Bryan Hirsch
20 August 2007
opinion
Johannesburg — WHEN hearing about crashing markets, many investors breathe a sigh of relief as they believe they do not have funds invested in equities or markets.
This is a misconception as they don't realise the extent of their exposure when equity markets drop.
If you are a member of a pension or provident fund or have endowments or even retirement annuities, there is a good chance that a large portion of your contribution or premium is diverted into equities. When markets fall, they will affect the ultimate value of these investments.
Among the many changes in the pension industry in the past 10 years, I would like to comment on only two.
The first change was that members of defined benefit funds were encouraged to move to defined contribution funds, thereby taking on the risk of investment returns. Previously, under a defined benefit fund, the company bore the investment risk and the member was guaranteed a pension.
However, in a defined contribution fund, the member has to buy a pension from the ultimate end value. For this reason, investment performance is paramount.
The second change relates to buying a pension with these funds. It is the advent of living annuities, whereby the pensioner selects an amount they wish to draw from these funds, as opposed to receiving a fixed annuity which is guaranteed.
Under the living annuity, poor investment decisions will affect the amount the member is able to draw as a pension each year.
The strong performance of the shares listed on the JSE has been driven by the demand from foreign investors. These same investors have no loyalty to any market in any country.
International investors, terrified of anything that sounds likely to destabilise the country, would be quick to withdraw funds. A large percentage of their investments will be in mining and resource stocks and this withdrawal could result in stocks falling 25%-30%.
In a pension fund, about 55% -60% is invested in equities and in the case of an endowment policy closer to 70%. The mining and resource weighting is a minimum of 30%, which means 18% of the equity portfolio is made up of these stocks.
A 25% fall in the price of these stocks will therefore result in a loss of 4,5% on the value of one's pension or endowment policy.
Financial advisers are frequently asked by smaller investors whether they are able to help because the person doesn't have a large amount to invest. But every investor, large or small, is entitled to the best investment advice and the right to secure their capital for the future.
It is imperative that when you are close to retirement or have an investment falling due, that you understand the decision you need to take. My advice is to use a competent adviser. It will cost commission or a fee, but in the long term should be worth it.
Bryan Hirsch is CE of Pioneer Financial Planning.
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