Shreekanth Sing, Technical Legal Adviser, PSG Wealth
Your clients’ retirement portfolios will probably need to sustain them in retirement for 30 years or more and for most people, it is the most challenging investment goal they will face. Arguably, other than saving enough, the next biggest challenge is ensuring client’s capital grows sufficiently ahead of inflation over time. Yet we still find many investors err on the side of preserving capital, rather than growing it.
Understand real growth is non-negotiable
Firstly, clients need to realise that achieving inflation-beating growth in the long term, is non-negotiable. If their money is not outpacing inflation, they are effectively going backwards. To beat inflation, you need to invest in growth assets like shares, which can be volatile in the short term. This short-term volatility is probably the biggest reason why many people invest too conservatively. This fear is heightened when we experience periods like those we have seen over the last three years, with the local equity markets delivering disappointing returns. In an environment like this, the importance of a diversified portfolio is again highlighted, since it can help to buffer investors from some volatility while other asset classes fare better.
Your investment horizon is longer than you think
Increasing lifespans mean most of us are likely to be retirees for longer than anticipated. For example, a person who starts saving at 25 and intends retiring at 60 has an estimated 65-year investment term: 35 years in the accumulation phase, and a further 30 years after retirement. Depending on their health and advances in medical care, their time horizon could potentially be even longer. In retirement, their capital needs to continue growing sufficiently to ensure it can provide a sustainable income for the rest of their life. This simple example highlights that clients’ investment horizon is probably longer than they think. Because their investment horizon is so long, they should consider investing in growth assets
Understand risk correctly
The biggest risk in investments is volatility. Putting it simply, it measures the level of uncertainty of achieving the expected returns. Further, it is not only the willingness to take on risk that counts but also the ability to do so and the impact of not taking enough risk. While we tend to focus on the short-term ups and downs as a source of risk (as mentioned), the impact of not achieving the desired return in the long-run is often neglected.
Diversification is key
Diversification helps to protect the client’s portfolio against short-term ups and downs, manage risk, and is also important from an investor peace-of-mind perspective. Retirement portfolios are also required to comply with Regulation 28 of the Pension Funds Act. The main purpose of Regulation 28 is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios. However, while they can invest completely in cash and other fixed interest investments, advisers should remind their clients that equities are best positioned to deliver on long-term inflation-beating growth.
Maximum allocations to various asset classes in terms of Regulation 28
Source: PSG Wealth
Invest in advice
Because saving for retirement is probably the biggest challenge clients will face, investing in advice is worthwhile. It is worth pointing out to clients that many industry insiders – very capable of “doing it themselves” – still opt to make use of the services of qualified financial advisers. Clearly, they do not lack the knowledge to make the decisions themselves. Rather, it is an outside perspective, non-biased views and the role as financial coach that make the input of a trusted adviser so valuable and help in achieving better long-term outcomes.