Why have my retirement savings lost so much value?
Your retirement savings are invested into financial markets, thus there is a link between your investment and the financial markets. A portion of your retirement savings are in shares; shares and your investment have either a positive or negative correlation. This means when share prices or values increase so do your savings, however the same theory applies when share prices fall.
Share prices worldwide have experienced exponential losses due significantly to COVID-19, with the USA alone recording one-third loss in share prices (-30%). South Africa too has felt similar losses when measured in Rands (-33%). These events have been the reason your retirement fund savings have decreased.
What is the reason for the financial market crisis?
There have been several problems in the world economy for some time now. With last month a term known as “March Madness” arising, this was due to the recent global health emergency caused by the coronavirus, oil wars and the South African credit downgrade. The reason for this effect, is somewhat because the virus will have an impact on economic growth going forward and partly because of the decrease in consumer confidence. Low consumer confidence occurs when individuals are uncertain and anxious, leading them to sell shares because of fears of further decease. When many people are trying to sell off their shares at the same time it causes share values to drop.
Will my retirement savings decrease further and eventually recover?
Markets have fallen by over -30%, but they have subsequently gained is up +29% from its lows in March. Meaning markets are recovering already and you could have missed out if you sold out.
So, Yes, it may happen that they decrease further and yes, they will recover – history proves that markets always recover. Financial markets go through cycles, we know that over some period’s markets go up, and over other periods markets go down, however we do not know when these ups and downs will happen. Coronavirus has caused many uncertainties. No one currently knows how it will end or when it will end – this means we still do not know the full impact this will have in financial markets or economies.
Understandably, seeing hard-earned savings decrease is tough to see, however, since 1969 financial markets have recovered within three years when similar losses have been incurred. History proves financial markets will always recover, below is an illustration which depicts the returns over 12 months, and 5 years after the worst trading days in the JSE. Three of those dates were from last month.
Do global financial markets affect my retirement savings?
Yes, this is due to several reasons. Firstly, a portion of your savings are often invested offshore, thus macro-factors outside of South Africa can impact your savings. Secondly, a disaster such as COVID-19 effects the world economy and world financial markets, which ultimately impacts the local economy and financial market. This means that global financial markets can affect retirement savings that are invested locally. Therefore, the recent fall in the global financial markets have had a negative impact on your investment values.
When will the markets recover?
We cannot give a date on when the market will recover, history shows us that markets tend to recover within one to three years after a financial crash. In fact, investments tend to perform very well after financial crashes.
Despite this crisis there are two positive takeaways to look at. Firstly, government officials worldwide are taking necessary steps to protect economies, financial markets, jobs, and health during this difficult time. Secondly, the markets in the past have always delivered, according to Moneyweb journalist Patrick Cairns “Historically, over any rolling five-year period, the JSE has never delivered a negative return”.
Should I switch to a different investment portfolio?
A common mistake people make is having an impulse reaction and transferring their investment portfolios into cash-type investments, such as money-market funds. This is not a good choice when markets are low.
Investors that sold out at the bottom have lost out on the 29% gain in the first two weeks of April.
Yes, Money Market funds do hold less risk, and they didn’t experience as much loss as high risk portfolios, the time most investors make this switch it is too late and the worst is already done. Because we do not know when the financial markets will fall and how far they will fall.
The most suitable strategy will be to speak to your financial advisor and get professional advice on what will be best to do.
What are you doing to prevent my retirement fund savings from reducing further?
We cannot eliminate the risk brought about from this financial crisis, but we can manage them. Our approach as financial advisors is aimed at ensuring we maximize our client’s investments to growth opportunities whilst as well as protecting them against market downturns. This is done by our multi-management approach which is why we spread your investments across different funds.
All our model portfolios are well diversified across various asset managers (Allan Gray, Ninety One, Prudential, Fairtree, etc.), assets classes (type of investments) and investment styles. We aim for our portfolio’s to be robust in various scenario’s, with the underlying funds having differently timed peaks and troughs – this means that while some of our funds outperform the benchmark, others aren’t. This ultimately delivers constant performance. We also consistently make changes where necessary to the funds right through these periods.
How does this market downturn create opportunities for me?
A decline in investment values lead to most investors panicking and selling off their shares. This is when the common phrase “buy low, sell high” is suitable for wealth creation. This is because investors can afford to buy more shares with their money they have, because share prices are so low. In other words, imagine going to the shops and instead of paying R25 for milk, it only costs R15 – exact same milk, much better price.
There is no such thing as market timing. Remember volatility = opportunity.
What to do during high market volatility like this?
- Do not miss out – if you sell out too quickly, you will lose out on the market’s recovery.
- Talk to a professional – keep in touch with your financial advisor during this period.
- Try not panic – When people panic, they often tend not to think clearly. News headlines can be very deceiving, it is important for investors not to make decisions based off these headlines. Furthermore, there has been more and more cases of “fake news” coming out, and with technology this fake news can be shared very quickly and easily. It is important for investors to distinguish fact and fiction and get advice before making investment decisions.
- Don’t try outsmarting the market – Attempting to make portfolio switches and time market movements can lead to missed opportunities and furthermore wealth losses.
- Control only what you can – Understandably emotions can easily take over during this period, however, keep you end goal in mind. Buy low, sell high!
Should I contribute more to my funds?
Make every effect you can to continue your retirement fund contributions. Always try have your future self in mind, and by saving towards retirement and keeping your retirement savings invested are the most important things that can be done. Below are several addition benefits for keeping your retirement savings:
- Contributions are tax deductible – Lowering members annual taxable income.
- Tax exemptions – While retirement savings stay invested there is no tax on interest, no capital gains tax and no dividend withholding tax.
- Protection from creditors
- Compulsory savings are a benefit – Most employees depend on their retirement savings as their only source of savings. Not having a retirement fund can lead to many individuals struggling to make ends meet when they retire.
This is a very difficult time, leaving many to feel uncertain. It is highly important to remember to keep calm and get professional advice before making any investment decisions.
Feel free to contact our office should you have any queries or concerns.
(Source: Morningstar, Alexander Forbes and Moneyweb)