Maximising your exposure to growth assets for retirement
Introducing the ETFSA RA Wealth Velocity Portfolio
As an investor in a pension or retirement annuity fund, time is a key benefit.
Except for a portion that may be withdrawn as part of the Two-Pot System and limited access to vested preservation funds, pension and retirement fund assets may only be accessed from age 55 onwards.
This forces patience during the early and mid-years of your career and has the potential to yield excellent results because, without the ability to draw down on them, your savings compound over extended periods.
How to put time to work
Retirement annuities and pension funds fall under Regulation 28, set out by the government to protect retirement-fund savings by limiting the extent to which funds may invest in a particular asset or asset class. This prevents excessive concentration risk, i.e., not putting all your eggs in one basket.
It is prudent to be well diversified, especially at the security level. However, it raises the question of how one should weigh exposure to, say, cash, bonds, property, and equity within a retirement fund.
These asset classes have different return profiles and correlate with each other in different ways. Defensive asset classes like bonds are usually negatively correlated with equities. Bonds are also considered defensive because a yield underpins their value, and price fluctuations (or volatility) are lower.
From a pure returns perspective, however, equities and listed property growth asset classes offer the best returns over time. Equities and shares tend to have lower yields and more volatility but greater capital growth and total returns over time.
But what about the risk?
This is where time becomes crucial. While equities are more volatile than bonds, the risk of capital loss greatly decreases as the time frame extends.
Long-term data for equities* show that:
- Over one year, your chance of losing capital is about 30%
- Over five years, your chance of losing capital is less than 10%, and
- Over 10 years, your chance of losing capital is less than 1%
* Based on the DMS database.
Historically, equities (and growth assets in general) significantly outperform defensive assets. For instance, since 1939, global equities have outperformed global bonds by approximately 4% annually and much more in recent times. Similarly, SA equities have significantly outperformed SA bonds by 5% per annum on average, over the long term.
With time on your side (more than eight to 10 years until retirement), it makes sense to maximise your exposure to growth asset classes, even if it means more volatility, heavier drawdowns and less protection against a market fall.
When it comes to investments, time remedies most things. Therefore, it is important not to panic and make portfolio changes during market unease.
In line with this thinking, ETFSA has added its latest offering – the ETFSA RA Wealth Velocity Portfolio.
The portfolio aims to maximise allowable allocations to growth assets within the parameters of Regulation 28, essentially, by allowing up to 90% in growth assets, including 15% in property.
When back-tested, the portfolio tends to outperform; however, as expected, it comes with higher volatility.
This means that this portfolio may benefit you if you have more than 10 years until retirement. However, it is essential to stay the course!
For more information on the ETFSA RA Wealth Velocity Portfolio, Download the Brochure
