Question:
I need to re-invest my provident fund and was thinking of putting it into a preservation fund. Can you offer some advice. Sharon Garson
Answer:
Sharon,
We cannot offer financial advice in this forum, as we would need to do a full financial needs analysis to do do. A preservation fund is a good preservation option. You will be allowed one full or partial withdrawal from the fund before retirement (earliest age 55). You cannot however, make contributions to the preservation fund, you can only transfer in the proceeds from other pension or provident funds.
The two critical things you need to look out for in your preservation fund (or any fund for that matter) are your asset allocation and fees. Your asset allocation should match your investment time horizon. Whenever you invest, you assume investment risk, but the concept of investment risk depends on the investment time horizon. For short term investors (less than 5 years) the risk lies in volatile returns. For long term investors, this volatility is insignificant; their risk is that they earn a real return insufficient to meet their retirement goal.
If you are still some years off retirement, you should strive to earn a high return, by investing in a high risk (ie high equity) portfolio, as equities have typically delivered the highest long-term returns, albeit with intermittent volatility. If you are near retirement (5 years or less), you should begin to lower your equity exposure (ie reduce volatility), unless you plan to buy living annuity at retirement (in which case you will effectively remain a long-term investor).
You can find out more about the 10X Investment Mix. Fees are also critical. Every 1% in fees you pay reduces your final retirement pot by some 30% over a 40-year working life. Some fees are inevitable but you should ideally never pay more than 1% pa. Find out more about fees. Find out more about the 10X Preservation Fund.
