In the context of current economic uncertainty and market volatility, investors are increasingly turning to fixed rates and dividend or interest-bearing products. With reduced performance risk, this conservative approach aims to ensure steady returns in the uncertain investment climate.
This is according to Dr Anton Hay, Director of Ecsponent Financial Services, who notes that this trend is supported by figures recently released by the Association for Savings and Investment South Africa (Asisa).
“According to Asisa, nearly 44% (around R68 billion) of new investments made in the first quarter of this year were conservative investments, in money market funds and interest-bearing funds for example.”
“On the other hand, unit trusts investments only accounted for 36% (about R56 billion) of all new investments as conservative investments provided an option that could beat inflation (of 6.3%) up until the end of March.”
Hay explains that these figures are in line with the general sentiment in the market, that returns on unit trusts have been extremely poor and that the majority of unit trust investment opportunities cannot beat inflation.
“In these uncertain times, many people consider moving their money to fixed rate investment products. This is because they want greater security. A fixed rate allows investors to sleep better at night, knowing that their investments are safe and that there is no risk of losing it all in a matter of hours.”
“Even experienced investors appear to be unsure lately and fund managers are openly acknowledging that they are less confident about managing their clients’ investments. Ultimately, it is becoming ever more difficult to make major decisions in an environment which can change drastically within just a matter of days,” Hay adds.
An example of the serious consequences which can follow one wrong investment move was when panic-stricken investors decided to move billions of rand to foreign countries in December 2015. Hay says, “This was their immediate reaction to the sharp drop in the Rand after the former Finance Minister, Nhlanhla Nene, was removed from his position. Since then, the rand has strengthened again and the wisdom behind the capital flight reaction of many investors has come under question.”
“With this in mind, how do you make a decision in these uncertain times? The last thing you want is to choose an investment which may eat into your capital and diminish all hope of financial success. Yet, inadvertently, this can happen.”
Hay suggests if such a scenario of uncertainty arises, it is essential to keep calm and act rationally so that you do not end up losing even more – if not all – of your money by panicking and investing it in some dodgy scheme which promises unrealistic returns.
“It is your responsibility to understand your investment. So, do you have the knowledge? Are you willing to do the homework? Do you really get expert advice? The real challenge is to make the right decision and to do so with confidence,” Hay says.
What are some of the benefits of choosing a fixed investment rate? Hay shares his insights.
Reduced volatility risk
Fixed investment returns offer the lowest risk on capital and returns when compared to other options.
Reduced risk of poor performance
The yield is not determined or linked to the markets, where returns can be volatile.
Reduced risk to exposure
Limited exposure to factors that could lower the yield. There are no medium or high risks, only low risks which are very predictable.
You invest in something you understand
The yield, period and objectives are clear. You know exactly what you are getting and you can identify whether or not it fits in your long-term investment plan.
You do not have to predict the market
You can sit back and enjoy the returns. With fixed rates, the days of tracking the markets and comparing stock returns are over. Concerns over junk status and political turmoil do not affect your investment.
No need to keep up with different types of investments
You know where you stand. You do not need to research a variety of investment options. If the product meets your requirements, go ahead and invest!
An investor’s biggest enemy – apart from postponing investing – is inflation. It destroys your money’s purchasing power. An inflation rate of 6% per year cuts your purchasing power in half every twelve years.
In addition to money market and fixed interest products from banks, Hay explains that there are also a number of other fixed rate investments. “Always keep in mind that you should do at least 2% to 3% better than inflation if you want to maintain your standard of living.”
“Whether you are a seasoned investor or a newbie, it cannot be stressed enough that as times change, so do your circumstances and while it is never a good idea to make any hasty or irrational changes to your investment portfolio, it should be reviewed regularly to ensure the best results,” Hay concludes.