Market volatility presenting significant risk for South Africans approaching retirement

Wynand du Plessis, Product Actuary at Old Mutual.

The volatility in global markets and talk of a possible recession in South Africa means that many local investors run the very real risk of retiring at a time when the value of their retirement funds are below their anticipated levels, thereby placing their financial security during their golden years in jeopardy.

Wynand du Plessis, Product Actuary at Old Mutual, says that market movements can severely impact retirement investments. “While market movements should be viewed with a long-term lens, the reality is that many retirement fund members are highly loss-averse, and don’t have appetite for such uncertainty and risk.

“These members don’t tend to think of risk in sophisticated terms, meaning they have a high expectation that what they put into their retirement savings, they will get out.

“However, individuals retiring during this period of market volatility / uncertainty could possibly experience a drop in the value of their investments, meaning they are accessing their investments during a period when the value is much lower than they would have expected a year ago. Some of these investors don’t have the option of delaying retirement and waiting for the market to stabilise and for returns to normalise,” says Du Plessis.

The Old Mutual Smoothed Bonus Customer Monitor 2014 found that most retirement fund members are uninformed and disempowered when it comes to their retirement savings, with approximately 90% of members not being aware of whether their investment fund protects against such volatility.

Du Plessis says the findings from the monitor also reveal that 80% of respondents, across all age groups and income levels are highly loss-averse and are likely to become very concerned if they experienced even a small loss of 5% of retirement savings over a one year period.

Du Plessis adds that the majority of respondents (63%) also indicated a preference for a retirement investment which delivers stable returns, even if slightly lower.

Retirement fund investors looking for these requirements should consider a smoothed bonus fund, which levels out the returns from one period to the next so that investors are less impacted by market volatility. This is a particularly valuable feature when market volatility reaches the levels experienced towards the end of 2015 and that we continue to experience currently.

“If a member seeks protection against volatility, he or she will feel more comfortable with consistent positive returns,” says Du Plessis.

All retirement fund members desire a secure and comfortable financial future, however, the uncertainty of a high risk / high return investment option often cripples investors from either choosing the correct long-term investment, or even having one at all, says Du Plessis.

“One of the biggest risks to any investment is emotional decision-making. Research done by behavioural finance experts has shown that a lot of people don’t achieve their investment goals because they make bad choices when they see their investments suddenly drop or rise in value.

Du Plessis says that retirement fund investors need to proactively manage their investment risk by making use of the various protection mechanisms available. “Members need to determine whether they should take risks in order to give them the long-term growth that they need, whether they should invest conservatively and forfeit the higher growth, or strike a balance between the two.”

“To provide peace of mind, investors need a stable and resilient long-term investment vehicle that will smooth out turbulent times, such as a smoothed bonus fund. Based on past experience, smoothed bonus funds have performed well despite uncertain market conditions as they have the ability to manage the effect of market forces by using sound smoothing methodologies and underlying investment strategies. And although in extreme market conditions it remains possible, Old Mutual Smoothed Bonus Funds have never declared a negative bonus since their inception in 1967.”