When my quarterly investment statements arrived at the end of March I didn’t open them. I had witnessed the carnage of stock markets around the world which, at that time, had wiped out around 25% of people’s investment values.
By opening my statements, I could not change anything, it would not miraculously increase the value of my retirement fund, it would just upset me. And quite frankly lockdown was about all I could handle at that stage!
But I also knew I was going to be OK. I am comfortable that my retirement fund and other investments are for the long-term. I do not need the money today, in fact I have at least another 15 years before I need to start worrying about them. I know I am appropriately invested with a mixture of asset classes. That means I have exposure to local and international shares, government bonds, cash and even listed property. Diversification is important in diversifying and reducing risk. The offshore exposure in my fund benefited from the weaker rand and protected me to some degree from the collapse of my exposure to the Johannesburg Stock Exchange. Government bonds held up well compared to listed property which has been the worst affected. Even locally, share prices in the industrial sector faired far better than financials (banks). In the absence of a crystal ball to predict the future, our best option is to spread our risk as much as possible and ensure our investments are not concentrated on one sector, asset, currency or country.
With this in mind, I know I do not need to do anything, or take any action. I just need to sit this out. The worst thing I could do is cash in out of panic. In fact, since the end of March, when those quarterly statements were issued, the JSE has already started to recover. The losses from the beginning of the year have reduced from -23% to -11%. That means if I had cashed out R100 000, I would have missed out on the recovery so far of R12 000. The best advice is the same one we have for the coronavirus – don’t touch your face or your investments!
Now this may sound perverse, but this market crash is the best opportunity I have to boost my retirement fund. This is because of the concept of rand cost averaging. As I invest a consistent amount each month, I benefit from lower prices. When share or unit prices fall, I buy more of those units for the same amount of money. That is likened to a shoe sale and buying two pairs for the price of one. When markets recover, those low prices really pay off as they boost the overall return of my investment. Think about this – my monthly contribution at the end of March has already returned 12% in just two months!
So, I really wanted to keep investing during this market crash as much as possible. In fact, cancelling my investments came right at the bottom of the things I would be cutting back on right now.
That is my story, but not everyone is in the same situation, so what action, if any should you be taking right now?
Stopping contributionsIf you have had a significant reduction in income, you may have no choice but to cut your investment contributions. Some companies who could not continue to pay staff in lockdown have already put a hold on retirement contributions. It is not a train smash, but keep in mind that this will impact your longer-term goals. Inform your investment provider that you will be putting contributions on hold - don’t just let those debit orders bounce. Once your finances are stable, resume those contributions and ideally find a way to boost your contributions to catch up for those lost months.
Review and adjustThis is also an opportunity to review your finances, specifically your retirement funding. When you are young, time and the power of compounding, is your biggest asset. For example, if you save R500 per month from the age of 25 to 35 and then stop contributing, leaving the money in an investment earning 10% per annum, you will have R1.2 million by the age of 60. You would have contributed R60 000 and all the rest of that money comes from the power of compounding - your interest earning more interest. In comparison, if you only started saving R500 at the age of 35 and continued saving until age 60, you would have contributed R150 000 but only have R663 000 at the age of 60. This is because you effectively lost the huge potential of compounding in those earlier ten years. This means if you are starting later, or even if you take a premium break, you will need to increase your contributions to catch up.
Also take the time to review your other investments and make sure they align with your goals:
Saving for emergencies: The first step is to have an emergency fund. You need to have money readily available for unexpected expenses. This can be kept in a seven-day or 32-day notice account for example. Given the uncertainty in light of the COVID crisis, it would be advisable to focus on building up your emergency fund before starting other longer-term investments.
Short-term goals: If you have shorter-term goals like saving towards a house or car, then you want to be saving that in cash-like investments through a bank. You do not want to be taking risk with the money in the shorter-term. Check with your bank for their best interest rate offering.
Medium to longer-term: This may be for your child’s education, starting your own business one-day or just having extra money at retirement. Here you want to utilize your tax-free investment account. You can invest up to R36 000 a year and you pay no capital gains tax when you sell one day. Tax-free investment accounts can be opened with most unit trust funds and exchange-traded funds. Ideally you want to have an investment that provides diversification.
In summary, all of our investments have caught the coronavirus, but if you have time on your side, view this as an opportunity – there is no need to panic.