Fear overdose killing real wealth generation
A double dose of fear is killing the prospect of real wealth generation for thousands of saver-investors – a process so insidious the victims don’t even notice. The alert comes from Lara Warburton, managing director of Imara Asset Management, South Afr
Warburton says the double dose of fear is administered by two parties on opposite sides of the desk – fearful advisers and their fearful clients.
She ascribes adviser fear to three factors:
- Market uncertainty and the risk of loss in the post-2008 environment
- Growing regulatory rigour and a better-safe-than-sorry mindset among advisers as client complaints of mis-selling and poor advice are only likely to arise when significant capital loss occurs
- Fear of contradicting or challenging a conservative client in a tough industry environment in which advisers have to protect their client-base and keep clients happy
Client fear, says Warburton, is attributable to unease following the global financial crisis and JSE losses of more than 40% in 2008.
Clients therefore prefer conservative investments that give good protection against immediate loss, even though many of these clients are in their late 20s or 30s and have the opportunity to secure inflation-beating gains through long-running exposure to equity markets.
“When a fearful client meets a fearful adviser the outcome is usually sub-optimal for the portfolio,” says Warburton. “This is often reflected in extremely low equity allocations because equities carry some risk of short-term loss.
“Yet, we are looking at inflation of more than 6% for the foreseeable future while taxation remains at or near 40% for those in a good job. Adding other taxes like VAT and fuel levies, overall tax is even higher. Clients should remember that this rate applies to interest earnings over the exempt amount / in excess of the exemption as well as their earnings at work.
“Therefore ‘tax-flation’ is sure to erode wealth for those who ignore equities and focus entirely on interest-bearing instruments. To build wealth, clients and their advisers have to beat ‘tax-flation’, usually by appropriate equity allocations.”
The risk of losing out to a combination of tax and inflation is never highlighted in a dramatic fashion, unlike the situation in equities where a market slide always makes headlines.
“Those governed by fear don’t feel the insidious effects of gradual wealth erosion through tax and inflation,” says Warburton. “You can log small, nominal gains quarter after quarter and keep the client happy.
“But a few years down the line, the client becomes uncomfortably aware that the carefully accumulated R50 000 or R100 000 nest-egg won’t buy very much. At the same time, those with appropriate equity allocations will probably have seen much greater growth because history shows share prices outstrip inflation in the end.
“That’s why the best advice for clients – and some advisers – is to get over your fears and start thinking objectively. That usually means reviewing, then up-weighting, the client’s equity holdings. Investors in turn need to understand market volatility, stick to their long term investment plan, and not panic when quarterly statements show losses – a loss is only realised when you sell.”
