Investment risk vs reward: what is driving South Africa’s current appetite for risk – and should we be worried?
Sonja Steyn, Head of Wealth Management Strategy, Private Wealth & Business Management at Consult by Momentum
When it comes to their investments, South Africans are not known for their propensity for risk.
Perhaps as a result of encountering more than our fair share of risk every day – will my house be burgled? Are we going to be hit with stage 6 loadshedding? Is the rand going to take a turn for the worse? – we lean towards conservative in our investment approach, veering away from riskier investments.
So, it may have come as surprise when a move to higher-risk funds was reported a few weeks ago, with the Association for Savings & Investment South Africa (ASISA) noting that local investors were increasingly turning away from traditional safe havens such as money market funds (which are seeing returns suffer under inflation), and showing renewed interest in equities and other higher-risk, higher-reward vehicles.
According to ASISA’s data and excluding reinvestments, around R11.6bn of net flows were directed to multi-asset funds, with a significant portion landing in multi-asset high equity funds, and around R6.9bn in equity funds.
Sonja Steyn, Head of Wealth Management Strategy, Private Wealth & Business Management at Consult by Momentum, weighs in. “Our advisers have noted a move towards higher-risk investments across the market, but this is not necessarily a wise move for every investor,” she cautions.
Defining risk
In finance, risk refers to the degree of uncertainty and potential financial loss inherent in an investment decision; however, Steyn believes that this definition should also take into account the investor’s personality, circumstances and the expected investment lifespan.
Steyn says that it is vital for advisers to determine their clients’ financial goals and the time they have to achieve those goals. “The shorter the timeline (or older the client), the more conservative the approach should be, as they won’t have the necessary window to recoup any potential losses.
“Secondly, advisers should ask: what is the investor’s risk appetite, tolerance and understanding? An appetite for risk doesn’t always equate to a favourable tolerance; it may be that the individual is comfortable with risk, but their financial circumstances do not allow for any potential losses. This is where a good understanding of risk comes into play.”
The silly, the safe and the savvy
She says there are several factors which have contributed to a growing appetite for risk among local investors. “There will always be times of market volatility, but these times of stress also create investment opportunities and an ideal environment for buying, invigorating investors’ risk appetite.”
While this can be a good thing, she adds that it is prudent to seek guidance from a qualified financial adviser, who will help guide your decisions. “Investors are often swayed by new products such as Cryptocurrencies and supposed lucrative returns, without always realising the greater losses that come part and parcel with new vehicles.”
She adds that sudden market movements can often be attributed to a very human emotion: fear. “There is a concern among investors around the possibility of their funds being used to support failing infrastructure. Particularly in a volatile economy, investors are understandably wary of losing their hard-earned savings, and so move their monies into other higher-risk vehicles or funds that appear to offer better returns and are not controlled by government.”
During the early stages of the Covid-19 pandemic, some investors panicked and exited the market or de-risked their portfolios, and later lost out on the phenomenal market recovery. In an attempt to ‘catch up’, they sought out high-risk, high-return investments – another factor possibly driving the current market trend.
Finally, she says, South Africans are notoriously poor savers, and so “the closer they get to a milestone, such as retirement, the more desperate they are to rapidly build capital. This leads to high-risk placement of funds, which is not always the best plan for their particular circumstances,” she adds.
However, it seems that a ravenous appetite for risk is not evident in all investors, according to Consult advisers. “Our advisers have told us that many investors (particularly those nearing the retirement stage) typically opt for traditional rather than living annuities – a clear sign of risk aversion. They’ve also seen a move to income funds driven by a desire for safety, which offer better-than-cash returns.”
Steyn adds that inflationary pressures (exacerbated by the Russia-Ukraine conflict) and ongoing market volatility are making investors nervous, which typically precedes a drop in investors’ desire for risk.
Those who are astute about their investments tend to play a more active role in their portfolios, says Steyn. “They understand the macroeconomic factors that impact their investments and are wary of unduly risky investments or scams that their friends and family may fall victim to.”
Weighing risk versus reward
So is risk a good idea? Steyn believes that you need to weigh the potential risk against the possible reward. “There is a time and place for higher risk investments. For a professional in their 30s or 40s who is earning a decent income, now is the time to look at medium to high-risk investments, as you have time on your side.
“However, this needs to be a calculated and informed risk. In most cases, a well-diversified portfolio will ensure a good balance across higher and lower-risk asset classes.
She concludes, “To get real about your success, you need to get real about the advice you take. Even the savviest investor will benefit from engaging a qualified and experienced financial adviser, who’ll be able to spot the potential investment opportunities and pitfalls you haven’t thought about.”
ENDS