Article by Sherwin Govender. Article from Glacier, Sanlam.
It’s perfectly natural for clients to feel nervous about their investments, given the low-return environment over the past few years, and even more so when the client is nearing retirement.
It becomes very difficult to be optimistic with the constant market shocks and negative news both locally and internationally. It is repeated time and time again but it is important to not let fear lead clients to making adverse decisions.
The true value of an adviser
History repeatedly shows us that markets recover from bad periods and that investors who ride out the tough times tend to do much better than those who sell out of the market.
But if we look at investment flows in times of high volatility, we see the converse of this. This is where the true value of an adviser comes in. Being able to stomach tough times and under-performance becomes more a function of trust in an adviser as opposed to knowledge of investment finance principles. Many professionals in the industry have advisers themselves, because they also need someone to help manage their emotions. Advisers also keep the focus on the long term goal of a comfortable retirement and steer clients away from “knee jerk” reactions.
Contextualising your investment
If clients understand upfront what they’re buying, it makes it easier to tolerate future volatility. It’s quite common for clients to refer to investment returns as “interest”. If a client views a market-related portfolio the same way as they would a fixed deposit at the bank then they are more likely to see negative returns as “losing money”. However, if the client can see that they actually own small units of companies (equity), provided loans (bonds) or own a piece of property, then it becomes easier to relate to the under-performance.
It gives investors a different perspective when they look at the JSE Top 40 with the significant negative returns year to date and see a “sale” on top quality companies as opposed to seeing loss.
There are two major considerations when it comes to saving for retirement. Firstly inflation, the ultimate detractor of value. Conservative investments give you a smooth and low-stress ride but they are never going to beat inflation in a meaningful way. My previous manager used to have a saying when it came to risk: “You either sleep well, or you eat well.” I personally would prefer the latter.
The second big consideration is longevity risk. Life expectancies have increased steadily over time and many of us have a high probability of reaching 100 and beyond. This means that our retirement life may well be longer than our working life. This means that growth investments become more of a necessity than a personal choice.
Stay the course
Once your retirement strategy is in place, it is usually best to trust in the plan and keep to the time frames. Adverse decisions are usually made based on short-term market fluctuations which will have long-term ramifications on your retirement. If the focus remains on the ultimate goal (retirement) then the noise tends to soften.
It may seem difficult to ignore the negatives around us. The way I like to think about it, is that investing in the market is essentially betting on the progress of everyone around us. Sure, the challenges and obstacles are numerous but we have, and always will, persevere.