• Editor

Why staying on course should be on your new year’s financial resolution list

The end of the year is often about reflecting on the changes we want to make in our lives – changes to our eating plans, exercise regimes, relationships or even financial plans. While it’s important to make positive shifts, sometimes the best thing you can do is stick to your current plan.

According to Shaeera Essop, Strategic Client Engagement Manager at Momentum Corporate, when it comes to your retirement investment strategy, it’s key to stay on course despite market ups and downs. “When the going gets tough, don’t allow emotional decisions to switch investment portfolios when performance declines due to market volatility to distract you from your long-term goals. A big part of your financial plan is saving enough for retirement.

The COVID-19 pandemic and international lockdown resulted in high levels of global uncertainty this year. Like us, investment markets don’t like uncertainty and markets have been volatile, delivering an overall lacklustre performance,” says Essop.

The Johannesburg Stock Exchange (JSE) All Share Index (Alsi40), which includes the top 40 JSE-listed companies by market capitalisation, can be used to gauge market performance. It shows how markets declined seriously in February and March this year, started to recover in April through to June, and then dipped again over August and September, declining quite sharply in November, after which they started to rise again. Essop explains that these ups and downs are referred to as volatility.

A large part of your retirement savings is invested in these markets because this is where your savings can grow at a level higher than inflation. This means you would have seen the value of your retirement savings also go up and down.

According to Essop, market volatility is part of the journey all long-term investors experience. “Historical trends show that markets do recover and the value of your retirement savings will rise with the recovery,” says Essop.

“It’s a bit like walking up a hill while playing with a yo-yo. The hill represents 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.”

Having enough money to retire well is your long-term goal

“Your retirement savings have to last throughout your retirement years. With people living longer nowadays, this could be as long as 20 to 30 years. You need to make sure you have saved enough money so you have enough income when you retire and don’t outlive your savings,” says Essop.

“It’s easy to worry and panic when we see our savings lose value when the markets are down. You may even consider switching to a portfolio which does not fluctuate with market ups and downs. However, this can be risky,” Essop says. “Switching to a more conservative portfolio like a money market fund may give you greater stability but returns over the long-term are likely to be lower. Taking your savings out of the investment market when markets are down also means you “lock-in your losses” and miss out on the opportunity for your investments to grow when the markets recover again.”

According to Essop, it is better not to do anything rash and rather leave your investment portfolio choices as they are while you wait for the volatility to pass. “According to our research, people who stay invested through market ups and downs receive inflation-beating investment returns in the long term,” says Essop.

Long-term investing is a bit like taking a long drive

Say you are off on your holiday, driving from Johannesburg to Durban. But an hour outside Johannesburg you hit roadworks, which mean you have to drive a lot slower. Are you going to turn around and go home? No – you’ll tell yourself that at some stage the roadworks will end and you’ll be able to speed up as you travel towards your destination. You know that in the end, you’re going to get to where you want to go.

“Investing for retirement is the same. There will be ups and downs on your journey but if you stick to you plan, you’ll get to your goal of saving enough to retire well,” says Essop.

You are not alone

“While you wait for the volatility to pass, make sure you take the time to understand where your retirement savings are invested and how the markets affect your investments,” says Essop. You can do this by talking to your retirement fund’s benefit counsellors, as well as a qualified financial adviser, who can provide professional guidance to make sure your investment choices are right for your personal needs and future plans.