Retirement savings – keep your eye on the goal

Behavioural finance explains how market movements and the resultant emotional reactions thereto may cause investors (including members of retirement funds) to make financial choices they might not otherwise make. The relationship between these emotional reactions and poor financial choices has become clearer as the study of behavioural finance has
evolved.

The only certainty about market movements is that they are uncertain.

As Ben Bernanke, former chairman of the US Federal Reserve, explains it:

"In some ways, predicting the economy is even more difficult than forecasting the weather, because the economy is not made up of molecules whose behaviour is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behaviour may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy scepticism."

Volatility in a depressed economy

Finance Minister Tito Mboweni earlier this month delayed the much-anticipated Medium-Term Budget Policy Statement by a week, moving the date from 21 October to 28 October. When he gave his June 2020 Covid-19 emergency budget, Mboweni rang the alarm bells over debt, noting that 21 cents in every tax rand was spent on meeting interest costs on historic debt. The country’s debt services are estimated to reach 22% of GDP this year. Mboweni’s “active scenario”, which entails R230 billion in expenditure cuts over the next few years, seems hopeful at best and unlikely at worst.

The IMF World Outlook released in mid-October expects South Africa’s GDP to contract by 8% this year, while unemployment was forecast to rise to 37%. Consumers are definitely feeling the pinch as they strive to manage increasingly strained finances. According to the Credit Bureau Monitor recently released by the National Credit Regulator (NCR),  the number of consumers classified in good standing has decreased by more than half a million, to 16.96 million consumers, while those with impaired accounts increased by 24%, to 20.66 million.

2020 has certainly been a turbulent year, with the goalposts constantly shifting as Covid-19 cases spread and one of the strictest lockdowns in the world resulted in the loss of more than 2-million jobs. At times like these, markets tend to be volatile, with large sell-offs and quick recoveries in both global and local markets. When faced with highly volatile or risky markets, there may be a temptation to switch into less risky portfolios, but we do not advocate such a response. It is impossible to time the market consistently or accurately predict the timing of a market recovery. Switching out of a portfolio with a high share allocation means you are likely to miss the recovery if you get the timing wrong – and it is likely that you would get the timing wrong.

Life-stage model investment strategy

At Sygnia Umbrella Retirement Funds (SURF), our default investment strategy is a life-stage model that uses four risk-profiled portfolios. To achieve an investment return of 5% above inflation, you will be invested in an aggressive portfolio for most of your contributing life. In the aggressive portfolio, about 70% of the portfolio (70c for every R1) will be invested in shares, both locally and abroad. Being invested in shares means that your portfolio performance is linked to the performance of shares on the Johannesburg Stock Exchange – this is a market-linked investment portfolio. This is a long-term investment, which is why the savvy investor trains themselves to ignore the monthly or daily return figures and remains focused on long-term performance.

Below, we look at the incidence of negative returns over different time periods for the 70 portfolios in each of the three SURF life-stage ranges:

The table clearly shows that returns may be volatile in the short-term, with higher chances of negative returns. However, the probability of a negative return reduces over time, and the probability of negative returns becomes unlikely after the three-year mark. 

If you are using the life-stage model as your investment strategy, your retirement savings will automatically be transferred to a more conservative and lower-risk portfolio as you approach retirement age (from portfolio 70 to 60 to 50 to 40 each year). But even close to retirement age, short-term focus is not helpful when looking at the performance of your retirement savings. While retirement is a milestone, recent longevity changes over the last two decades suggest you are likely to live at least 30 years beyond retirement age.

The bottom line

The ideal attitude towards your retirement savings is to remain focused on the long-term goal; contrary to popular opinion, the goal is not to have a pot of money the day you retire, but rather to ensure your retirement savings will be sufficient to sustain you through your retirement years.