Edition: March - May 2015
Editorials

SAVINGS

Spoiled for choice

It can be counter-productive, and often is.
The industry should not only issue exhortations but also look to itself.

It’s a no-brainer. Rather, it’s supposed to be a no brainer: the sooner one begins to save, the more and the longer one saves, the greater the ultimate payouts. That so few South Africans adhere to such demonstrable basics, and are prepared with open eyes to risk painfully diminished lifestyles as a consequence, surely doesn’t indicate that so many lack brains.

The warnings are trotted out at a pace that’s fast and furious, for example in the depressing results of surveys annually produced by Old Mutual and Sanlam. More brightly, the Association of Savings and Investment SA (ASISA) has illustrated the flip side in what happens as a consequence of regular saving (see charts showing returns net of costs).

Why then the preference, reflected in the dismal level of SA household savings, not to save? The reasons hardly bear repetition: that savings are a grudge purchase; that the state or one’s children will pick up the tab; that short-term exigencies displace long-term priorities, and so on.

Ho, hum. It’s better to satisfy consumer cravings than accept, as it’s said, that those who choose not to enjoy the rewards of compound interest (by accumulation of savings) are doomed to suffer from it (by accumulation of debts).

But perhaps there’s another reason for the consumer behaviour that defies common sense. It relates to the savings industry itself. The range of products on offer, and their complexity in comparing some with others, is intimidating. Rather than respective individuals making decisions on what’s best for them, they make no decisions at all.

It’s a no-brainer.
Rather, it’s
supposed to be
a no brainer:
the sooner one
begins to save,
the more and the
longer one saves,
the greater the
ultimate payouts.

Possibly too, there are elements of mistrust. Much is heard about charges and fees, all of it negative. Much is heard about various types of funds performing better than others, all of it confusing. People naturally want to go into the top performers, but rival marketing claims can see targeted audiences at their wits’ end. Making a real meal of it, continued hullabaloo about risk and volatility frighten the innocent.

savings-graph-1  

It’s all very well to recommend that potential clients consult their financial advisors. The fly in the ointment is the pressure on advisors themselves, to get atop the array of choice and to offer “independent” recommendations free from the interest conflicts that so concern the regulators.

What’s left? Simply, a return to basics that the ASISA charts illustrate. Frankly, it hardly matters how one saves so long as it isn’t in cash (hammered by inflation) and is diversified across asset classes (to hedge one’s bets). Then it’s a matter of catch as catch can, for there’s no predictability in the future performance of one peer group against another. At present, and over time, the case to have a high component of a portfolio in equities screams out.

savings-graph-2

The operative term is “over time”. Having ridden through the 2008-09 financial collapse, share markets across the world have continued consistently upward in defiance of lacklustre economies.

Thanks are due largely to the “quantitative easing” by central banks pumping out money, leading to record-low interest rates as a counter to fears of deflation. It’s also led to recordhigh equity prices, and in turn to fears of an assets bubble that can prick when “quantitative easing” eventually reverses into tightened interest rates.

All the more reason not to take guesses at timing the market. Sit it out and be comforted by history. What applies to individuals in their own right applies equally to individuals in retirement funds. The fortunate difference is that the latter have little choice.