How your risk tolerance changes over time, and what it means for your preservation fund

Preservation funds play an important role in your retirement planning, especially when you are changing jobs or find yourself between jobs. With a preservation fund, you can keep your retirement savings invested and allow them to potentially grow and compound this growth over time. As an investor, you can customise your underlying investment portfolio by selecting from a range of carefully curated investment funds. Your risk tolerance should play a major role in the fund that you select.  

Risk tolerance refers to the level of risk that you are prepared to accept regarding your investments. By routinely reviewing your preservation fund and making adjustments based on your needs and financial circumstances, you can improve the likelihood of achieving your financial goals. In this article, we will take a closer look at factors such as different risk profiles, asset allocation, index tracking, and the effects of fees and inflation on your preservation fund.  

What is a preservation fund?  

A preservation fund is a retirement savings vehicle that allows you to maintain your savings when changing jobs. This includes savings such as those in an employer-linked provident or pension fund. You can transfer these savings to your preservation fund without incurring tax. You then have the opportunity to select the underlying funds in which you wish to invest your capital. By investing your capital in a preservation fund rather than withdrawing them, you can potentially maximise the long-term growth of your capital to provide for your retirement years.   

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With the introduction of the Two Pot Retirement System in South Africa in September 2024, the way withdrawals are now structured has changed. All contributions are now split between two pots. We have the ‘retirement pot’ and the ‘savings pot’. There is also a third pot called the ‘vested’ pot, which refers to all contributions made before September 2024. 

Your ‘retirement pot’ needs to remain invested until retirement age, and you are unable to withdraw from this pot before retirement. You may access the savings pot once per year for a minimum amount of R2000, with tax being applied at your marginal tax rate. The vested pot is governed by the rules before September 2024, which allows for one withdrawal before retirement. This is taxed according to lump sum withdrawal tax tables. Of course, it is best to keep capital invested to allow them to potentially grow, if possible. 

Understanding risk tolerance and why it changes  

Risk tolerance refers to how comfortable you are as an investor with market volatility and your capital potentially losing value when there is a market downturn. There are a few key factors that may influence your risk tolerance. These are factors such as: 

Age: The younger you are, the more risk-tolerant you may be. This is because you have longer timelines available to you for your investment to recover from a market downturn as well as to grow and compound.  

Time to retirement: The number of years available before your expected retirement date may also influence your levels of risk tolerance. The longer you have until retirement, the more risk-tolerant you may be. 

Other retirement savings: If a preservation fund is just one part of a broader retirement portfolio, your risk appetite may be higher. A well-diversified portfolio across different savings and investment products can give you more flexibility to take risks. 

Income needs: If you need to draw an income from your retirement savings soon, and with a higher drawdown rate, opting for a more conservative strategy may be better. If the fund is more of a long-term plan, you may be able to take on more risk.  

Investment knowledge and experience: You may also be more risk-tolerant the more financial knowledge you have and the more investment experience you have. Knowledge and experience can help you stand firm through periods of market volatility.  

Emotional comfort with volatility: While you may be able to afford to take on more risk, you should also consider how comfortable you are with market volatility. If more volatility leads to high anxiety and sleepless nights, you may want to consider a lower-risk strategy.  

Your risk tolerance changes as you move through the different stages of life. You will most likely start off being more risk-tolerant, but as you approach midlife, you may become less risk-tolerant as family and retirement planning becomes important. As you move into your retirement years, you could find yourself being more risk-averse and a lot more conservative in your investment approach.   

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The link between risk tolerance and asset allocation  

When discussing asset allocation, we refer to the various mixes of asset classes in which funds are invested. This typically includes equities, property, bonds, and even offshore investments. Each of these asset classes carries different levels of volatility and risk. Equities tend to be the riskiest asset class, making them suitable for investors with a higher risk tolerance. Those who are moderately risk-tolerant might consider a more balanced portfolio that includes both equities and bonds. Bonds are generally more stable, appealing to more risk-averse investors. Conservative investors with low risk tolerance may prefer to allocate a higher percentage to bonds.  

10X offers a range of strategically curated underlying funds within the preservation fund wrapper, each of which is geared towards investors with different risk profiles and time horizons. If you have a greater risk tolerance, you may prefer a fund more heavily weighted towards equities. If you are more conservative, you may wish to choose a fund with a higher percentage of bonds.  

With 10X, you can find a fund that suits your particular investor profile, whilst diversifying across the different asset classes. The 10X funds include a focus on long-term results while also emphasising the importance of asset allocation to the long-term success of your preservation fund. To view the selection of funds available at 10X, follow this link. Please note, fund details are correct as of 20 May 2025.  

Fighting inflation with the right risk strategy  

Inflation has the effect of reducing the purchasing power of our money. The basket of goods and services that you can buy with a nominal value of money reduces over time, so essentially, your money is not stretching as far as it has in the past. Inflation also has the effect of reducing the real returns of your capital over time.  

For your capital to grow, you need the net returns generated to outperform inflation. You can better position yourself to beat inflation with a well-planned asset mix. A diversified asset allocation aims to beat inflation over the long term.   

You want your investments to deliver real (inflation-beating) returns, not just nominal gains. As an investor, you need to focus on the real returns of the preservation fund - this means the returns after they have been adjusted for inflation. 

The role of fees: risk, reward, and cost 

You should always be aware of the fees charged by providers when deciding where to invest your money. There are fees, such as management fees, which cover portfolio oversight, while performance fees depend on the fund’s results. You may also see additional charges for transaction and administrative fees. Over time, fees can accumulate and impact your savings. The typical fees which you may expect to see charged on your preservation fund include: 

Administration fees: These are the fees charged for admin activities related to the fund, such as record keeping and compliance.  

Advisor fees: The fees which are charged by an advisor for their services. There may be both an ongoing and annual fee charged. 

Management fees: These are fees charged for activities related to the running of the fund, such as analysis and portfolio management. 

The Effective Annual Cost (EAC) of an investment is a metric implemented in 2015 by ASISA. It is a metric which allows you, as an investor, to see and evaluate all the costs and fees charged on an investment over one year. It includes all fees as well as any other penalties or hidden costs that have been charged.  

The information can then be used to compare similar product offerings from other service providers. Naturally, the EAC of an investment should only be one factor which is used when comparing and selecting products. This EAC calculator allows you to calculate the cost of owning an investment over one year. It is a free resource provided by 10X as part of a suite of online tools. 

High fees may have the effect of decreasing the potential growth of your preservation fund, especially when compounded over many years. Trying to minimise fees may allow for more potential returns to be reinvested, grow and eventually provide for your retirement.  

Let’s look at an example to show the effect of high fees on your preservation fund. We will be comparing fees of 3% and 1% and determine the real investment value after 30 years. The real investment value refers to inflation-adjusted returns after fees have been deducted.  

Let’s assume the following information: 

• Investment period of 30 years 
• Investment of R100,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is approximately R398,500. 

Example 2 (3% Fees): Real investment value is approximately R231,000. 

With a difference of R167,000, we can clearly see how fees may potentially impact real investment value. Note that this example is for illustrative purposes only, and actual results may vary. 

10X aims at minimising fees, which may then result in more potential returns being allowed to grow and compound over the long term. We charge a single fee on our retirement products, which reduces the more that you invest. Please view our website for the most up-to-date fee information.  

Active Management vs Index Tracking: Which strategy suits your risk profile?  

Active investment management refers to a fund manager attempting to pick the stocks which will generate the highest returns. This involves research, analysis and buying and selling of stocks, which may lead to more costs being incurred and passed on to the investor. 

Index tracking, on the other hand, is when a particular benchmark index, such as the S&P 500, is mirrored in an attempt to generate the same returns as the benchmark. This approach can result in index tracking being more cost-effective. As data from the SPIVA Scorecards suggests, index tracking outperforms active management most of the time, especially over the longer term. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten years ending 31 December 2024.  

10X makes use of an index tracking methodology to keep costs low, combined with a more active approach to asset allocation decisions in an investment strategy that is geared towards long-term returns. To read more about our investment strategy, clickhere. 

How to reassess your risk tolerance and adjust your fund  

It’s important to regularly review and reassess your risk tolerance. Reviews every 5 years or after any major life events are a good idea. As your financial situation and needs change over time, you may look to switch the underlying funds of your preservation fund in order to cater for your changing risk tolerance levels. For example, you may consider switching to more conservative underlying funds as retirement approaches, remembering that it is still important to include some growth assets in your portfolio. Even near retirement, exposure to growth assets like equities may help your capital keep pace with inflation during a retirement that could span decades. Finding the balance between your risk tolerance, financial needs and investment timelines is important.  

Conclusion: Preservation funds and risk tolerance  

Risk tolerance levels change over time as you move through the different life stages. It’s important to regularly review your risk tolerance and ensure that your asset allocation reflects your current risk tolerance levels. Your fund’s asset allocation should reflect your financial situation and needs, while still taking into account your timelines and stage of life. As is the case with any investment, you also need to be aware of all fees being charged on your preservation fund, as they can have a potentially significant impact on your returns.  

Remember, preservation funds are long-term savings vehicles which allow you to preserve and grow hard-earned savings over the long term in order to provide for the retirement years. By keeping your savings invested and regularly reviewing your risk tolerance and asset allocation, you are setting yourself on the right path for a secure retirement.  

10X has delivered consistent long-term returns in line with our stated investment strategy. Speak to one of our investment consultants to learn more. Grow your pension and provident fund savings with a 10X Preservation Fund.