How multi-asset funds can help manage wealth-destroying behaviour

As investors, we are often our own worst enemies. Although most investors often blame the market for not meeting their investment goals, the reality is that it’s often due to their own behaviour. The good news is that such behaviour can be managed by putting the right investment plans and strategies in place and sticking to them. And also by using the right investment vehicle.

A well-managed multi-asset fund can help many investors combat losses caused by bad investor behaviour. These funds can be especially useful when it comes to taking on enough of the right kind of risk.

Multi-asset funds combine a variety of asset classes, providing a mix of growth assets like shares, and more stable assets like cash, in line with their respective mandates and objectives. The funds are professionally managed and are continuously rebalanced to ensure they retain exposure to the right types of assets in varying market conditions. By taking the pressure off the individual to select the right funds, investors are also relieved from the pressure of having to react to market developments – and potentially making the wrong decisions in the face of fear.

The Association for Savings and Investment South Africa (Asisa) reports that most net new retail investments were invested in the South African Multi-Asset High-Equity sector – also known as balanced funds – in the last quarter of 2016. These funds comply with the Prudent Investment Guidelines, as set out by Regulation 28 of the Pension Funds Act, and are popular choices for pre-retirement investments (retirement annuities, preservation funds, pension funds and provident funds).

Behaviour to avoid

1. Saving too little

Medical advances mean that lifespans are increasing, and investors often don’t realise how long their retirement years could last. A person who starts working at 23 and works until 65 would spend 42 years working. If they live to 100 years of age, that would mean spending 35 years in retirement. Had they decided to retire earlier, at 55, they would spend more time in retirement than the time they had spent working! This could also mean that your medical expenses in retirement are likely to be higher than what you may expect.

2. Not saving for long enough

Longer life expectancies mean that you need to start saving as early as possible and continue saving for as long as possible. This may in turn mean that you end up retiring later than you originally planned. Unfortunately, investment plans – like many things in life – seldom turn out exactly as planned, and if investors are not careful, they may fail to meet their investment objectives. Compound interest is often touted as the eighth wonder of the world, but it takes time to work in your favour, so it is best to start saving as soon as you possibly can.

3. Not taking enough risk

Although many investors are hesitant to take on risk in their portfolios, well-managed risk can be your best friend, provided you understand and respect it. This is where financial advisors can play a crucial role. By stepping into a coaching and mentoring role, they can help you overcome the biases and bad habits that undermine your ability to invest successfully, rather than merely offering investment advice. Not taking on enough risk means your money is not exposed to enough growth assets, and that your money is unlikely to generate a sufficient return in the long run.

4. Taking too much risk

Investors often try to remedy behaviour 2 above by trying to find “high-return” investments. This is especially the case when they realise too late that they have saved too little. Sadly, if it sounds too good to be true, the chances are that it is. In addition, chasing short-term performance by regularly switching between funds can destroy your wealth. Rather, choose a strategy and stick to it.

Jac de Wet is head of sales: southern regions at PSG Wealth. 

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