The current global health emergency caused by the COVID-19 outbreak has led to widespread losses across global financial markets. This is a global phenomenon and South Africa is no exception.
Many investors from around the world, including South Africans, are becoming increasingly concerned about the impact on what may be their biggest investment – their retirement savings.
Vickie Lange, head of best practice at Alexander Forbes, offers South Africans a comprehensive response to concerns about the impact of COVID-19 on retirement funds.
1. Retirement fund savings have decreased
The value of your retirement savings is linked to what happens in the financial markets as most retirements savings are invested in financial markets. Lange explains, “Most retirement savings include some investments in shares. In the case of shares, when their value or price is increasing your savings will also be growing. When share prices are falling, the value of your savings will go down.”
She continues, “Share prices in all countries have fallen because of COVID-19 and other problems in the world economy” What we are also seeing is that shares are not the only asset class falling during this time. We are experiencing a broad-based fall across most asset classes, including more defensive investment types such as bonds.
These events have led to a decrease in retirement savings.
2. Global financial markets affect retirement savings in South Africa
What happens in the world economy and to global financial markets can affect retirement savings that are invested in financial markets offshore or local investments.
“This means that the recent falls in global financial markets have had a negative impact on the value of your investments,” says Lange.
3. Managing retirement fund savings during high market volatility
Different asset types behave differently over time and during different market cycles. Growth assets (investments), like shares (equity), and property, look to achieve an investment return that exceeds inflation. Assets like cash and bonds, on the other hand, achieve lower, more steady returns relative to growth assets.
“When investment values fall, people often react by changing their investment portfolios or preferring a cash-type investment like a money market fund, but because we don’t know when financial markets will fall and how far they will fall, these actions usually take place too late after investment values have already decreased,” comments Lange.
“Although switching into cash or other similar assets may seem like a good idea right now, these asset classes are less likely to grow your money by more than inflation in the long term,” adds Lange.
It’s easy to get emotional about your life savings. Hasty or poorly informed decisions could prevent you from reaching your goals. The most suitable investment portfolio for you to be invested in is one that will help you achieve your goals. She warns against impulsive reactions that leave you with savings that fall short of your needs.
4. Continue contributions to your retirement fund
Lange recommends that investors make every effort to continue their retirement fund contributions. Retirement funds have several other benefits that are worth mentioning:
“We love shopping when goods are on sale but strangely our instincts often differ when it comes to our investments. A decline in investment values often results in investors reacting impulsively by selling or changing their investments. However, it is during these periods that investors can afford to buy more shares with their money, just like when goods are on sale. This may lead to better investment values in future as markets recover,” concludes Lange.