Understand the real enemies of wealth

By Adriaan Pask, CIO, PSG Wealth

Investors generally view geopolitical events, currency volatility and concerns around slowing global growth as the main enemies to wealth creation, but these should be the least of their worries. While these events can cause short-term volatility and uncertainty, there are bigger enemies to be aware of.

Saving too little, especially for retirement

The number one mistake people make remains not saving enough, and the pain is primarily felt in the retirement space. This retirement shortfall gap currently sits at around $70-trillion and continues to grow at around $28-billion every 24 hours. When you consider that the 2008 Global Financial Crisis caused $2.8-trillion in stock market losses, you realise that those losses were less than 1% of the total retirement income shortfall. We tend to become obsessive about market events because media reports keep them top of mind and because they confront us with a loss right now, rather than because of the severity of their impact.

South Africa is no exception to global experience. According to the Organisation for Economic Co-operation and Development (OECD), South Africa has one of the lowest gross replacement rates in the world. OECD countries have a projected future gross replacement rate (GRR) of 70%, while South Africa’s is only 12%. This means that on a current monthly salary of R10 000, South Africans have only saved enough to draw an income of R1 200 in retirement.

Emotional reactions to market events

The above graphic highlights that we tend to focus on the wrong things when assessing their impact: short term factors often carry more weight than they rightfully should. Market volatility can be unsettling, but it should not deter you from saving. Yet we find many people postpone saving, believing volatile markets won’t reward them, or opt to save in cash instead of investing in stock markets. Being swayed by recent market volatility often leads to poor financial decisions based on emotions, rather than facts. It’s critical to keep your eye on the long-term horizon of your investment and filter out the noise. You want to be invested in funds that offer a smoother return over time and consistently stay above the benchmark, rather than jumping from one best performing fund to another, trying to time the market and getting it wrong.

Ignoring inflation and opting for cash

While inflation does not reduce the money you have saved up, it manifests itself through reduced spending power. Its impact is negligible in the short run but profound in the long run. It is crucial to price inflation into your wealth plan. If your returns don’t beat inflation, you’ll never achieve your financial goals. Investments in cash do not help you to grow your wealth in real terms.

Beware the real enemies of wealth

Market volatility can slow down wealth creation in the short term, but saving too little, together with emotional decision-making and inflation are by far the biggest enemies of wealth. Speaking to an experienced financial adviser can help you decide on, and stick to, a suitable investment strategy that will optimise your desired outcomes and help curb emotional decisions during turbulent times. Provided that you are guided by an expert and invest in quality shares, equities are well worth the wait and risk, as they have been proven to beat inflation by a wide margin over time.