Question:
Pension Fund values have tumbled, but professionals are of the opinion that these things are cyclical. Accordingly, fund managers are supposedly buying up shares at current prices (some 40 percent lower than not too long ago) so that when the market normalises the Funds will be stronger as they will benefit from the upswing.

Is this actually true? While I fully understand the reasoning, will this be relevant to me who has to retire in less than five years?

Answer:
After surviving decades of meetings, deadlines and targets you are now approaching an important and exciting event: retirement. But as you dream of exchanging your worn-out office chair and weak canteen coffee for a low-slung beach lounger and piña colada, one can't help but question whether the current market performance is the monster in the cupboard determined to turn your utopian dream into a grim nightmare.

But before we continue any further in our sleep-deprived state of quandary, let's grab a strong cuppa and take a closer look at what this 'monster' really is and understand what this means for you, your money and, more importantly, your retirement.

For the 12 months ended 31 December 2008, the JSE All Share Index posted a negative 23.2 percent performance. Now, although it is natural for one to shudder at the thought of any loss eating away at your investments, one should be mindful of the overall performance of this asset class and remember that short-term volatility is no stranger to the equity market. If we look just at the last five years, equities have produced growth of 19 percent per annum. This would mean that if you had invested R100 five years ago, it would be worth R238.63 today. Considering that this takes into account last year's dismal results, it is only fair that we afford it the positive recognition it deserves. If we extend this out to ten, twenty or even thirty years, the outcome is much the same — sound inflation-beating returns. Markets go up and markets go down, but when we filter this through the hourglass of time we see that there is no other asset class that has performed as well over the longer term.

What is also apparent is that every strong Bull Run experienced in the market was superseded by a year or two of muted and/or negative returns (much like the year we've just had). So, although I would hesitate to call the market cyclical, there is a lot of evidence to support the fact that what we are experiencing is very 'normal' and that the market will recover. The big question remains as to exactly when this will take place.

With that said, where does that leave you as an investor still in the accumulation phase of your life? There is no doubt that the market has presented many quality shares at bargain basement prices that will surely offer exceptional value going into the future. To benefit from this, the fund manager is in a position to trade some of the less attractive assets classes (e.g. bonds and even cash) and begin looking at shares that offer more potential for growth. In addition to this, all the 'new' money that is attracted by regular premiums can go directly towards buying the 'cheap' shares without the risk of opportunity cost from trading off a previous share or asset class. This market phenomenon is known as Rand-cost averaging and is undoubtedly one of the most powerful mechanisms available to investors. What this essentially allows is for you to purchase more units per Rand while the market is suppressed and therefore benefit in the upswing. The longer the anaemic performance continues the more shares you will be able to accumulate. So to answer your question: Yes it is true. As to how much you will benefit from the upswing will largely be determined by the level of equity exposure in your portfolio.

British comic writer, Douglas Adams once said: "Time is an illusion. Lunchtime doubly so". A mistake most often made in retirement planning is that of confusing your retirement and that of your money. As you prepare to drop a gear, open the sunroof and settle into the slow lane, this is the precise time when your money needs to step up and work even harder! So, when considering your expected time horizon, forget your retirement date ('under five years') and rather focus on how long you expect your money to still work for you post retirement. With many people retiring earlier (by will or otherwise) and living longer, the average lifespan in retirement could range anywhere from twenty five to thirty five years and beyond. With this in mind, there are two very important factors to consider. Firstly, with that kind of time horizon, short-term volatility is not of paramount importance. Secondly, one needs to carefully evaluate where it is that you are most likely to get the kind of returns to fund your retirement for this length of time. After all, it is better to run out of life at the end of your money than run out of money at the end of your life.

One may now begin to question whether the dark figure haunting you from across the room in the dead of the night is in fact a monster or is it rather the Big Friendly Giant that, if understood, could protect you against the ravages of inflation and provide sound, long-term returns to fund the life you want to live in retirement.

As with all finance-related decisions, I strongly urge that you meet with a Certified Financial Planner to develop a meaningful financial plan to navigate you through the next few years as well as into retirement. In preparation for your retirement, sound financial management is imperative and quality professional advice will prove invaluable in the years that follow. You're in the home straight — go, go, go!!!

If you would like acsis to put you in touch with an independent financial planner, click here!

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