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South African investors do not make adequate provision for retirement because they have too little exposure to equities while building capital, and they wait too long before constructing an investment portfolio, according to research conducted by Plexus Asset Management.

"The latest figures released by the Association of Savings and Investments South Africa (ASISA) reveal that only around 22 percent of the R706.3-billion local assets is invested in pure equity funds," says Johan Pyper, head of research at Plexus Asset Management.

The recent JSE rally achieved a 37 percent return, which translates into proceeds totalling R9250 for a portfolio of R25 000. Although this return cannot make a significant difference to a person’s wealth at retirement, it makes a huge difference on large portfolios: on R250 000 it amounts to R92 500 and on R2.5-million it amounts to R925 000. "This does not mean the R9250 return is not important to the R25 000 portfolio," says Pyper. "The amount could equal quite a few months’ contributions and is essential to a portfolio that seeks to build capital."

Capital building vs. capital growth

According to Pyper one should distinguish between the phase in which an investor focuses on capital building and the phase in which the focus is on capital growth. "A R250 000 portfolio is not built up overnight. It is a difficult and lengthy process," he says. "During the capital-building phase, monthly contributions usually play a bigger role in the growth of the portfolio value than market yield. The portfolio will enter the growth phase only once the market yield starts to play a more important role than the monthly contributions."

Another difference between the phases is that the investor can take more risk during the capital-building phase, whereas diversification and capital protection become increasingly important in the growth phase. "The investor thus plays a more important role than the portfolio manager in the final outcome of the capital-building phase, while the portfolio manager plays a bigger role during the growth phase," he says.

To validate this statement, Pyper uses the example of two investors who invest R1000 monthly in an equity unit trust from 31 July 1999. Both investors enjoy the benefit of rand cost averaging (click here to learn more about Rand Cost Averaging and how it can make your rich) and over time both should outperform the market.

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