MONEY CLINIC | My pension is in an aggressive portfolio. Is it too late to opt for a lower risk?

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A Fin24 reader facing an uncertain future seeks advice on her investment strategy.

She writes:

I am 55 years old, and my pension is currently in an aggressive portfolio. 

Should I change it to medium or low risk or am I already too late?

I have no Stock Market expertise and I do not know whether I may be retrenched in the near future.

Andre Tuck, Senior Investment Consultant at 10X Investments, responds:

As a pension fund member you are probably in a balanced fund, which means you are in a diversified portfolio or fund and invested in all asset classes (which is Regulation 28 compliant).

Even at 55 years old, you are a long-term-investor, which means you have an investment horizon and goal to invest for five years or longer.    

Your long-term retirement plan would ideally have a high allocation of equities (shares) in your investment portfolio. Historically, high equity portfolios have delivered the highest return for long-term investors even over periods of uncertainty in the financial markets, as seen in 2008 and again recently.

Given the market turmoil we are going through, with the JSE down 36% for 2020 at one point, it may not seem like the best plan. Yet, despite the enormous setback we have suffered, the economy and share markets will recover eventually (and indeed, the All Share Index has already recovered half those losses). It will take time to get back on track fully, but as a long-term investor, you have time on your side. 

Based on stock market history, sticking to your high equity strategy is likely to be the right thing do. This strategy always feels wrong during a crisis, but then seems obvious afterwards. As a long-term investor you should focus on your long-term financial goals, follow the right strategy to meet those goals, and not focus too much on short-term performance, either good or bad. 

Of course, you could potentially improve your situation by switching into a more defensive portfolio now, holding mainly cash. In a bear market, as we have now, prices tend to go lower in stages, depending on the news flow. During the 2008/2009 Global Financial Crisis, the JSE All Share Index eventually fell 45%.

Then you could return to your growth portfolio later, when markets bottom. But doing so is a big gamble because you need to get your timing right, not once, but twice. If markets fall further, then yes, you could reinvest at a lower level. But if they don’t, you will merely lock in your losses. 

Finding the right time to switch back is even harder. Equity markets turn well before sentiment does. Much of the ‘long-term’ return is earned in short spurts after these turning points. Missing out on the initial recovery can cost you many years of the ‘annual average return’. Or it may cause you to stay out of the market altogether, waiting for the next correction to get back in. Some investors have been holding out for that opportunity since 2009.

So, rather than perfect your portfolio switches, perfect your long-term investment strategy: maintain your level of market risk, but avoid other risks that do not promise a higher return: trying to time the market, trying to beat the market with stock picking (use an index fund instead), and paying high fees in the hope they automatically translate into a higher return (they don’t). 

The very reason to have such an investment strategy is to anchor your decision-making during difficult periods to stop yourself taking the wrong action at the wrong time.

The best thing you can do for your retirement savings right now is to act responsibly. This means protecting your money from unrewarded risks and sticking to the long-term plan. 

Questions may be edited for brevity and clarity.

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Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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