Preservation fund psychology: Why inactivity can be your best investment decision

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A lot of emphasis is placed on driving growth when it comes to your investments, but sometimes doing nothing might be the best course of action, especially when it comes to preservation funds. Preservation funds are a way to preserve and potentially grow your accumulated savings over time. This type of retirement savings vehicle may remain untouched for many years, and often, that’s not a bad thing.  

In this article, we’ll look at how behavioural finance data may support keeping your savings invested and avoiding making constant changes. We’ll also cover how low fees and smart asset allocation can help you get the most out of your fund.   

What is a preservation fund, and why does it invite inaction? 

A preservation fund is a long-term retirement savings vehicle that is funded by savings transferred from an employer-sponsored pension or provident fund when an employee changes jobs. These savings can be transferred without triggering a tax event.  

Growth within the fund is also tax-free, meaning that potentially more returns can be compounded and grow over time. This is especially important in a preservation fund, as this vehicle is unable to receive any further contributions, so you are relying on the returns generated for growth.  

The way withdrawals are treated has changed with the implementation of the Two-Pot Retirement System in September 2024. This system now splits contributions between the ‘savings’ and ‘retirement’ pots. This is not applicable to preservation funds, however, as further contributions are not allowed. There is also a third pot, which has been named the ‘vested’ pot. This pot is for all contributions which were made prior to September 2024, and the old rules will apply to this pot. According to the previous rules, you are allowed one withdrawal from your vested pot prior to retirement.  

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You aren’t allowed to access your retirement pot until retirement. Upon retirement, it will be used to purchase either a life or a living annuity. The savings pot allows for one withdrawal per year, for a minimum amount of R2000. It’s essential to be aware that withdrawals are taxed at your marginal tax rate, and an administration charge applies. Please consult the FSCA guidance document for the most up-to-date information on the Two-Pot Retirement System.  

Regulation 28 of the Pension Funds Act also needs to be adhered to. This regulation places a limit on the percentage of your retirement products that you can invest in equities, as well as offshore investments. Regulation 28 is to help ensure that investors diversify their retirement products appropriately. Current regulations permit an investment of up to 45% of your retirement funds offshore and 75% of your retirement savings in equities.  

Behavioural traps that can lead to harmful action 

Emotions and behavioural patterns tend to play a bigger role in decision-making than we realise. When you’re aware of these common traps, you can better protect yourself from making impulsive or counterproductive moves. Here are a few common behavioural traps:   

Action bias: Often, investors feel the need to make a change to their investment vehicle (such as changing the underlying funds in which money is invested), when inaction might actually be the better choice. This urge to do something may stem from the idea that being proactive is always better than doing nothing. It may also be linked to a fear of making a loss. This kind of impulsive behaviour can be reduced by sticking to your long-term financial plan and avoiding unnecessary or unplanned changes. 

Market noise: It can be easy to be distracted by ‘market noise’ when we are continuously bombarded with easily accessible information.  ‘Market noise’ is information that is unimportant or misleading and is not of use to you in the long term, but which can have the effect of distracting you from your long-term investment plan and goals. This may then result in making poor, knee-jerk decisions that are unnecessary. You probably don’t need to put all your money in the latest hot stock!  

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Overconfidence: This can be a fairly common behavioural trap. Some investors may feel that they are more knowledgeable and skilled in investing than they actually are. This can lead to investors making poor decisions, which may result in them taking on excessive risk in their portfolio or failing to diversify their portfolios effectively. Making sure you keep on learning - our 10X website contains a wealth of useful tools and articles to help you with this - and educating yourself can help ensure you are more skilled as an investor. 

Loss aversion: People may have a deep fear of their fund losing value. Market volatility in the short term may result in investors panic selling. Another common behavioural bias is to switch out of more growth-oriented assets into more stable asset classes such as bonds or cash. Investors may remain in bonds or cash for many years or even decide to stay invested in cash or bonds permanently. This kind of action may result in losses being ‘locked in’ and, in the long run, lead to potential underperformance of the capital. When the market rebounds, you would ideally want to have your savings invested so they can take advantage of any potential market recovery.  

Recency bias: Investors can also place a high importance on recency bias. This is a behaviour that favours recent events over those that occurred further back in history. It is based on the idea that a recent event will recur soon, and the result of this can be poor decision-making. In order to try to avoid this kind of behaviour, you want to make sure that you stick to your long-term financial plan and try not to be influenced by short-term market volatility.  H2: The value of sticking to a long-term strategy  Investing is a long-term game, and for this reason, it’s vital that you have a solid long-term financial plan that you can continuously refer to as needed, avoiding any poor decisions that are not aligned with this plan. You should ideally look at the following areas and ask yourself these questions when putting together a plan for your preservation fund:  

• Risk tolerance: What are your risk tolerance levels? Are you a risk-tolerant investor or a risk-averse investor? Are you comfortable with short-term market volatility and potential loss in capital? 

• Timelines: What are your timelines? How long will you have your preservation fund invested for? What is your ideal retirement age? 

• Asset allocation: Is your asset allocation aligning with your risk tolerance levels and the timelines that you have for your preservation fund? 

• Goals: What are your goals for your preservation fund? What real returns are you hoping to achieve? 

• Reviews: How often will you review your preservation fund? 

 Once you have your long-term strategy and plan implemented, you ideally want to stick to this plan and avoid being distracted by any market noise. By sticking to your plan, you can avoid making poor decisions that affect your retirement outcomes. 

How low fees support the inactivity advantage 

The inactivity advantage works best when coupled with low fees, aiming for more potential compound growth over the long term. When using this approach of less action, it would be a waste to see your returns going towards covering high fees. The common fees that you may see charged on your preservation fund are:  

Administration fees: Administration fees will be charged for tasks related to administration. This is for reporting, tax, compliance and similar.  

Management fees: Management fees are those fees charged for the management of the preservation fund. 

Advisor fees: Advisor fees are the fees charged by an advisor for the financial guidance being provided. This often comes with both an initial and an ongoing fee. 

High fees have the potential to reduce the returns available to be reinvested and to take advantage of potential compound growth over time. Lower fees, on the other hand, mean that there are more returns available to be reinvested and allowed to grow and potentially compound over the long term. 

Let’s look at an example to compare fees of 1% and fees of 3% and the effect of these fees on your preservation fund when compounded over time. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R200,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is R797, 160 

Example 2 (3% Fees): Real investment value is R462, 007 

We can see how small differences in fees lead to big differences in retirement outcomes. This example is for illustrative purposes only, and actual results may vary. 

10X offers low fees of 1% or less on most retirement products, depending on the product chosen and the amount invested.

The role of asset allocation 

Asset allocation should be aligned with your investor profile. Your investor profile looks at your risk tolerance levels and your timelines for your preservation fund. This should be fundamental when deciding on your asset allocation. The asset allocation is the mix of different assets such as equities, bonds, real estate (property) and cash, in which your preservation funds are invested. As an investor with 10X, you can customise your underlying portfolio by choosing from carefully curated funds, each with a different asset allocation and geared towards different investor profiles.  

If you are a more risk-tolerant investor looking at longer timelines, you may want to consider investing more of your savings in growth-oriented assets, such as equities. As data suggests, equities have historically produced returns above inflation by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020). Keep in mind that past performance does not guarantee future results. 

If you are a more risk-averse investor looking at shorter timelines, you may wish to include more bonds in your portfolio for stability. Cash is the most stable of the asset classes, but it is also likely to generate the lowest returns. Diversifying your portfolio offshore may also bring additional opportunities that are not available in the local market, which may also provide a hedge against local market instability, as well as against any depreciation of the rand.  

The fund that you’ve chosen can be reviewed to ensure it aligns with your financial objectives and plan. Avoid reviewing this too obsessively, however, as it may lead to the temptation to make unnecessary adjustments in response to short-term portfolio performance. 

Avoiding the temptation to withdraw  

It’s natural to be tempted to withdraw money from your preservation fund. This can be sparked by the need for immediate cash or even fear and panic around market volatility.  

It's important to remember that if you do withdraw savings from your fund, these cannot be added to the fund again, as further contributions are not allowed. You will also lose out on the potential compound growth of these funds and be liable to pay tax on your withdrawal.  

The capital invested should ideally not be seen as money to use in difficult times. Even the savings pot should remain invested if at all possible, so you can take full advantage of compound growth.  

What can you do instead of over-managing?  

While over-managing should be avoided, there are still benefits to reviewing your preservation fund annually to ensure that you are aware of areas such as fees, net returns and asset allocation.  

In general, you should check in on fees and the Effective Annual Cost (EAC) of your preservation fund. It’s important you are aware of the net returns (after inflation and fees), so you are up to date with your fund’s performance.  

Furthermore, beneficiary selection should reflect your wishes; if there have been any changes, these should be updated accordingly. And as mentioned above, you should make sure that the fund you’ve chosen to invest in is aligned with your retirement goals.   

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It could be of benefit to make use of some of 10X’s free online suite of tools to help you with your review and analysis. The EAC calculator is useful when comparing fees charged by 10X with those of your current service provider.  

The benefits of index tracking 

Index tracking involves mimicking a benchmark index to try to generate the same returns. This is a cost-effective strategy that focuses on consistent long-term returns and is perfectly aligned with an inactive approach to investing.  

Active management, in comparison, involves timing the market and a fund manager aiming to pick the winning stocks. This approach involves a significant amount of research, analysis, and buying and selling, which may result in additional costs that could be passed on to the investor. 

10X uses an index tracking investment strategy with a more active approach to asset allocation, while focusing on the long-term returns for our clients. Find out more about our investment strategy here.  

Final thoughts on psychology and preservation funds  

Taking an inactive approach to your preservation fund can be a way to optimise growth, especially when combined with low fees and the appropriate asset allocation for your profile. Being able to block out the noise and stick to your long-term plans is a way to put your best foot forward. There doesn’t always need to be action, and sometimes inaction may bear the best results. Set your retirement plan, don’t deviate and let compound growth work in your favour.  

At 10X, we believe in superior returns, low fees and a transparent approach. If you have any questions relating to your retirement or would like to invest in a 10X Preservation Fund today, get in touch with our experienced and qualified investment consultants. Protect and grow your provident or pension fund savings with a 10X Preservation Fund.