This is the first in a series of reports on presentations to the 1998 Personal Finance/TMA Investment Products Services Truth about Retirement seminars.This presentation was delivered by Vernon Cresswell, a director of Fincorp, a company specialising in financial advisory services. Cresswell has been instrumental in converting the company`s business from commission-based to charging a flat "fee only".
Only four percent of South Africans who are 45 years old now will be financially comfortable when they retire.
And research shows that out of every 100 people who are 45 years old now, 34 will be forced to continue working when they reach the age of 65; 32 will be dependent on the State; 17 will need family support and eight will rely on welfare.
Successful investments are therefore crucially important if you want to retire comfortably.
Vernon Cresswell, a director of Fincorp, told the delegates to the recent Personal Finance/TMA Truth about Retirement seminars that while a successful investment strategy can help you achieve financial security in retirement, there is no magic to achieving your investment goals. This requires thorough planning, dedication and focus.
Cresswell suggests a fivestep process to achieving your investment goals:
Step One
Identify your own investor profile. This is particularly important because it will determine how much risk you can afford to take.
Cresswell says when you assess your profile, you have to consider aspects such as how many assets you have, over what period you will be able to invest, how much risk you can afford to take, what your tax profile looks like and what your income requirements will be at retirement.
Once you have identified what kind of investor you are, you will be able to set yourself a benchmark of what you want to achieve over a period of time.
You need the returns on your investments to be inflationrelated, but remember that it will also be relative to the risk you are prepared to take.
Cresswell says statistically, in the long term, higher returns will assume a higher level of risk.
Step Two
Determine what your asset allocation should look like. This means deciding whether you want to be invested in equities, properties, bonds and cash, and in what percentages. You also need to identify what mixture of these asset classes will be most appropriate for you.
Remember, too, that diversification works best when securities held rise and fall in value at different times.
Cresswell warns that diversification does not simply mean putting half your money with one investment house and the other half with another. The fund managers in these houses may have exactly the same mandates and philosophies, so there may be no point in splitting your investments up in this way. In fact, you may be duplicating costs as well as diluting each fund manager's ability to perform.
You should really look at diversification from the point of view that asset classes may be more volatile at certain times than other times.
For instance, the volatility of equities may be as high as 92 percent and as low as minus 29 percent in the same year.
The longer you are prepared to hold on to equities, the less volatile your investment will be. This sort of planning becomes very important when you look at your asset allocation, says Cresswell.
You have to look for a blend of asset classes which is appropriate for you to achieve your desired result.
Step Three
Select the right fund manager. One fund manager may be more suitable than another to help you achieve your investment goals.
Cresswell says to select a fund manager you should look at more than past performance. Consider, for instance, whether a fund manager is young and very aggressive in his investment style or older and more conservative. The one is not necessarily better than the other, it all depends on much risk you want to take and what your goals are.
Step Four
Decide what investment medium or instrument you should use when investing your money. This means deciding where you want to house your investments in equities, bonds, gilts, properties and cash.
For instance, do you want to put your investments into a pension fund or a managed portfolio?
Cresswell says you should keep in mind aspects such as costs, tax and flexibility when taking these decisions.
Step Five
Monitor your investments. With markets changing and new legislation being introduced, you need to review your portfolio and your objectives from time to time.
For instance, you may have decided that it is appropriate to have between 50 and 60 percent of your portfolio in equities. If the markets perform well over a certain period of time, you may find yourself sitting with 70 or 80 percent of your investments in equities.
If this happens you should balance your portfolio again and sell your equities or you should be prepared to assume a higher level of risk for a higher rate of return.
If so, your original objectives have changed.
SELECTING A FINANCIAL ADVISER
You may decide to plan your own financial affairs, but be clear on exactly what your role will be.
If you do decide to employ the services of a financial planner, make sure you maintain control of your overall investments and don't be pressurised into doing or signing anything.
Gather as much knowledge as you can to implement your investment plans proactively.
Cresswell says you should think long term, set firm objectives for yourself and stick to them.
This new approach to investing and retirement planning may require a paradigm shift and a move away from the way in which you have become accustomed to doing things.