| RETIREMENT FUND MEMBERSHIP MANUAL
INVESTMENT CHOICE id you know that your benefit in your retirement fund is probably the single largest asset you will ever own? Most people do D not realise this. • Also, did you know that very few people worry about whether they will have enough money for their retirement until closer to the time? Of course, the problem with this is that you may be left with too little time to rectify the situation should it emerge that you have made insufficient provision for your retirement. •
As a member of a Defined Contribution arrangement the investment returns earned by the Fund have a direct impact on the amount of your retirement benefit. Given that this is probably the largest asset you will own, it is probably worth thinking more about its investments and the risks you face now. The Fund provides an automatic investment plan (the so-called Life Stage Model), which is intended to build members’ retirement capital prior to retirement and protect this capital as retirement approaches. In this section you can learn more about: • The main asset classes in which you can invest your pension savings • The key investment risks you face as a member of the defined contribution section • How the Fund’s life stage model works • Choosing your own portfolio • Common mistakes members make when investing
MAIN ASSET CLASSES The main asset classes in which the Fund invests your money are equities, bonds, infrastructure, and cash. These asset classes are available both in South Africa and offshore. One cannot explain all the intricacies of these asset classes, but the following provides an overview.
Equities (or shares) When an investor owns the equity (or shares) of a company, he/she effectively owns part of that company. Equity prices are sometimes affected by market sentiment. Sometimes investors are negative towards the market and even if the company in which you have invested is doing well, it may still fall in price. Equities can be bought and sold on stock exchanges throughout the world. The South African stock exchange is called the Johannesburg Stock Exchange (JSE). The two main features of equities (compared to bonds and cash) are: • Historically, over the long term, equities have been the asset class that provided the highest investment return; and • Equities have had the highest volatility (or highest risk of reducing in value), especially over shorter measurement periods. This makes sense – logically investors should look to be rewarded by higher investment returns for taking on more risk.
Bonds The Government (and some large companies like Transnet, Telkom, ESKOM and SASOL) are regular borrowers of money. So, they issue bonds that invite investors (like the asset managers of your Retirement Fund) to lend them money. The bond will set out the interest the borrower will pay, and the date on which the loan will be repaid. The market value (price) of a bond at any point in time depends on interest rates and, importantly, that price can decrease. By way of example, let’s say the Retirement Fund owns a bond that is worth R1 million, which is currently earning 8% per annum. If interest rates now increase to 10% per annum, the market value of the bond will fall because no investor will be prepared to pay R1 million to earn a 8% return when they now can earn 10% elsewhere!
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