![]() Avoid typical mistakes In times of stress, the human impulse is to take action. When investment returns start to sink, this instinct could drive investors to do something – anything – just for the sake of taking action. This is precisely the wrong reaction in challenging times. There are many knee-jerk responses to short-term underperformance – all of which will ultimately detract from long term returns Switching to cheaper products In a low-return environment, clients typically consider cheaper managers or passive products to save on fees. However, this is precisely the time that outperforming the market becomes even more important. In a high-return environment, alpha is nice to have. When the market delivers 15%, it’s nice to achieve an outperformance of 2% or 3%. But in a low-return environment, outperformance really starts to matter. Outperformance of 2% to 3% on a base of 9% is a must-have: The difference between 9% and 12%, compounded over years, can transform your retirement. Skill in delivering strong outperformance becomes more valuable (not less) in challenging times. Investing with managers that have a demonstrable track-record of successful asset allocation will become even more important. Cutting exposure to risk assets When the investment outlook and market sentiment are poor, stressed investors often lose their tolerance for volatility. However, it is crucial that investors maintain appropriate exposure to growth assets, which are the only investments that will provide the real long-term growth investors require. Shortening your time horizon The temptation is to shorten your investment horizon – instead, it should be lengthened. Identify long-term winning managers and asset classes, and back them for the long run. Don’t fidget or lose faith at precisely the wrong time. Retirement investing In a low-return environment, it is key that your clients exact strict discipline in their draw-downs. The gains from reducing annual drawdowns is non-linear. A small reduction in the drawdown rate can add years of additional retirement income. It is also important to understand the place of underwritten annuities in the market. In times of low returns, it is tempting to buy an underwritten annuity. But investors should be sure that the product is suitable to their needs. Be very careful of annuities that escalate by a rate below inflation. Currently, a 65-year-old investor typically gets a 4.7% yield in an underwritten annuity, which escalates at 5% a year. This may feel like a low-risk option, but in fact it is actually a proposition that holds a lot of risk. Over a 30-year time horizon, the power of compounding will not be on your side. In 30 years, something that costs R1 today will cost R4.3 at 5% inflation (compounded), compared to R5.70 at 6% and R10.10 at 8%. No-one knows the future; South Africa is a volatile and uncertain place, and inflation could just as easily average 8% as 5%. Inflation protection is crucial, and we do not believe investors should consider anything less than an inflationary escalation. Source: Coronation Comments are closed.
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January 2025
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