into inflation + 2% type investments, R100 000 into inflation +4% and R200 000 into inflation + 6%. Ideally, however, the monthly contribution should be invested into a unit trust in the inflation + 6% bracket.

In addition try to ensure that you choose reputable funds that have low TER’s (Total Expense Ratios) and preferably purchase in such a manner that no up-front fee is charged.

This simple investment strategy should serve you well into the future.

Robin Gibson CFP ® is a director of Harvard House Investment Management.

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