Our latest survey shows that 57% of Smart Money readers would rather put their long-term money into a money market fund. Few readers would even consider a low equity unit trust fund or even to phase their money into the markets over six months.
The fear of the short-term loss of money is definitely out-weighing the longer-term threat of inflation.
Inflation is an intangible threat which you only notice few years later; however seeing your investment portfolio half on paper, as it did in 2008, is felt immediately and brings on panic attacks.
So it is completely understandable that during these uncertain times people are worried about the value of their money today – not in ten years’ time.
However rational this thought process is, it will have a detrimental impact on long-term savings and this is where investment decisons become very difficult.
If your advisor recommends that you have equity exposure in order to meet your long-term financial needs and the market falls again, you will be very angry and most likely fire the advisor.
A year or two later the market may have recovered but if you had sold your investments out of fear, you would have lost a significant amount of money. Therefore advisors are driven by their clients’ fears. Avoiding a short-term loss means they keep the business and if in ten years’ time the retirement funds have not keep up with inflation, the advisor would probably have moved on by then.
But here are some pretty sobering statistics. If we just invested our retirement funds in cash which keep track with inflation, we would need to save 41% of our monthly salary for 35 years to fund our retirement according to Old Mutual economist Rian Le Roux.
If however we invested in a low equity fund that just returned 3% above inflation, we would only have to save 24% of our salary per month. If we invested in a high equity balanced fund that delivered 5% above inflation (that would be around 11% based on current inflation figures) we would only need to save 15% of our salary each month. That is the power of growth investing.
The simple truth is that no matter how worried we may be about the short-term market movements, the long-term consequences of staying out of growth assets will be far more detrimental to our wealth.
Of course ideally we would like to time our entry into the market perfectly and avoid all market corrections, however that is impossible.
Take now as a perfect example. If one is waiting for a crash and it materialises, when would you feel save enough to re-invest? And if the market kept running higher, would you remain on the side-lines indefinitely or eventually panic that you were missing the run and invest at the peak? We simply cannot invest on emotions, we have to invest according to valuations.
The best solution is to invest in a multi-asset class fund where the fund manager can make tactical investment decisions based on the valuation of the markets as whether to be in cash, bonds, property or equities.
At least this way you are not staying away from growth assets but the ride will not be quite so bumpy.
And avoid looking at your investment statement every month – you just need to worry about the ten year figure.
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