What factors should influence my investment strategy?
When choosing an investment strategy, there are a range of issues that will influence your decision. It is advisable that you think about the following points:
- How familiar you are with investment matters. If you have a lot of experience in the investment world then you will probably feel confident enough to create your own investment strategy. But if you are not comfortable with investing, you will need to research before changing from the Default Choice portfolio. This will ensure that you choose an investment strategy which suits your specific needs. Remember, if you have the wrong investment strategy you could lose a lot of money.
- The length of time your investments will remain invested. Even if you are thinking about leaving employment soon, you should keep in mind that those assets represent your retirement savings. Your intended date should therefore determine your investment horizon. So, if you decide to leave the Fund before you retire, you will have the chance to preserve your benefit by using the Preserver option, or transferring it to another retirement or preservation fund.
- What do you intend to do with the proceeds of your benefit, either at retirement or at earlier withdrawal? Members should match their pre-retirement investment choices with their intended pension (annuity) and investment choices. This means that if you are close to retirement you should carefully consider what kind of pension (annuity) you are likely to select when you retire. You should then try to match your investment strategy in the Fund to your post-retirement plans. A professional financial adviser may provide valuable assistance here.
- Your personal tolerance for risk. In this context, ‘risk’ means negative returns. The higher the exposure to equities, the most volatile asset class, the higher the probability of negative returns in the short term. However, this risk is counter-balanced by a higher probability of stronger performance in the longer term. If you are willing to take more risk (i.e. greater probability of negative returns in the short term) you are likely to be rewarded in the longer term by higher returns. If you decide on a more conservative option, your annual returns will be more stable but your longer-term performance is likely to be significantly lower.
Your investment risk profile will be determined by the above aspects. It will also be influenced by such personal factors as your other provision for retirement, your health, the age of your dependants (should you have any) and your financial expectations after retirement.
Balancing risk and return
Two of the major risks to consider when it comes to investing are:
- The risk that your investment value falls because investment markets experience a downturn. (This risk is often called volatility).
- For example, if you were to invest R1,000 in a risky (volatile) investment with lots of potential, but investment conditions changed and the value of this investment fell by 10% just before you sold the investment – then you would only have R900.
- The risk that you don’t earn sufficient investment return over your investment lifetime, so that you have too little to money when you retire.
- For example, if you hid your R1,000 under the mattress, you wouldn’t earn any investment growth, even if you know that the money is safe there.
- However, remember that inflation eats away at the value of your money all the time. This means that after a year’s time, your money under the mattress may only be worth R950 in real terms, and after another year only R900.
- In fact, to retire comfortably, you need to earn an investment return of MORE than inflation – because you need to benefit from the power of compound interest to make your money GROW!
The challenge is therefore to find the right investment strategy that protects you against major falls in value, while still providing you with sufficient investment growth. OMEGS offers members three specific categories of investments, as well as a “Default Choice” category which provides a very good option for members who are not confident in making investment decisions. See the “Investment Options” section above for more detail.
All members are strongly advised to seek the guidance of a professional financial adviser before making any decisions. Your adviser will complete a full needs and risk analysis before giving you advice.