Sit on your hands – old-school investment advice?
With Stock Markets all over the world almost fully recovered from the coronavirus shock and you’d be forgiven for thinking that this is all over, now we just need everything to open up, planes to fly and life will carry on as normal. The drop in the stock markets was so quick very few people had a chance to react to it, and by the time they woke up to cry into their beer (or ginger beer for us Saffers) over their ‘paper losses’ the market had turned around and is now back at closer to the pre-pandemic levels. You dodged a bullet, right? Maybe, but maybe this is a wake-up call to have a good hard look at your portfolio and where you need it to go in the future.
Should you keep adding to your retirement pot, even if markets are volatile and on the edge of a downturn? The theory behind this recommendation is called ‘Rand Cost averaging’. This means that if the market drops, your Rand will buy ‘more’ units than it did when it was higher and you’ll be better in the long run with ‘more units’. In the case of South Africa, the ‘long run’ is a very long run, with flat equity markets for over 5 years. Another, not so obvious reason that your broker might want you to keep up with your RA is that he/she has placed you on an insurance platform and taken their fees ‘upfront’ so that you’ll be slammed with outrageous penalties (called ‘early termination fees’) if you stop paying those premiums (and he could lose commission, obviously).
Your retirement investments should be backed by a plan, done by you and a qualified advisor. This will give you an idea on how much to put away every month to achieve your desired retirement income at your preferred retirement age, and that will dictate how those funds are invested. These plans are required by the FAIS act, but you might end up with a cookie-cutter machine-produced plan just to tick the boxes, rather than something that is useful. It does not need to be rocket science, there are a couple of basic parameters that you need to plug into a program – and you could do that yourself. The secret sauce is the assumptions underlying the projection (market growth, tax, inflation, yield etc).
One argument made by authors (who don’t actually have long term clients they have to manage) to reduce the costs of running your wealth portfolio is to pay a once off ’fee for a plan’, and not pay ‘assets under management’ (AUM) monthly/annual fees. The problem is that you might get the impression that this is going to last you indefinitely. It won’t be. You will need to redo or review it probably once a year, and again if there has been a major shock to the economy – like we’ve just seen. The plan will be right for that moment in time, and every day that goes past after that it will start to go off track (so you will need a once off plan and monthly retainer – you might as well go for AUM). This is because the assumptions (the secret sauce I was talking about) that were made in putting the plan together start to change from day one. Interest rates and inflation change relative to each other (and therefore change the real interest rate assumptions). Stock markets change different sectors go through their own super cycles (especially commodities) and things happen in the market that effect some sectors more than others. Some industries are growing (internet, online shopping, healthcare during the first stage of the pandemic), others declining (bricks and mortar retail, industrial property).
Emotions play a hug part in the investment decisions most of us make, and often stifle us from making any decisions at all. If the stock market drops, many investors will wait for the stock/ ETF/ Unit Trust to improve again before even thinking of selling it. (That may be where you are right now, even if it hasn’t fully recovered to previous levels.) See the graph below
(Source of graphic: ShareData online).
Some investors may sell in a flat panic as it crashes. Should you really ‘sit on your hands’ and trust that this will work out in the ‘long term’? Sorry if I sound vague, but Ja/Nee. If you are 5 years out from retirement you need to consider preserving capital and spending power if your pension pot isn’t overflowing. I am not saying put it under the mattress, but also de-risk it a bit (less equity). Offshore exposure is a good bet as the Rand is expected to continue to depreciate over time. Gold is a good substituted because it is quoted in Dollars, not Rand. When ever you look at an investment ask yourself, if I had this money in my hands today, would I buy the same thing? If the answer is yes, then leave it, if it is no, then look to buy that ’something else’ that has better prospects. If fees are eating away at your investment, then you can look at switching platforms or funds and add another 1-1.5% to your performance annually. Even if you’re if you’re locked into an insurance platform, you can usually still switch out funds for free.
South African GDP is expected to be -8% to -10% this year, and this will be replicated to a greater and lesser extent all over the world, even if the stock markets are hoping it won’t. You cannot stop the world for two months and just pick up where you left off. As Furlough and PPP schemes (paying companies to keep-on workers) are run down, companies are going to declare bankruptcy and retrench workers. This is already happening with Shale oil producers in the States. We have still to feel many of the ripples of the lockdown. Think of the implications of rent not being paid – both commercially and privately. The dramatic drop in VAT, Sin Tax, company tax and personal income. Grounding of flights all over the world and continued lockdown of tourism. Long term drop in demand for entertainment that involves crowds – restaurants, cinemas, sporting events and concerts. Take the advantage of this hiatus, when it is psychologically easier to make a decision, to make sure your investments are aligned with your future objectives.