Know the real enemy of wealth creation

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 bear in mind.  

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  sits at around $70 trillion (R1.014 trillion) and continues to grow at around $28bn every 24 hours.

When you consider that the 2008 global financial crisis caused $2.8 trillion in stock- market losses, you realise 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.  

SA is no exception to the global experience. According to the Organisation for Economic Co-operation and Development (OECD), SA has one of the lowest gross replacement rates in the world. OECD countries have a projected future gross replacement rate  of 70%, while SA’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 infographic (right) 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. But 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 on 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.

Ignoring inflation and opting for cash

While inflation does not reduce the money you have saved, 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 in growing 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 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.  

For more information, visit www.psg.co.za

Adriaan Pask is the chief investment officer at PSG Wealth.

This article was paid for by PSG Wealth.