Retirement fund members invested in more aggressive portfolios delivering poor returns during certain market cycles may be tempted to make emotional, short-term decisions. Katherine Barker, Head of Momentum FundsAtWork, says 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.
As life expectancies increase, the risk of outliving retirement income rises. Many South Africans face a bleak retirement because they are either not saving enough or are following an inappropriate investment strategy.
One way of increasing retirement savings is targeting returns that are well above inflation. Barker says, “Aggressive portfolios typically target inflation plus 7% over seven 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, 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.
“Professional financial advice is critical in helping members to understand the implications of moving their assets between portfolios when disappointed by short-term returns. 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. Plus, selling and ‘locking in losses’ means having to re-enter the market with an investment that has decreased in value.”
According to Barker, 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.
“An outcome-based investment approach also helps members reach their long-term retirement goals. The FundsAtWork Umbrella Funds offer members a wide range of investment portfolios, including a number which follow Momentum’s outcome-based investing methodology,” says Barker.
“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.”
Barker also says 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.
Barker concludes with a quote from investment guru Warren Buffet who said, “Games are won by players who focus on the field, not the ones looking at the scoreboard.”
“Financial advisers need to remind members in aggressive portfolios that, despite market volatility and poor short-term returns, the best thing they can do is to keep calm and stay the course,” says Barker.
Momentum Corporate is the division of MMI Group Limited within the JSE-listed financial services group MMI Holdings, that engages with large and medium sized businesses to enhance the Financial Wellness of their employees. Momentum Corporate offers a holistic range of employee benefit solutions such as Retirement and Insurance benefits, Health Management, Workplace Risk Management, and Business Solutions.