Issue: March 2012 / May 2012
Expert Opinion

Investment education is key

Capricious and underperforming markets have resulted in investors questioning the viability of their current asset-class mix. Financial advisers need to be mindful of the importance of educating investors during these challenging economic times.

Market turmoil since the onset of the global financial crisis in 2008 has resulted in the financial-services industry being viewed with some mistrust and investors are generally anxious about the future. Yet much can be done to help investors better weather the effect that the economic downturn has had on their investment and retirement planning.

“Bear markets often lead to investors switching from risky assets like equities to cash,” says Sonja Saunderson, chief investment officer at Momentum Manager of Managers, a business unit within Momentum Investments. She advises against this type of switching.

Investment strategies with higher equity exposure are usually formulated with a long-term outlook, she points out, meaning that returns will not be optimal if withdrawn before policy maturation date. Asset losses are often then locked in and there are associated trading and market impact costs affecting savings at a time when markets are at their lowest.

Research based on historical data (1925 and 2006), and using JSE indices as proxies for the different asset classes, showed results that may be surprising in terms of the time it would take an investor to recover lost investment value should the decision to switch to a more conservative investment portfolio be taken.

The figures in the table show that, if a loss of 30% of investment value occurs during a bear market, moving to a more conventional investment option could extend recovery time by almost 35 months.

Investors should adhere to their investment goals. They should speak to their trustees, consultant, financial adviser or investment specialist if they are at all unclear on their asset-allocation strategy. Although the fear (often associated with underperforming markets and related negative returns) is normal, remaining focused on a targeted outcome and obtaining expert advice on areas of uncertainty is preferable to making rash and perhaps uninformed investment-altering decisions.

“Service providers also need to have a fiduciary mindset and to educate investors in terms of alternatives to traditional investment opportunities,” adds Saunderson. “Advisers should adopt a more diversified approach to managing investor money, with non-traditional asset classes -- such as hedge funds, unlisted instruments, commodities and frontier markets -- forming part of the mix. Assessing the risks associated with these alternative avenues is essential and needs to form part of the overall investment service.”

Another important consideration, in terms of encouraging investors to adhere to their strategies, is to ensure that products are aligned with their investment goals. These objectives should be reassessed continually, particularly when personal circumstances necessitate revisions.

Service providers must have the tools and skills necessary for advising clients on net replacement values (the percentage of current income that will be maintained at retirement), as this could similarly act as an incentive for them to maintain their retirementplan focus. Responsible scenario planning can, under present economic conditions, also provide some level of education and assurance in terms of likely outcomes as market changes can be factored into the overall investment approach.

The current economic climate has had a significant effect on investor returns. Investors and advisers should not be controlled by fear and overreaction. They should make every effort to understand their portfolio structures and adhere to their savings plans.

In turn, service providers must ensure client trust is not misplaced. They should consider different asset classes and investment strategies when developing and maintaining client portfolios. These options include cost-sensitive access to different markets that can assist in creating a broader investment spread and, as a result, provide clients with a better chance of enjoying a meaningful return on their investments.

“Investors approaching retirement age could consider, under the guidance of their financial advisors, changing the balance of their portfolios with a view to gaining more protected market exposure,” says Saunderson. “But I would not advise younger people to take this approach. They have time to take on additional risk that could ultimately lead to better capital growth.”

Be informed, whichever route you choose, and tread carefully. Decisions about one’s future financial security should not be made on a whim or in haste.

Momentum Investments is a full-service investment house. With assets under management exceeding R325bn, it holds some of the country’s most respected investments players: Momentum Asset Management, Momentum Alternative Investments, Momentum Manager of Managers, Momentum Collective Investments, Momentum Investment Consulting, Momentum Global Investment Management, Momentum Properties and Momentum Wealth.