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Minister urges South Africans to build their houses on rock

ARTICLE BY

  • Shameer Chothia

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Why this has a profound meaning for your retirement investments 

In his recent budget speech, Finance Minister Tito Mboweni warned South Africans that “the storm is not over”. Although lockdown restrictions are easing, the unprecedented emergency budget speech drove home the sobering impact COVID-19 has had, and will continue to have, on our lives, businesses and investment markets. This means that the investment markets, where a big part of your retirement savings is invested, are likely to remain volatile for the foreseeable future. 

Shameer Chothia, Consultant at Momentum Consultants and Actuaries, says that for most retirement fund members, the best action is still no action. “Buckle up to weather the storm by staying invested so your retirement savings can benefit as markets eventually will recover.”.  

“In his speech, the minister quoted scripture by reminding us that a wise person builds their house on a rock: ‘like a wise person who built their house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock’. Staying invested during the storms creates the stability you need to weather it.” 

According to Chothia, while most members stayed invested when the recent volatility started, some switched to more conservative investments, like money market portfolios, in the second half of March 2020. This meant that they locked in their losses from the poor performance of the market. 

The figures below show the returns of the local and global equity markets as well as the money market index for April and May 2020. While it’s important to look at returns over the long-term, these two-month numbers for equity-type and money market investments show the extent to which members can miss out by switching at the wrong time. 

Asset class

For April 2020

For May 2020

Local equity market (JSE All Share Index)

13.98%

0.31%

Global equity markets (MSCI All Countries)

14.07%

0.15%

Money market (Short-term Fixed Interest Composite Index)

0.52%

0.50%

 

The figures show that members who switched in March missed out on the slight recovery in local and global equity markets which took place in April 2020. The other bad news for members who switched is that money market rates have been declining since the start of the year because the South African Reserve bank has cut short-term interest rates by 2.75% over the last 4 months. 

“Investing for long-term goals like retirement often means volatility is par for the course. This year the pandemic has been a major driver of volatility but in years to come, it could be something else. It’s still important to invest a big portion of your retirement savings in growth assets like local and global equities which, despite volatility, deliver the high inflation-beating returns over time that you need to save enough for retirement,” says Chothia. 

Although the market ups and downs mean that the value of your retirement savings also go up and down over time, the markets generally do recover and the long-term trend is steady growth. 

Chothia explains, “It’s a bit like walking up a hill while playing with a yo-yo. The hill is the increase in your wealth as you move towards retirement, while the yo-yo is the short-term market ups and downs along the way. Like the yo-yo, the short-term value of your savings may go up and down but the overall long-term value of your savings rises as you go up the hill. 

The problem is that when factors like COVID-19 cause markets to fall, the focus tends to shift to the yo-yo and we forget that our goal is to increase our wealth over time by steadily moving up the hill. When we focus too much on the yo-yo, it can lead to emotional, panicky decisions that push us backwards on our journey.” 

No one knows what the future holds, when the recovery will happen and how long it will last. The key is to keep calm and to carry on with the peace of mind that everything is likely to recover.  

Chothia concludes, “If you’ve just been retrenched or are about to retire, you’re likely to be more worried than the average member as your investments may not have enough time to recover the value lost in the recent market downturn. If you find yourself in this situation, it’s important to talk to a qualified financial adviser who can offer options to minimise the impact of the recent COVID-19 volatility on your retirement savings.” 

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