Cape Town – Adopting a cookie cutter approach when making your investment decisions is a sure fire way to endanger your hard earned savings. One needs to carefully select the appropriate retirement savings solution that fits your age, risk profile and long-term investment goals.
Nevertheless, there are some useful rules of thumb to help guide your decision making.
1. Start saving now
“By the far the best investment advice you can give anyone is to start saving immediately,” says Jeanette Marais, Director of Retail Distribution and Client Service at Allan Gray. “Start saving today with something, even if it’s just a few hundred rand. This is the only way to truly harness the power of compound interest.
“Few people in their 20s realise how drastic the impact will be of only starting to save in their 30s. Starting to save at age 35, as opposed to 25, can chop a massive 40% off an investor’s potential retirement benefits. In fact, our research has shown that your first 10 years of investing are even more important than your last 10 years.
“For example, if an investor saved R1 000 a month for 10 years (i.e. a total contribution of R120 000) and then ceased contributing but remained invested for 30 years, they’d achieve the same outcome as someone who delayed investing for the first 10 years but then saved R1 000 per month for 30 years (i.e. total contributions of R360 000) assuming the same rate of return.”
2. Define your investment goal, define your risk
“Too many people invest without clearly defining what they are investing for,” says Anne Cabot-Alletzhauser, Head of the Alexander Forbes Research Institute.
“You need to ask yourself: what is the intended purpose of the proceeds of this investment? The reason this is so important is because it enables you to quantify how much risk you need to take in order to achieve that goal. If you’re investing for your children’s education and you have a relatively short investment horizon of say five years you can’t expect to achieve high growth in a short space of time by investing in low risk assets like the money market.
“At the same time if you are investing for your retirement, and you’re taking a 20-, 30- or even a 40-year view, you can afford to take a bit more risk. However, if you’ve already accumulated most of your retirement savings and you want to protect your capital for retirement in say five years, then you’d want to choose a low risk option.”
3. Diversify, diversify, diversify
“It’s the old adage of not putting all of your eggs in one basket,” says Glenn Silverman, Chief Investment Officer at Investment Solutions. “That’s particularly relevant at a time when the global economy as well as financial markets are facing a lot of uncertainty. That’s when a well-diversified portfolio that helps spread your risk – as well as the potential to deliver returns – across a wide range of asset classes certainly makes sense.”
4. Reduce your costs
“Reducing costs is a crucial part of any investment strategy but is often sadly overlooked. You can’t control whether or not your investment outperforms the market but you can control how much you’re prepared to pay to achieve that potential outperformance,” says Cabot-Alletzhauser.
“If you consider that your investment horizon can be as long as 20 to 40 years, then the compounding effects of fees and other costs can significantly erode your returns over time.”
5. Take a long-term view
“It’s far better to take a long-term strategy to investment by buying into a well-diversified portfolio and holding course for the long-term rather than trying to chase short-term gains,” says Cabot-Alletzhauser.
“As seasoned investors often like to point out: time in the market beats trying to time the market. Rather take a long-term view and stay invested in a well-diversified portfolio rather than trying to chase short-term gains, which is more akin to gambling than investing.”
6. Keep some cash on hand
“When markets are performing well the mantra is often ‘cash is trash’ as there are usually better returns to be had elsewhere,” says Silverman. “However, when things go south there is nothing as beautiful as cash. It’s a much maligned asset class but it provides wonderful optionality in that it allows you to take advantage of a falling market by purchasing under-priced assets. If you’re fully invested and have no cash available then you can’t take advantage of falling asset prices.”
7. Develop the right expectations
“Investors often don’t have an appropriate understanding of what a particular asset class can do for them,” Cabot-Alletzhauser. “For example, you can’t invest in a low risk investment like the money market or income funds and expect to achieve stellar inflation beating returns.
“At the same time, you can’t invest in an aggressive equity fund and not expect occasional bouts of volatility or even an outright correction. If a particular asset class is doing exceptionally well it is likely that at some point it will also suffer an exceptional correction.
“You need to bear in mind that over time the returns on most asset classes tend to revert to their long-term mean. If you’re not factoring in that risk into your expected returns then you’re fooling yourself.”
8. Go offshore
“It’s always a good idea to have some of your portfolio in other jurisdictions,” says Silverman. “The weak state of the domestic economy coupled with the steep selloff in the rand that we’ve witnessed recently highlights just why you need to have a not inconsequential amount of money offshore.
“There is a big debate right now about whether the rand is over-sold or not and whether it will stage a recovery. By having a healthy exposure to hard-currency assets means you don’t have to worry as much about a weak rand.”
9. Stay invested when you change jobs
“The worst thing you can do is not preserve your money when you change jobs,” says Marais. “The minute you do that you lose all your pre-tax benefits, as you get taxed on the pay-out if you’re under retirement age. You also have to start saving again from scratch at a much later age, which again means you lose out on the compounding power that you would’ve benefited from had you started saving early on and remained invested in the market.”
10. Eliminate emotion
“People think money is rational but it often isn’t as our decisions about money are so often swayed by emotion,” says Marais. “This is where a good financial adviser can help by being a rationale sounding board to help counter balance your decision making process, which is prone to being swayed by emotion, especially in times of market volatility.
“The only trick here is to choose an objective, independent adviser with a good reputation for giving ethically sound investment advice. Don’t pick an adviser who is associated with a particular firm and who earns commission for selling their products.
“Independence obviously doesn’t guarantee good advice but it’s certainly a good place to start.”