Investing towards a goal

By Janice Roberts
Johan Esterhuizen, Portfolio Manager, FedGroup Asset Management

Johan Esterhuizen, Portfolio Manager, FedGroup Asset Management

Lately, the investment strategies employed in managing retirement funds have tended to favour a performance-based framework as fund managers chase the best returns. While this strategy may seem more attractive on the surface as it aims to maximise wealth creation, the returns achieved don’t always meet the needs of investors in retirement.

In chasing a performance-based objective, fund managers merely aim to achieve a specific percentage; a monetary figure over time. The relevance of this figure is often meaningless in the lives of most investors as it doesn’t correlate with the real cost of living and requirements in retirement.

Investors are often left with less than they need to live the way they would like to once they retire. In addition, the higher fees associated with this approach also erode returns, particularly if an investor aims to out-perform the market. Generally speaking, there is also less transparency in terms of fees in performance-based funds.

A goals-based framework, on the other hand, is more likely to meet an investor’s needs for retirement as it aims to meet pre-established goals and objectives with a number of specific investment strategies. However, regardless of the goals, the main focus will always be on maintaining a minimum standard of living by preserving capital and investing in income-producing assets.

Accordingly these goals and objectives should be established through consultation with investors to ensure a more personalised and individualised outcome is achieved. The three main goals are:

  • Meeting an investor’s needs and obligations
  • The investor’s priorities and opportunities
  • Their desires and aspirations in retirement.

A goal-based investment strategy will focus on investing in asset classes where the risk of loss is low as the pain of loss is extremely high.

An investment strategy aimed at meeting an investor’s priorities and opportunities would generally consist of a more balanced risk profile, where the pain of loss and the risk of loss are more equal. This ensures that elements such as healthcare costs are adequately catered for when they become most critical.

On the other hand, investing for desires and aspirations – the ‘nice to haves’ in retirement – could entail investment into higher risk asset classes for better returns as the pain of loss is low. However, for this to be possible the first two goals need to be achieved.

It is important to note that a goal-based approach doesn’t always mean lower risk. Rather, the risk is spread across the three goals, with a heavier weighting for desires and aspirations instead of across the entire portfolio, as it is in performance-based investments.

Due to the tiered nature of a goal-based approach it is imperative that there is collaboration between the investor and their financial advisor. This ensures that clients think closely about what they want from their investment and how they would like to live in retirement. This affirms a better correlation between the investment strategy and the returns that need to be achieved.

Accordingly the degree of risk in each of the investment strategies should be determined by the investor with the help of an advisor. The manner in which the funds are invested then rests with the fund manager.

Regardless of the approach, investors need to be realistic about what can be achieved in the time they have available as the investment term is critical. However, while more risk doesn’t always mean investors will attain their goals, shorter timeframes may require that more risk is assumed.

Poor planning can’t be made up for in the short term, despite many of the unrealistic returns promised in the industry today. At the end of the day the old investment adage always holds true – ‘if it sounds too good to be true, it probably is.’

By: Johan Esterhuizen, Portfolio Manager, FedGroup Asset Management at FedGroup

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