Investors urged to protect retirement savings from erosive volatility

Recent volatility in local and international equity markets has once again highlighted the need for investment vehicles that offer protection from the eroding effects of market fluctuations.

This is according to Eddie Theron, Head of Guaranteed Investment Portfolios at Old Mutual Corporate. He explains that protecting your retirement savings from the effects of market shocks is especially important for members close to retirement.

“It becomes even more critical for members facing retrenchment or needing to resign, as these events generally occur during times of economic downturn and are often coupled with a lack of preservation of their retirement savings. These members may not only lose savings due to market fluctuations when they leave their fund, but by taking their retirement savings in cash rather than reinvesting they miss out on future investment market recoveries, with severe negative results in the long term.”

“During this year, from its highest point on 6 April 2011 to its lowest level on 8 August 2011, the JSE All Share index (JSE ALSI) lost 13% of its value. For a member with a significant proportion of their retirement savings invested in equities, retiring during this kind of market decline would have been severely detrimental,” he says. “‘Particularly if they were planning to convert some savings into cash while purchasing some form of annuity guaranteed for life with the balance.”

He advises that one way of softening the impact of equity market declines is to invest in a balanced portfolio made up of a range of different, uncorrelated asset classes.

Though the declines experienced in world markets recently do not match the severe losses that were experienced during the credit crisis of 2008 and 2009, when the JSE ALSI lost over 40% of its value over the 9 months to February 2009, Theron warns that investors could still see their retirement savings eroded over the short-term.

“A typical balanced fund lost over 20% of its value over the nine months to February 2009. The cost of such a 20% capital loss for members saving for retirement after they have contributed to their retirement savings for 40 years is equivalent to approximately eight years’ worth of contributions,” he says.

According to Theron, a good example of an investment vehicle that protects retirement fund members from short-term market shocks is the Old Mutual Absolute Growth Portfolios. In addition to protecting against short-term market volatility, these investment vehicles offer an additional layer of protection through the provision of a range of guarantee levels to protect against extreme and sustained negative markets.

“Guarantee levels range from 50% (effectively providing smoothing protection only) to 100% capital protection. This feature allows members to be invested in a portfolio that is suited to their risk appetite, and is ideal for retirement funds that are looking to implement life-staging solutions,” he explains.

At its core, the Old Mutual Absolute Growth Portfolios also invest in a balanced range of asset classes, and are in this way similar to a balanced fund. However, says Theron, by using its smoothing mechanism to gradually distribute returns to members over time, these portfolios remove up to 80% of the volatility in returns associated with such a balanced fund without giving up long-term growth potential.

Theron points out that members invested in this kind of investment vehicle throughout the most recent market declines, as well as the much worse periods of negative market returns during 2008 and 2009, would not have experienced any losses in their retirement savings.