Investment certainty in uncertain times

There has always been uncertainty in markets. Recent negative investment returns, coupled with increased inflation and rising interest rates, have not helped much in easing the minds of investors. So, what should investors do? Should investors ‘de-risk’ by moving to money market investments or should they wait until the market, or conditions affecting the market, stabilise to invest again? The simple answer is: “None of the above!”

When investing, one needs to spend time in the market rather than trying to time the market. Despite being surrounded by uncertainty, investors need to plan and save for their future needs. This means that inflation-beating returns should be top of mind.

Inflation is the general increase in the price of goods and services and an equal fall in the purchasing value of money. This effectively means that the buying power of an individual diminishes over time. So, how does one keep up with inflation when it comes to investments? By investing in growth assets. Balanced funds provide their investors with exposure to growth assets such as equity, property and alternative assets, both local and global. The problem with growth assets, however, is that they are deemed to be riskier than other assets. Why? Their returns are more volatile than those of other investments.



Volatility

This is the measure of increases and decreases in returns over a period. In simple terms, growth asset returns move up and down more frequently and to a larger extent than the returns of other assets. This means that there is a possibility that at your date of retirement, financial markets could be in a depressed state, leaving you worse off than expected. Managing this volatility is thus important when it comes to investing for retirement. Smoothed bonus funds (SBFs) provide inflation-beating returns while still managing volatility.

What is an SBF?

These are long-term investment portfolios that use smoothing to target the distribution of stable, inflation-beating returns to investors over the longer term, while significantly reducing the volatility associated with market-linked investments. The underlying investment portfolio SBFs invest in ranges from conservative to aggressive balanced funds. These portfolios usually provide exposure to local and global investment markets as well as alternative assets, such as private equity, natural resources, infrastructure and/or development finance, which meet environmental-, social- and governance-related factors.

SBFs aim to provide the investor with smoothing throughout the journey to retirement by catering for both growth and protection of capital. The investment returns targeted by SBFs usually range between 2% and 6% above inflation.