Steven Nathan, founder and CEO of 10X Investments, answers some frequently asked questions about investing during a pandemic.
1. Should I put my investment plans on hold?
The perfect time to start investing for retirement, as the saying goes, is when you start work. The second-best time is now. Long-term retirement investing is a goal-orientated pursuit that is totally unrelated to what financial markets are doing at present, be it good or bad.
If you still plan to retire one day, you should not delay implementing your retirement plan, irrespective of what is going on at present. Procrastination is the thief of time (and money) as far as your retirement savings are concerned.
2. Should I pause my contributions when the market is low?
No. It’s better to invest when markets are low as you are a buyer of investments and investment prices are lower. However, we never really know when investment markets will do well or badly over the shorter term so the best strategy is to invest as much as you can through good and bad investment markets.
READ: Don’t stop saving now, you are getting fantastic value
3. Should I invest more now that the markets are down?
Saving more towards your retirement is recommend under all market conditions, as this reduces the risk that you will miss your retirement goal. If you have additional funds available, putting them into your retirement fund is usually a very good idea. Not only will you benefit from compound growth over the years, but you can also take advantage of tax incentives on retirement saving.
Earnings that you put away for retirement are tax-free, which means the government returns any tax that you have paid on those earnings, up to a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000. You can contribute more to your retirement annuity but, after you have reached these limits, your contributions are rolled forward to and automatically deducted in future years.
4. Should I switch portfolios?
Unless your retirement plan called for a switch to a defensive portfolio during a pandemic, you should stick to your original plan. Your retirement plan is designed to give you a high chance of reaching your savings objective under all realistic conditions, including the one we are presently experiencing.
Of course, you could deviate from your long-term plan, and switch into a more defensive portfolio, holding mainly cash, in the hope that markets will go lower still, with the idea that you would return to your growth portfolio at a later stage. That is a nice idea, but very hard to get right with the potential to make a mistake. You would need to get your timing right, not once (when to sell), but twice (when to get back in).
If markets fall further, then yes, you could reinvest at a lower level. But if they don’t, you will merely lock in your losses. Equity markets turn well before sentiment does. Much of the ‘long-term’ return is earned in short spurts after these turning points. Missing out on the initial recovery can cost you many years of the ‘annual average return’. Or it might cause you to stay out of the market altogether, waiting for the next correction to get back in.
Investing in a more defensive fund is going to give you a calmer ride, but it may not take you as far as you need to go. Investing in a high equity portfolio, rather than a defensive or low equity one, has historically delivered higher returns over periods of 5 years and longer, so this strategy should make your savings last longer, and/or afford you a higher sustainable income.
5. When would be a good time to do a lump sum deposit?
No one can realistically tell you when the best moment would be to make a lump sum deposit, except to say that the sooner you make that deposit the longer it will be invested and the more time it has to grow. The benefits of time tend to outstrip the good luck of good timing.
But if you are not comfortable taking on this timing risk, you could split your lump sum, and make a series of smaller investments over time, to mitigate against this.
6. Should I defer my retirement?
Provided you follow an appropriate investment strategy, your decision to retire should not depend on what is happening in the financial markets. If you expect to retire within the next five years, then you should already be transitioning your current portfolio into alignment with your post-retirement investment strategy.
If you are approaching retirement, and your plan is to buy to buy a life annuity or invest defensively in a living annuity, your fund administrator would have switched your portfolio on to a de-risking glide path, gradually swopping out your share market exposure for more defensive investments, such as bonds and cash. Although this would make you more exposed to the bond market (which also fell sharply in recent months), you are hedged against this, because lower bond prices translate into lower annuity prices. So what you’ve lost on the swings, you’ve gained on the roundabout.
The typical de-risking glide path is 5 years.
If you are only just starting out and still felt the brunt of this correction in your high equity fund, then you have time in hand to recover before you retire, or to re-evaluate your retirement decision at a later stage.
If your retirement is imminent, and you plan to invest in a high equity fund in your living annuity, and you have accordingly not de-risked your retirement portfolio, then you may be starting your retirement with less capital than you had planned. Although you have time on your side to recover from this, it would be prudent to delay your retirement, if you have that option, or to draw less income than you had planned initially, so that you don’t deplete your capital too quickly.
If you have not invested appropriately – that is to say you have not adjusted your level of market risk to your time horizon – and the current market turbulence has caused you to miss your savings goal by a considerable margin, then you could consider delaying your retirement, if you have that option, in anticipation of a more favourable outcome in future.
7. Should I switch from a Living Annuity to a Guaranteed Annuity?
When you initially chose a living annuity over a guaranteed annuity, you did so because you believed that the former better met your financial needs. You would have done so knowing that you have the opportunity to switch to a guaranteed annuity at a later stage should it then serve your financial needs better. As your circumstances and financial market conditions change over time, you should re-evaluate this decision every year, before your policy anniversary date, also this year.
However, if you are merely worried about the volatility in your high equity portfolio, you should look to offset this for now by preserving your savings by a) reducing your draw-down rate and b) switching to a low-cost annuity.
8. How can I make my capital last longer?
Many investors are paying high fees, in some cases, close to 3% pa. Switching to a low-cost living annuity (charging 1% or less per annum), would mean they could pay themselves a higher pension, or their savings would last much longer.
Whether or not you are already keeping your costs low, you could look to counter any market value lost in your portfolio by temporarily reducing your annuity income.
If you normally request one annual payment, consider switching to a monthly one, to reduce the timing risk of drawing your entire income at a market low. A recovery may well be underway in a few months’ time, or sooner, which would moderate the impact.
If your policy anniversary date is coming up, consider lowering your draw-down rate for a year or two, to preserve your savings. If you have just passed your policy anniversary date, then you are bound by that until next year.
In that case, try to cut back on your spending and reinvest some of your income, possibly into a retirement annuity. You could save some tax and also return your savings to the market, buying back at a low price what you were forced to sell at a low price.
9. Will the market go lower?
Nobody knows, and it really should not matter to you. Your investment decisions should not rest on what markets are doing at present, but rather on your financial needs and your investment time horizon.
What is going on in the world right now is deeply unsettling, but it is important to remember that the point of a long-term investment strategy is to anchor you in times like these, when things are confusing, or up in the air. Your long-term plan should be designed to protect you from over-emotional choices and knee-jerk reactions in times of turmoil.