If you aren’t happy with the growth on your investments, be assured that you are not alone! The majority of investors worldwide achieve poor returns on their investments and retirement savings.

Numerous studies show that the returns that investors have achieved over time are much lower than the returns of the average investment. This holds true in all countries, and over many decades. Studies in the USA have revealed that since the 1974 establishment of the personal Retirement Annuity (called a 401k account), the US stock market has grown at over 11% per annum. Over this same period, the average investor earned less than 4% per annum. Allowing for different returns from the asset classes typical of a balanced retirement portfolio, the average investor here received only half of the returns that they should have benefited from.

Investors receive only a fraction of the returns that they could

This sounds crazy, but the good news is that if we take the time to understand why this happens, we can approach investing in a more systematic manner, and then achieve consistently better investment returns.

Conventional financial theory suggests that investors are rational and seek to maximize their wealth through objective, non-emotional investment decisions. That makes sense. Nobody invests with the goal of losing money. However, the emotions of fear and greed, along with the herd instinct, can override rational thought. Behavioural finance is a relatively new field that seeks to combine psychological theory with conventional economics to provide explanations for why people make irrational financial decisions.

You don’t need to beat the market – just don’t let the market neat you

Successful investors tend to take a longer-term view, select reputable fund managers and avoid switching between managers to the fund of the moment. They stick with their manager and ride out the market cycles. But most investors don’t do that. Instead, they move their money in and out of their funds in the hope of gaining better returns – and because their timing is often bad, the result is long term poor performance.

Why do we do it?

This “behaviour gap” is driven by several well understood cognitive errors. Human nature shows that we have evolved to avoid pain and to pursue pleasure and security. It feels right to sell when everyone around us is scared (we tend to sell at the bottom of the market when it is cheaper) and to buy when everyone feels great (we often buy at the top of the market when it is expensive). It may feel right – but it is not rational. What many investors may not realise, is just how difficult it is to then make up that loss. For example, a 50% loss would require a 100% gain just to break even—a concept known as negative compounding.

Better investment returns for the average investor can be achieved by:

• Defining your own realistic and clear investment goals.
• Understanding your risk profile, and the potential returns and volatility that can reasonably be expected from that assumed risk.
• Investing in a strongly diversified fund with reputable asset managers who have good track records.
• Stay the course and adopt a long-term investment approach.

Markets are beyond our control, but knowing how we are going to behave in any market environment is essential to long-term investing success

Investing your own money is a very difficult thing to do. To invest properly, you need to emotionally detach yourself from your money which is not easy. How markets are going to behave is beyond our control, but knowing how we are going to behave in any market environment is essential to long term investing success. Partnering with a trusted Financial Advisor will enable you to remain objective and neutral.

Assuming your investment portfolio is doing well, it may be tempting to skip a portfolio rebalance at your next review meeting with your financial advisor. However, there are sound reasons why it could be a mistake to overlook this important aspect of investment management.

There are two fundamental reasons why a diversified investment portfolio should be rebalanced regularly.  Rebalancing ensures that your portfolio is aligned with your own risk profile and secondly, the discipline involved enables an investor to stay on track with their financial plan, rather than being swayed by the ‘noise’ in the market.

Rebalancing your portfolio ensures that your target asset allocation and consequently your portfolio’s risk characteristics remain in line with your personal risk profile

A diversified portfolio should be made up of different asset classes in proportions accurately calculated to achieve certain desired investment outcomes while taking a calculated amount of risk. 

All investors, whether you are just starting out with small regular contributions to a retirement provision or are an experienced investor with a larger portfolio, should be familiar with the risk profiling exercise undertaken by your financial advisor and you should understand the principles of risk profiling.

An investor with a moderate risk profile (CPI +3%) would typically be invested in a portfolio with a split of 55% equities and 45% bonds and cash. If, hypothetically speaking, after a very good year or two on the stock market, the equity portion of your portfolio rises to 75%, the portfolio as a whole will have shifted into the high risk category.

Now that you have more equities in your portfolio, you’re exposed to much more risk than you had planned to be.  In order to address this, portfolios should be regularly rebalanced. 

Balancing Risk and Reward

Asset allocation is all about balancing risk and reward. Inevitably some asset classes will perform better than others during a particular market cycle. As we have seen above, this can cause your portfolio to be skewed towards an allocation that takes on either too much or too little risk according to your financial objectives as defined in your risk profile. To rebalance from a high risk position to a moderate risk, we would need to sell some equities and buy some bonds. This means that we are selling the asset class that has performed better (selling high) and buying the asset class that is lagging in this cycle (buying low).

One of the great things about rebalancing is that it forces you to buy low and sell high.

The intrinsic discipline that comes with rebalancing your portfolio helps save investors from their worst instincts. It can be very tempting to hold on to top performing assets when markets seem to keep on going up, but market cycles obviously do also have down turns. So, by rebalancing, selling high and buying low becomes automated. Regular portfolio rebalancing also provides the investor with a measure of protection from the fall out of market crashes by ensuring that only the agreed upon portion of funds is at risk in equity markets.

Leading fund managers advocate rebalancing a diversified portfolio at least annually as part of a disciplined investment approach that avoids market bias.  Their chart below, compiled by JP Morgan Asset Management, clearly demonstrates the value of an annual rebalance. Their research shows that over time the rebalanced fund provided 60% higher returns than a similar fund with no rebalancing.

Over the long term, rebalancing helped shield investors from being over and under exposed during market turmoil and rallies. The 60% difference results from a disciplined approach of buying low and selling high.

This reinforces the benefit of investing in Rutherford’s funds as they are actively rebalanced on a continuous basis.

As we approach the end of the tax year on 28th February, it’s time to revisit our retirement funding goals and consider topping up retirement annuities to take advantage of the tax benefits. It’s a sad reality that only 6% of South Africans can retire comfortably, but having said that, there’s no need to panic. There are many strategies we can employ to get you to retirement with your finances intact. The real enemy is simply doing nothing at all, so just starting to save consistently over a period of time is a great step in the right direction – remember Rome wasn’t built in a day.

Tax deductible Retirement Annuities

Contributions of 27,5% of gross remuneration or taxable income (whichever is the higher) are tax deductible subject to an annual limit of R350 000. For employees who also have a pension or provident fund, the total retirement funding may not exceed the said 27,5% or R350 000 for tax deduction purposes. So, your retirement contributions can be deducted (up to the limits mentioned) from your taxable income which means that you could receive a tax rebate from SARS after assessment of your tax return. The income and capital growth earned on your investment in the Retirement Annuity (RA) are also tax free until you retire, resulting in a bigger lump sum on retirement. ­­­on a favourable basis according to the SARS sliding scale with a portion being tax-free.

The Tax Saving is R46 460.50

Who can benefit from a Retirement Annuity?

• Self-employed persons
• Employees with no corporate pension fund
• Employees with a corporate pension fund who wish to save extra for retirement

Benefit from a Tax-Free Savings Account

A tax-free savings account may be utilised to further supplement retirement funding or to save for shorter term lifestyle events. There is no tax on income or interest, no dividend tax and no capital gains tax.

You can choose from a wide selection of bank account products or equity funds depending on your risk profile and needs. You can also invest for minor children.

An investment of a maximum of R33 000 per person per annum is allowed subject to a R500 000 lifetime limit.

The TFSA investment of R33 000 per annum is allowed in addition to the normal interest exemption which currently stands at R23 800 for persons under 65.

“Compound interest is the eighth wonder of the world. He who understands it, earns it – he who doesn’t pays it” Albert Einstein

Ensure that you are one of the 6% of South Africans who can afford to retire comfortably

When you retire, you generally need less income than during your working life. This is simply because some of your expenses like travelling to work fall away and children and education costs are a thing of the past. Depending on your retirement plans, you would typically need at least 60% of your final pre-tax salary after retirement.

What can be done if retirement is looming and your retirement funding projections fall short of the 60% goal?

The first thing is not to panic and make a hasty, ill-considered decision with the money you do have.

The second step is to consult a financial planner to formulate a plan to manage the shortfall. A financial planner will not have a miracle cure for the 10 years where you didn’t save, but they will be able to advise on the best investment for your retirement savings and suggest life-style strategies that can be employed to move you closer to the goal.

Consider Relocating or Downsizing

If you live in an area with a high cost of living, moving to a less expensive area and investing your savings for retirement could make a big difference to your ability to amass a nice nest egg.

If your children have left home and you're still living in a big house that has appreciated in value, consider selling it and buying a smaller, less expensive home. You'll save not only on your mortgage payments, but in less obvious places like the cost of rates, electricity, insurance and repairs and maintenance etc. You can divert all those savings to boost your retirement plan.

Delay Retirement

Delaying retirement and therefore withdrawals from your retirement fund can help a great deal, even if it’s just for a few years. If full time work is a bit much, consider consulting or working fewer days or less hours per day. Since you will no longer be contributing towards retirement funds during this period and may have down scaled your home, you will require much less income to cover your living expenses. Left untouched, your retirement fund will continue growing. Even if you assume an ordinary savings account, nothing fancy, with an interest rate of 8% compounding over 5 years, your capital will increase by 25%. Other investments, such as a balanced fund should achieve higher returns than a fixed deposit and therefore increase your pension income by over a third for the rest of your life.

Remember you don’t have to start withdrawing from retirement funds at any specific age, so you can delay withdrawals for as long as possible.

Plan on a second career

These days many people have the potential to live long and healthy retirements. Do you really want to sit around doing nothing from 55 to 100? If you are not able to remain at your current employer after a certain retirement age, in the years leading up to retirement, you may want to upgrade your skills, study something new or start a small business.

Two Cars?

The chances are a second car spends most of its time in the garage. Consider selling it and taking an Uber for the odd occasions when you need two cars. It will work out much cheaper than R300 000 worth of capital parked in a garage, and that capital can be put to work in your retirement fund.

Ideally, we should all have a retirement plan in place throughout our working lives. However, during the last 10 to 15 years before retirement careful consideration needs to be given to be given to life-style and savings goals to ensure that you do not outlive your assets. For assistance with retirement planning, feel free to contact us at