Rugby World Cup fever is following its usual 4-year cycle of uniting a country that has experienced a wealth of emotions and it’s too tempting an opportunity for me not to produce a rugby analogy to summarise the last 4-5 years of investments returns for the average South African investor.
Whether you feel like you’ve caught a rogue elbow to your eye socket, or a boot to your lower extremities, it is perhaps an understatement to liken the investor experience to a bloodied rugby pitch. As you’re walking around the pitch, somewhat dazed, hopefully this article will provide some first aid relief in what seems to have been an unnaturally lengthy 80min match by answering some of your most pressing questions.
Given the current low growth and low return environment, when can we expect to see a reversal?
The graph above illustrates the point that the equity market has been in the position of underdelivering on a 3% real return target before. Interestingly, we are now almost on par with the period of underperformance during the Global Financial Crises in 2008. As painful as the past 3 years have been, it is clear that when the tide turns, it turns sharply, and the correction is significant (shown by the greater grey area above the dotted line). This underperformance is part of the investment cycle, and notwithstanding the undercurrent of uncertainty generated by macro events linked to political or economic outcomes, asset class returns will converge back to their long-term average over time.
The table below shows the expected forward-looking asset class returns, where local equities and property should give you 6-7% real, and local bonds and cash, should yield 3% and 1% real respectively, measured over a 10-year period. When exactly the reversal will happen, is not something we can say with any certainty, but being invested through the pain is one’s best opportunity of finding yourself on the favourable side of the scoreboard in the 80th minute.
What should I do within the current growth landscape if I need a monthly drawdown of more than 6% post retirement?
The idea of saving adequately in the here and now, to avoid a more uncomfortable standard of living after retirement, is a concept that should inspire us all to heed the necessary gravitas in our approach. Within a living annuity product, upon retirement, one can select drawing between 2.5 – 17.5% as a monthly income. Deciding which percentage to draw, is of course based on the total size of the pot you’ve been able to save up. It is therefore critical to build that pot sufficiently while saving towards retirement.
Many people would like to draw 6%, but in reality, this is not always possible, as people often live above their means and do not follow an investment strategy of adopting the correct level of risk to be able to give them the best chance of meeting their income requirements. We are creatures of habit, and adjusting one’s standard of living would most likely involve a level of focus that could even be likened to the concentration of South Africa’s greatest flyhalf, Hendrik Egnatius Botha.
Historical returns going back to 1905
The graph reflects the various drawdown scenarios for a 60-year-old male that retires today and has R1m savings that has been allocated in a low equity strategy. Drawing 6% monthly will see the individual starting to draw less than their monthly requirement by age 75. By the age of 80, their income would’ve halved, which is far less than an ideal situation. People are also living longer than before, and this would further exacerbate the situation of running out of money and one’s golden years turning into the cost saving strategies of one’s gap year. Nedgroup Investments has developed a very useful tool in the form of the “Big Picture App” to help advisors with making better investment decisions for their clients. Many different scenarios can be modelled and we encourage you to try out the app on our website.
Is investing in Cash and Fixed Income funds a suitable or appropriate long-term strategy?
In short, the answer is no. There will be times like the present, where investors are tempted to act on emotion and move to the more predictably safe option of being in cash. The reality is that cash and income assets do not offer the same return profile that equities exhibit over the longer term.
As an investor, you should be aware of your inherent risk profile, and not second guess an investment strategy with a higher equity allocation during periods of market underperformance. To switch in a down market will still be the wrong decision as you’ll not only be locking in your losses but also putting yourself at risk of trying to time the re-entry, which is not an easy endeavour. The table below shows the medium to long term average peer group returns for the spectrum of risk/return products ranging from cash, enhanced cash and bonds, as well as low to high equity multi-asset products.
As is illustrated above, the longer term returns for the multi-asset categories with higher levels of equity as a component, are better suited to provide an investor with the ability to achieve their long-term investment objectives.
Now that we’ve touched on some of the difficult questions investors might have while trying to ignore the trauma they’ve been feeling for the past few years, we can only hope that the Rugby World Cup ushers in good fortunes for a country that could do with a bout of positive momentum. It could just be the healing ointment needed to remedy more than a few bruised limbs out there.