This year, so far, has one common theme – massive market volatility, the sort of volatility we haven’t seen since the pandemic. Most of that volatility has come from Trump’s Tariff tantrums, but locally there was also a brief wobble around the budget. Source: Sharedata.co.za  Watching an investment go through wild swings can be highly stressful, especially if you are in retirement and this is your retirement nest egg, but here as some time-tested tips: 1. Understand your risk appetite. In other words, know how much volatility you can stomach before you need to reach for your sea-sickness pills. This is sometimes called risk profile and is actually a requirement in the FAIS act (Financial Advisory and Intermediary act (Section 13 and General Code of Conduct)). There is a FAIS approved risk profile questionnaire that I use for this purpose, as required by the Act (you’re welcome to email me for it) but frankly it is often more of a tick box exercise rather than being really instructive. Many of my clients are at, in or near retirement and, in my opinion, the biggest risk they have is running out of income before they finally punch their ticket for the last time. That is not just a sickening feeling, it is devastating and life altering. It is the role of the financial advisor to be the devil’s advocate, and if necessary, a buffer.  2. Use a human buffer. While this may not be in a financial advisor’s job description, we often play the role of buffering the client from the day to day to fluctuations of the market by putting the movements in context, summarizing the performance periodically (at most, in my opinion, once a month) and tweaking the investment to align with the objectives of that investment. (You can read another post on the role of a financial advisor here) Let me use a couple of real-life examples of how useful this is: During the pandemic panic in Feb/March 2020 the drop in the in markets was a gut-wrenching 31% and I am sure most investors remember that sickening feeling as it tanked, and social media was awash with pundits telling you to cash in everything (including your pension and provident preservers, taking a massive tax knock) and push everything offshore ASAP because RSA Inc was going to hell in a handbasket. Moving on mere months, just like the story of Chicken Little, the sky did not fall on our heads, and the markets were back up at the previous levels by the 10th of August. As advisors and asset managers it is our job not to panic, and certainly not to follow the lemmings and put a 36% hole in someone’s preserver (on top of the 30% they had already lost in the market). At Rexsolom we used the opportunity to buy quality stocks that had been on our wish list but we had deemed ‘overvalued’ before the dip. We had a bigger issue with finding yield (for portfolios that require an income to be generated) because interest rates and bond yields were so low for much longer. In the ‘Liberation Day’ dip, the panic was much more short lived, but was still a short sharp almost 10% dip in the JSE, but nearly double that on the Nasdaq. When these short sharp ‘corrections’ (as they are politely called) happen you find that it is the ‘retail investor’ (man on the street) that reacts, usually, not the professionals. Professionals, like ourselves, sit on the sidelines and pick up quality stocks that have been thrown out with the bathwater in the retail investor’s haste to offload stocks before they reach the bottom. Some retail investors may employ ‘stop losses’ which automatically trigger when a share falls below a predetermined level – so might well have woken up to every single stop loss being triggered overnight. The use of algorithms (used by professionals and retail investors alike) to make automatic buy and sell decisions would also have exacerbated the situation, adding to the sickening drop until buyers come back in the market and pick up the spoils.  3. Every investment should have a very clear objective. This includes the end use, the length of time it will be invested, the need for liquidity of the investment, the tax implications or objectives, where and how it should be invested, need for liquidity, estate planning considerations etc. This will be built into most financial plans, but if you are doing your own investment, don’t skip this step. Flying by the seat of your pants comes with a Surgeon General’s warning that it might be detrimental to your health. 4. The time scale of the investment is a vital consideration. There is a mathematical correlation between risk and time and understanding that is crucial to the ultimate success of the investment. This is most usually measured by ‘Standard Deviation’. Simply put, Standard deviation is a measure of how ‘bumpy’ the roller coaster ride is. I don’t want to get into the higher-grade boring math here, but over time the standard deviation is less and less of a factor. Let’s look at an investment over say 8 years, in stocks (a volatile investment). In one year, you have a good chance of getting a return anywhere from -31% to +30%. If you need that capital in a year – you probably don’t want to take this risk. I think most of us know that intuitively. Say you cop a drop of -10% in year one (from the long-term average), but stay invested, and the y-o-y growth in year two is +10% above the long-term average – you are now back in the same place. (Note that I am explicitly talking about deviation from the average, an actual 10% drop investment has to grow 11.11% to get back to the same place – the maths of percentages.) This sort of deviation from the mean is usually shown on a bell chart. These two movements have cancelled each other out, and over time they are likely to get closer and closer to the ‘long term average’ (aka the mean). The long-term average for the JSE since 2000 is 11%. Fixed income like money market and bonds are much less volatile, but their long-term average is also lower, so your capital retention is more certain over shorter periods of time.  5. The biggest risk in your lifetime is not having sufficient capital to retire on. In my opinion, this potential risk far outweighs whatever the ‘Risk Profile’ might indicate. This is a hard conversation to have with a client. After 20 or 30 years of diligently putting money into a retirement investment, believe me, nobody wants to be the messenger that tells a client that it is not going to be enough to sustain the lifestyle they want. Only 6% of South Africans actually retire ‘comfortably’. Before retirement one has a number of variables to work with – you can contribute more, use a more growth orientated asset allocation (even if the risk profile deems you to be a cautious investor), trim your expenses and plan to work longer. At retirement, those options shrink dramatically. To ensure a sustainable income over the long term the investments may need to be more fixed income orientated (even into considering life annuities) even if you’re a risk-tolerant maverick. In summary then, whether or not you use a Financial Planner to help you navigate the murky waters of investing, it’s important to have a basic understanding of what risk is, what your risk profile is, and come to terms with the fact that you may have to move out of your comfort zone to get a better long-term outcome. If you’d like a copy of the Risk Profile questionnaire, or ask me any follow up questions, please feel free to email me. |
| Articles and Blogs: Difficult Financial Conversations NEW Kick Start your own Retirement Plan NEW You matter more than your kids – in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |