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Remaining invested through tough economic cycles will help employees’ retirement outcomes

23 July 2019 Momentum Corporate
Nashalin Portrag, Head of FundsAtWork at Momentum Corporate

Nashalin Portrag, Head of FundsAtWork at Momentum Corporate

Retirement fund members invested in more aggressive portfolios delivering poor returns during certain market cycles may be tempted to make emotional, short-term decisions. Financial advisers play a key role in helping members to avoid hasty portfolio changes that reduce the probability of reaching their long-term retirement goals.

This is according to Nashalin Portrag, Head of FundsAtWork at Momentum Corporate who says that many South Africans face a bleak retirement because they are either not saving enough, are following an inappropriate investment strategy or making knee-jerking decisions when markets are under pressure.

“One way of increasing retirement savings is targeting returns that are well above inflation. Aggressive portfolios typically target inflation plus 7% over 7 year rolling periods. Our modelling shows it’s necessary to invest up to 85% of the assets in local and global equities and property to generate the targeted return. With this, however, comes learning to live with the short-term volatility associated with these assets.”

While these growth assets may be volatile, Portrag adds that they are an essential part of the asset mix needed to deliver inflation-beating returns. “Historical performance shows they usually outperform inflation by a good margin over the long-term. However, over the short-term, aggressively-constructed portfolios can deliver very low or even negative returns.”

“Members invested in these types of portfolios need to take comfort in the fact that the portfolio is highly likely to recover and deliver inflation-beating returns over the long-term. However members often overreact and make an emotional decision to move their assets to another portfolio,” he says

Professional financial advice is critical in helping members to understand the implications of moving their assets between portfolios when disappointed by short-term returns. Portrag stresses that if members stay invested, there is a good chance they will recover the lost value. However, selling means there is no chance the loss will be recouped. “Also, selling and ‘locking in losses’ means having to re-enter the market with an investment that has decreased in value,” he highlights.

Global research over many years shows that investors who stick to a carefully-constructed, long-term investment strategy and avoid knee-jerk decisions when returns in the short-term are poor, outperform investors who make too many changes based on short-term market volatility.

Members’ retirement fund savings are often invested into many listed companies which are unlikely to do as well as what we would see when the economy is doing well. “This would certainly have a negative impact on their retirement investments, especially if the low economic growth becomes a long term trend. The average retirement fund member will therefore have to invest more to reach their goal of a comfortable retirement.”
“However, if a retirement fund follows an outcome-based investment strategy, the fund would make provisions for short term fluctuations in investment values. Retirement fund trustees, asset managers and asset consultants would ensure that investments are well diversified to achieve the long term goals to soften the blow of these short term fluctuations,” says Portrag.

Outcome-based investing doesn’t focus only on the inflation-plus targets of the various portfolios but also on the volatility of the journey. Solutions are crafted by considering members’ needs and risk tolerance, defining a goal (usually an inflation-plus objective) and an appropriate time-frame to achieve the objective. The approach improves the probability of the portfolio delivering on its ultimate objective and members achieving their desired retirement outcome.

Finally, Portrag highlights that while it’s important for members to have a solid long-term investment strategy, which often means riding out the market ‘ups and downs’, it’s also important to regularly review this strategy with a financial adviser. “This is particularly important as members approach retirement. Members should work closely with their financial adviser to align their investment strategy before retirement with their strategy during retirement.”

“Financial advisers need to remind members in aggressive portfolios that, despite market volatility and poor short-term returns, members need to keep calm and stay the course,” concludes Portrag.

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