Ageing equity risk-takers can now change their ways – BJM PCS

AGEING investment risk-takers have the chance to revert to a more balanced strategy thanks to our new interest rate environment.

The opportunity is highlighted by Barnard Jacobs Mellet Private Client Services (BJM PCS), a leading adviser to high net worth individuals and pre-retirement planners.

BJM PCS has become concerned by a trend to high-risk equity ‘plays’ by those in their 50s and early 60s – the years when the traditional focus is on conservative investment strategies.

However, increased longevity has changed the old arithmetic. Growing numbers of salary-earners have become worried that their retirement nest-eggs won’t cover 20 or more years ‘out to pasture’.

As a result, they over-weight equities in their portfolios at a time when they would normally try to preserve capital and reduce risk.

Alan Botha, head of wealth, Gauteng, at BJM PCS, notes: “The April rate rise and our move into a higher interest rate environment presents a unique opportunity for the 50-something risk-runner to review that strategy – especially if solid profit has been made over the last five years from the JSE bull-run.

“New factors such as revised risk-free rates have to be considered; preferably with the support of seasoned retirement planners who are close to market developments.”

A risk-free rate is a return that can be achieved without investment risk. The usual proxy is government’s 10-year bond (with current yields close to 9.3%). To justify added equity risks, investment analysts usually seek total returns (dividends plus capital growth) about 4.5% to 5% higher.

With prime up to 15%, many investment houses have begun to reduce domestic equity growth forecasts – suggesting lower upside at higher risk.

Botha comments: “This should give pause to older risk-takers who have less time to recover from market volatility.”

A typical pre-retirement risk-runner, says Botha, is a Baby Boomer in a salaried position at a major corporate. Investment growth in his defined benefit retirement fund has been running at 5% to 6% a year; yet inflation is moving toward 9.5%.

“This salary earner has seen medical costs rocket while his life expectancy is up from the early 70s to perhaps the early 90s,” adds Botha. “The prospective nest-egg suddenly seems inadequate.

“The response was often to supplement retirement savings with an aggressive investment portfolio. Thankfully, strong equity growth was achieved until recently, but risks now tend to the upside. The good news is that higher rates and inflation-positive money market returns create a readymade alternative strategy.”

Tax-free interest income for the under-65s is now R19 000 a year. The nominal money market rate is about 10.5%. Therefore, R181 000 can be put into the money market without tax implications.

“It’s time to review needs and recalibrate risks,” says Botha. “Each case is unique, but in some instances it’s time to ‘be your age’ and take fewer chances.”