Older South Africans who continue to take a healthy dose of investment risks through solid commitments to asset classes such as listed property and equities have got it right, says Absa Investments.
The problem is there are not more mature risk-takers like them, adds Johan Gouws, an Absa Investments executive director.
This small minority of investors has correctly identified the longevity challenge and aims to build wealth to last 25 to 30 years into retirement, says Gouws.
Others still follow traditional thinking that fosters caution and a wealth preservation focus once a salary-earner passes 55.
Some financial advisers tend to endorse or entrench this conservatism, resulting in progressively lower allocations to inflation-beating asset classes, says Gouws.
Yet Absa Investments endorses a moderate-to-high risk strategy for those aged 56 to 65, which, depending on the unique circumstances of the investor, could imply equity allocations as high as 50-60%.
History shows that equity, as an asset class, has the best long-term record of generating inflation-beating returns, but is subject to high short-term market risk.
The clash with conventional planning and the ingrained habits of older investor-savers was highlighted at an Absa Investments roadshow to communicate to professional advisers the advantages of life-stage investment planning.
“The single most controversial issue addressed concerned clients in the 56-65 age range and our recommendation that they exhibit high-to-moderate risk tolerance, maintain a long-term perspective and combine wealth creation with wealth preservation.
“Demographic projections indicate that up to 11% of South Africa’s population will be aged 65 or over by 2040. Judging by international longevity trends, those who maintain a healthy lifestyle could live into their 90s, suggesting that a 25 to 30-year retirement planning horizon is appropriate.
“In this scenario, the biggest investment risk aged 60 is conservatism. Caution could result in an old age in financial distress because inflation will have eroded the value of the retirement nest-egg.”
After face-to-face discussion with financial advisers all over the country, Gouws says two factors underpin resistance to significant equity investment in the senior years:
- ‘Best advice’ regulation that inclines advisers to caution
- Conservatism across older age groups
He adds: “FAIS regulation makes advisers wary of any strategy that might result in short-term losses being realised. But time and diversification techniques can limit downside risks while still creating exposure to high long-term growth.
“The issue essentially is one of ‘perceived risk’. The risk of capital loss is short term. Time is an excellent risk manager. Staying in the market long term enables investors to exploit the rebound after a loss. Risk should be viewed as a drop in what your retirement savings can buy due to inflation over the long run and not temporary drops in capital values in the short term.
“Our estimate is that investors in their early 60s need exposure to equity-focused instruments designed to beat CPI by 4 or 5% if they plan to build the wealth they need for a 25-year retirement.”