Smoothed bonus funds: Investing in uncertain times
Opinion
Global uncertainty has increased over the last 20 years or so, which means more than ever, global events impact investment markets. Political influence, war, the outbreak of a pandemic, disruption in trade or supply of goods - all these factors contribute towards market volatility.
What remains is the need to invest for retirement, grow above inflation and maintain your purchasing power. This forces us to rethink the way in which we invest, by looking at options that offer protection while still seeking growth. The reality is that if we do not seek real investment growth, we stand a chance of losing the battle against inflation. This simply means that N$100 today will be of less value in the future.
When investing for retirement, one needs to spend time in the market rather than trying to time the market. Despite being surrounded by uncertainty, we need to maintain our exposure to growth or risky assets such as equities to beat inflation.
What does risk mean to you?
If you drop from N$100 to N$95, over time this investment will grow back to N$100 or even more. This is called volatility - and although we cannot predict when these drops will occur, or how often they will occur, the result tends to be positive over time.
Rather than avoiding risk, it needs to be managed. And this is where solutions such as guaranteed or smoothed bonus funds (SBFs) become quite attractive.
What is an SBF? SBFs are long-term investment portfolios that use smoothing to provide for stable, inflation-beating returns to investors over the longer term, while significantly reducing the volatility associated with market-linked investments such as balanced funds. The underlying investment portfolio SBFs invest in range from conservative to aggressive balanced funds. These portfolios usually invest in both local and global investment markets as well as alternative assets, such as private equity, natural resources, infrastructure and/or development finance, which meet environmental, social and governance (ESG)-related factors.
How does it work?
SBFs aim to provide the investor with smooth returns throughout the journey to retirement by catering for both growth and protection of capital. The investment returns targeted by SBFs usually range between 2% and 6% above inflation.
An insurance premium, more commonly known as a ‘capital charge’, is levied on the investor to cover the cost of the capital protection. The higher level of capital protection, the higher the capital charge will be.
Did you know that if you lose 20% on N$1 000 today, which goes to N$800, you need growth of 25% to get back to the original N$1 000? How long do you believe it will take to recover these funds? What does it mean to you if a market crash occurs during the month of your resignation or retirement?
SBFs are ideally suited for:
Individuals who have retired from a pension fund, provident fund, retirement annuity or preservation fund who select a living/flexible annuity to receive an income in retirement.
*Isaack Veii is the head of distribution and retention of Old Mutual Namibia's corporate segment.
What remains is the need to invest for retirement, grow above inflation and maintain your purchasing power. This forces us to rethink the way in which we invest, by looking at options that offer protection while still seeking growth. The reality is that if we do not seek real investment growth, we stand a chance of losing the battle against inflation. This simply means that N$100 today will be of less value in the future.
When investing for retirement, one needs to spend time in the market rather than trying to time the market. Despite being surrounded by uncertainty, we need to maintain our exposure to growth or risky assets such as equities to beat inflation.
What does risk mean to you?
If you drop from N$100 to N$95, over time this investment will grow back to N$100 or even more. This is called volatility - and although we cannot predict when these drops will occur, or how often they will occur, the result tends to be positive over time.
Rather than avoiding risk, it needs to be managed. And this is where solutions such as guaranteed or smoothed bonus funds (SBFs) become quite attractive.
What is an SBF? SBFs are long-term investment portfolios that use smoothing to provide for stable, inflation-beating returns to investors over the longer term, while significantly reducing the volatility associated with market-linked investments such as balanced funds. The underlying investment portfolio SBFs invest in range from conservative to aggressive balanced funds. These portfolios usually invest in both local and global investment markets as well as alternative assets, such as private equity, natural resources, infrastructure and/or development finance, which meet environmental, social and governance (ESG)-related factors.
How does it work?
SBFs aim to provide the investor with smooth returns throughout the journey to retirement by catering for both growth and protection of capital. The investment returns targeted by SBFs usually range between 2% and 6% above inflation.
An insurance premium, more commonly known as a ‘capital charge’, is levied on the investor to cover the cost of the capital protection. The higher level of capital protection, the higher the capital charge will be.
Did you know that if you lose 20% on N$1 000 today, which goes to N$800, you need growth of 25% to get back to the original N$1 000? How long do you believe it will take to recover these funds? What does it mean to you if a market crash occurs during the month of your resignation or retirement?
SBFs are ideally suited for:
Individuals who have retired from a pension fund, provident fund, retirement annuity or preservation fund who select a living/flexible annuity to receive an income in retirement.
*Isaack Veii is the head of distribution and retention of Old Mutual Namibia's corporate segment.
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