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By Leslie Greyling*
After suffering through a brutal 2022, we are all hoping that global and local market conditions will be a little kinder this year. We don’t know for sure what lies ahead, but another volatile year appears to be on the cards.
Last year was an outlier in many ways because of the outsize effects of geopolitics on the markets, as well as inflation and the aftereffects of the pandemic. We continue to be optimistic that the war in Ukraine comes to an end, but we also have to be realistic about the war and other factors being beyond our control.
There are many other aspects of our investment journey, so it’s crucial that you focus on things you can control.
Here are three things I believe are within your control and should guide your thinking in 2023.
Clear thinking in uncertain times
One of the best ways to avoid panicking about what’s happening on the markets is to know what you’re invested in, and why. Building a diversified portfolio is one of your most potent weapons against short-term uncertainty.
Consulting with a financial advisor helps you to achieve the balance needed to grow your savings without taking unnecessary risks. While it’s always a good idea to review and adjust your portfolio, doing so with your financial advisor can help minimise your risks.
For instance, the makeup of your portfolio depends on your risk profile, age and how long you have before retirement. Specialised advice on whether and how you can rebalance your portfolio will go a long way to preparing you for the future.
Stay informed about regulatory changes
There have been several changes in the past few years to the laws regulating retirement savings. Among these, you might remember the three-year lock-in on retirement annuities (RAs) if you financially emigrate, which means you must be a non-resident for tax purposes for period of three consecutive years, on or after 1 March 2021. Also, the increase in foreign exposure to 45% has been allowed since Feb 2022.
Retirement products must comply with Regulation 28 of the Pension Funds Act. This rule regulates how much and what type of assets Retirement Funds can invest in.
Some of the final amendments that have come into effect from January this year, is
- The overall 45% limit for infrastructure investment across all asset classes was retained. A point of importance is to understand that this amendment does not categorise infrastructure as a separate or new asset class but is incorporated into the existing asset classes.
- Retirement funds are prohibited from investing directly or indirectly in cryptocurrencies or crypto assets.
- Private equity funds, hedge funds and excluded assets are classified individually rather than collectively. The maximum exposure funds can have to these asset classes are now 15%, 10% and 2,5%, respectively
- Investment in hedge funds is restricted to those approved under the Collective Investment Schemes Control Act.
- This rule previously had a 25% limitation on exposure to any one particular entity or Company. applied only to certain sub-categories of asset classes.
These may sound like boring and technical details that you’ll never have to deal with. But only by being informed – even if only about the broad-stroke changes – can you make fully informed decisions.
Asset allocation is key
Creating and maintaining a diversified portfolio is all about getting your asset allocation right. You want to hold the right mix of growth and defensive assets to offer some protection against market volatility.
What not all investors realise is that this mix changes over time. I’m not suggesting that you make wholesale changes to your portfolio every year, but there are certain milestones where you definitely need to assess the balance of your investments.
If you’re a member of a group pension fund, chances are this rebalancing will be done for you. The pension fund Trustees typically create an aggressive, moderate and conservative fund. They then allocate your portfolio based on your age and life stage.
Younger employees will typically have a higher exposure to growth asset classes, while members closer to retirement age will be shifted to more conservative funds. This is done to reduce the volatility and fluctuations in retirement investment values, especially during market turmoil.
You should adopt a similar rebalancing of your portfolio from time to time to make sure the portfolio risk matches your personal risk profile and age. This is a task that you should do with a financial adviser to limit the chance of making wrong decisions at important points in your life.
My watchwords for 2023, therefore, are to ignore the noise, stick to your planning as far as possible, and control what you can.
- Leslie Greyling is a financial advisor at Brenthurst Fourways. [email protected]
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