We hear many reasons why people put off saving for retirement. Apart from simply procrastination, because retirement seems so far away, recurring themes are ‘I’ll save more when I earn more and ‘I’m planning to move overseas'

With the high cost of living in South Africa, it’s no wonder that people find it difficult to start saving for retirement. So, here are some tips for saving money without having to earn more.

Make sure you contribute to a pension fund or retirement annuity

All too aware of the plight facing many pensioners, the government encourages and incentivises us to be better savers through tax allowances. Contributions to specific retirement products are tax deductible - whatever you put towards a retirement annuity or pension fund reduces your tax liability. So, simplistically, if you earn R500,000 a year and contribute R50,000 to your retirement fund, you’re only taxed on R450,000. (in reality, your tax calculation will likely have other deductions as well, such as medical aid, etc.)

Put differently, if your tax rate is 30%, then every R1000 you save in a Retirement Annuity only actually costs you R700. 

Contributions of 27,5% of gross remuneration or taxable income (whichever the higher) are tax deductible subject to an annual limit of R350 000. All investment growth in the retirement annuity or pension fund is also free of tax.

For those of us who are thinking of emigrating, the South African government has passed legislation that allows you to access the full amount of your retirement annuity or pension preservation fund, if you have left the country and have been tax emigrated for three years or more. The withdrawal will be subject to tax as per the withdrawal benefit table.

This is a meaningful development, as all too often we hear that investors don’t want a pension product because they are planning to leave South Africa and then the years go by and they never get around to leaving. Meanwhile, they have lost out on many years of savings together with the respective tax incentives.

Avoid cashing in your pension fund if you change job

To realise the full potential of a retirement fund, you need to stay invested as long as possible so, tempting as it may be, it’s never a good idea to cash in your retirement fund when changing jobs. You should always aim to preserve your retirement fund in a preservation fund because withdrawing will destroy a great deal of the growth gained during the years your savings spent compounding.

Buying USD and investing off-shore does not guarantee wealth

This may sound unlikely, but it is all too true – many South African investors rush to buy US dollars when the SA Rand tumbles and sentiment is low. They feel compelled to get money out of South Africa as quickly as possible, without first seeking professional advice and formulating a comprehensive investment plan. Emotional, panicky decisions and lack of sound financial planning result in poor returns on their offshore investments and the erosion of hard-earned savings.

Rand strength can surprise – In 2001 you would need R12 to buy one US$, but 10 years later that same US$ would cost only R6

If we look back over the past 20 years, we can easily identify periods of Rand strength and weakness.

Investing overseas is not as straightforward as it might seem

Some of the most common adverse scenarios that South Africans encounter when investing offshore include the fact that many overseas financial markets are not as well-regulated as those in South Africa, and costs are often higher overseas. Also, interest rates on bank deposits are usually low in most developed countries and barely cover the costs of the bank account.

The JSE is the best-performing world market in real terms over the long term

South African balanced funds usually comply with Regulation 28 and are allowed a maximum of 40% overseas assets, which combined with the fact that the bulk of JSE company earnings are derived from outside the country means that investors in South African funds can easily get access to a good degree of foreign exposure without taking money offshore.

The JSE offers foreign earnings without you taking the exchange rate risk

Our top tips for retirement savings are to start investing in a retirement fund as early as possible to gain maximum benefit from the tax allowances and the years of compounding; stay invested when changing jobs and don’t rush to move your investments offshore.

For more information on retirement funding, please contact your financial adviser or Rutherford Asset Management directly and we will gladly point you in the right direction www.rutherfordam.co.za or 021 879 5665.

Investment markets seem to be increasingly volatile and subject to news and events on the other side of the world. This can be put down to the speed of communication and social media, but also to the ease by which investors can buy or sell securities on any exchange in the world from the comfort of their homes.

For the speculator, rapid market moves are trading opportunities. But for the typical investor this volatility is not welcome, as it creates uncertainty and often leads to impulsive decisions, which undermine the achievement of long-term investment goals.

To solve this problem, a cornerstone of prudent investing is to ensure broad diversification in your portfolio. The reason behind this is that, consistently identifying the next asset or market sector that will perform well is nearly impossible. By creating a portfolio which holds a wide variety of shares and asset classes, the investor is likely to benefit from reduced volatility and enhanced long-term performance.

Food prices are going up worldwide. This is because large scale agriculture relies heavily on fossil fuels which are now so expensive. Much of the world’s arable land is given over to industrialised grain farming for both human requirements and animal feeds, and fertilisers, which are manufactured from natural gas, are vital to achieve high yields.  Farming is also highly mechanised and therefore food prices rise when we have high oil prices.

Our portfolios offer exposure to contrasting views on the economic outlook, opposing ideas on individual shares and different manager investment styles.

We attended an investment conference recently with presentations by over 30 top international and South African fund managers. Listening to them all, it was fascinating how many different and often opposing views they held – all with very well researched arguments.

We think these diverse opinions are a great opportunity. Our model portfolios benefit from the synthesis of these different views and investment styles, giving our clients access to an extremely wide range of securities, asset classes and sectors.

One of the key benefits of our Rutherford multi-manager funds is the extra level of diversification they provide. Investors gain access to all the usual benefits of managed funds, such as their particular asset allocation expertise, with the added layer of multiple fund managers’ views. This is important because rarely will fund managers perform equally in all market conditions. By diversifying across fund managers, exposure to the performance of a single manager is reduced.

The underlying funds that comprise our portfolios are actively monitored to ensure that they are delivering the best possible outcomes for investors in varying market conditions. Exposure to each underlying fund manager in a multi-manager portfolio is increased, reduced or removed completely depending on how each manager is performing, and how complementary he is with the other managers in the portfolio.

In constructing our multi-manager funds, identifying great managers is an essential part of the process. Just as important however, is recognizing fund managers’ varying styles or approaches to how they invest, such as value, quality or momentum. Manager diversification offers optimal exposure to those different investment styles, which provides a more consistent return experience throughout a market cycle. Simply put, your portfolio is exposed to specific areas of the market so that you don’t miss out when one style happens to be performing better than another. This approach blends fund managers together in an efficient way to benefit client portfolios.

Rutherford model portfolios are a strategic blend of world class South African and international funds designed to achieve consistent inflation beating returns at the lowest risk.

Numerous studies show that the returns that investors have achieved over time are much lower than the returns of the markets they are invested in. This holds true in all countries, and over many decades.

A recent report in the USA 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 received only half of the returns that they should have benefited from.

Why do investors receive only a fraction of the returns that they could?

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.

Frequently, this leads to investors selling at the bottom of the market – when it is cheaper – and buying at the top of the market – when it is expensive!

The Behaviour Gap

The ‘Gap’ refers to the difference between the return on investment that investors typically receive and the return the market actually delivers, if you were to stay invested.

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

‘Far more money has been lost by investors trying to time corrections than in the corrections themselves…’ Peter Lynch – Fidelity Investments

A recent example of this behaviour occurred during the Covid-19 pandemic. A record number of South Africans cashed  in their investments and banked their money earning 4% interest. If they had stayed invested, they could have enjoyed the 30% growth on the JSE during the same period.

How Rutherford Model Portfolios achieve better investment returns for the average investor

If you are invested in the appropriate Rutherford model portfolio for your personal risk profile and taking into account your investment time frame, it is important to stick to the plan despite what is happening in the markets.

Each model portfolio is designed to achieve a target return over a certain time period, taking into account a specified amount of risk. This means that you will have a clear idea of the expected returns of a particular model portfolio before investing.

The Rutherford Model Portfolios are a compilation of world class funds and are highly diversified in terms of asset classes and fund managers. The various asset classes (such as equities, bonds, property and cash) perform very differently through the market cycles, as do the individual fund managers. Our investors gain access to all the core benefits of multiple asset classes and fund manager expertise, with the added level of diversification through our blend of fund managers.

Ongoing rebalancing of our funds ensures optimum asset allocation at all times and better long term returns with lower volatility

A panel of experts rebalance our funds, which means that the client and financial adviser do not need to concern themselves with switching between funds. The rebalancing that Rutherford undertakes ensures that the various asset classes remain consistently at target allocation to achieve the projected return of the specific fund. Our blend of fund managers aims to smooth out some of the extremes of particular fund managers by off-setting with other funds in the model portfolio. This has the effect of reducing volatility and creating a more consistent long term growth path.

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

Understanding the mechanics behind how the Rutherford Model Portfolios work makes it easier to keep emotions in check and avoid the alluring temptation to throw away hard earned money on speculative switches.

Following the unsettled Covid years everyone was looking forward to 2022 being a more normal year. It has not panned out that way. Inflation has surged, particularly in the developed world, which is forcing central banks to reverse the policies of the last decade and to tighten monetary policy. Interest rates are going up, and stimulus policies are being reversed – the days of easy money are over.

Two of the factors fuelling inflation are rising commodity prices and supply chain disruptions. Let’s have a look at what is going on.

Commodity prices have surged over the last couple of months

The world still runs on oil, which is vital for nearly all modern activities. Over the last two decades environmental concerns have focussed on reducing the use of fossil fuels. This has meant that investment in new oil wells or coal mines has not been a priority. However, the global population has continued to grow and to become more prosperous, leading to the demand for energy to increase steadily. We are now in the position where demand for energy is outstripping supply, and the natural consequence is higher energy prices.

Food prices are going up worldwide. This is because large scale agriculture relies heavily on fossil fuels which are now so expensive. Much of the world’s arable land is given over to industrialised grain farming for both human requirements and animal feeds, and fertilisers, which are manufactured from natural gas, are vital to achieve high yields.  Farming is also highly mechanised and therefore food prices rise when we have high oil prices.

Fertiliser and diesel are the biggest input costs for modern farmers

Metals and minerals such as iron ore, nickel and copper are vital to all economies, and demand is steadily increasing as emerging economies become more prosperous, and developed countries need to maintain and upgrade existing infrastructure. Many of us are not aware that the transition to a greener economy is also very metals intensive and this has created surging demand for minerals needed to feed new solar and wind power installations, lithium-ion batteries for electric vehicles and grid-scale utility storage.

The war in Ukraine has amplified already surging commodity prices because both Russia and Ukraine are key commodity exporters. Russia is a major producer of oil, coal and fertilisers and is the world’s largest exporter of natural gas, nickel, and wheat, while Ukraine is the largest exporter of sunflower seed oil. These commodities saw particularly steep increases following the start of the war in Ukraine.

The commodity boom is likely to be with us for some time because it takes years for the exploration and development of mines and oil and gas fields

Many industry experts point out that the easiest and highest grade deposits have already been exploited, so new mineral deposits and oil wells will be harder to reach and much more expensive to extract. If this plays out it would inevitably lead to higher commodity prices in the longer term.

South Africa benefits from higher commodity prices because we export large quantities of minerals and agricultural products. This is behind the record trade surpluses we have enjoyed recently. Higher company revenue has resulted in increased taxes for SARS and allowed the Treasury to reduce SA’s debt burden this year. A sustained commodity boom would be very beneficial for the SA economy.

Covid 19 shutdowns played havoc with global supply chains

Another factor driving inflation is that the supply of products from cars to computer chips has become less reliable and more expensive due to changes in the functioning of global supply chains.

Covid 19 shutdowns played havoc with global supply chains. It was hoped that this would be a short-lived phenomenon, however with the chaos at ports showing no signs of abating and prices for a vast array of goods still rising, the world is absorbing the troubling realization that time alone will not solve the great supply chain disruption.

The USA and European countries were shocked during Covid to discover how much of their manufacturing base had been outsourced to cheaper jurisdictions such as China. They are now scrambling to on-shore these essential industries, and the Ukraine/Russia conflict only adds urgency to the task. Since sophisticated products require components and processes from around the world, this is not something that can be done either quickly or smoothly.

It is likely to take many months, and perhaps years, before the chaos subsides. Cheap and reliable shipping may no longer be taken as a given, forcing manufacturers to move production closer to customers. After decades of reliance on lean warehouses and systems that monitor inventory and summon goods as needed, manufacturers may revert to a more prudent focus on holding extra capacity.

Global markets have enjoyed a long period of increasing globalisation, low inflation and very low interest rates (at least in developed countries). These trends are now rapidly reversing as countries seek to bring manufacturing back home. Inflation is way above central bank targets and raising interest rates to curb this inflation may soon tip the US and Europe into recession. 2022 looks set to be as volatile as the Covid years.