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Switching from passive to active investment

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The 2008/9 recession has led to four years of high volatility being experienced by both businesses and investors. Pensioners, in particular, have taken the brunt of dubious investment decisions.

“The plight of pensioners reducing capital to survive requires a different approach from financial advisers,” says financial advisor, Peter Larcombe, who believes it’s time to take a new look at retirement funding.

Investors need to play a far more active role in decision making and the financial services industry has to be less set in its views on how retirees and potential retirees should invest and more accountable for its actions.

Larcombe’s standpoint is the result of 45 years in financial management and consulting across a wide spectrum of industries and businesses, both in South Africa and internationally. Over the past seven years, he has specialized in investments for retirees giving him firsthand knowledge of the challenges.

Larcombe says that his own experience in the industry led him to realize that those investing for retirement were overlooking some very basic principles that would enable them to move from being conservative investors who avoid risk at all costs to active participants achieving the same returns as other investors.  Last year, he decided to take this a step further and outlined his new approach to investing in detail. His recently released book, Creative Investment Planning for South Africans, is the result.

This book has been written to guide investors, and retirees in particular, towards higher growth on their investment funds without losing capital through the complete economic cycle. The unique approach suggested in the book outlines how retirees can draw from their investments during a period of market downturn or recession without losing capital and retaining the higher growth investments. (This book has been written with full explanations and procedures which are intended to be understood by the layman, with the help of his or her financial advisor when necessary.)

In his book, Larcombe covers all bases – what needs to be done, why and how. He draws on proven and successful techniques to show how an investor can grow his or her savings to ensure that there is enough capital at retirement and then make it last, how an investor can draw from investments during a recession without losing capital, how investments can be optimized with little or no tax implications and to identify specific investments that match risk and return objectives.

He is also forthright in his advice on how financial advisors and investment management companies should be selected and how investors’ should manage their relationships with them.

He says that that the 21st century has introduced new challenges with globalization, information technology and financial complexity. Many international financial institutions have exploited profit incentives for management and shareholders at the expense of investors and taxpayers – practices that played a major role in the seriousness of the 2008/9 recession and eroded the credibility of the financial services industry as a whole.

Investors have become very skeptical of the financial industry at large. In order to allay these fears and provide a better platform for financial advice in the future, he suggests that investments and portfolios be subject to more regular reviews than might have been undertaken prior to 2 000. He advises on half yearly intervals.

He adds that the more aggressive and active investment stance put forward in his book also  suggests that the industry needs to be more proactive in disseminating relevant information to assist investors with their decision making and needs to offer a more definitive classification of the risk and return implications for each sector.

He also insists that financial advisors, who may not be investment specialists or proficient enough, need to identify when to call for extra professional assistance from within their management teams. “The large financial institutions have the technical knowledge within their companies and should disseminate it on a regular basis so that those financial advisors who are not investment specialists are proficient enough and empowered to offer the necessary level of service to meet their client’s needs. This feedback loop should be at least monthly with market conditions being so volatile.”

He also believes that investors themselves need to step up to the plate. “Today we live in a dynamic world where technology and globalization is advancing at an incredible rate. South Africa has the added dimension of a higher inflation percentage than the developed world has. One can question why investors in general, and retirees in particular, do not optimize their investment returns but continue instead to adopt a passive investment strategy characterized by unawareness of growth opportunities,” he says.

He stresses that one of the fundamental premises of Creative Investment Planning is that, in the 21st century, it is logical and prudent that retirees adopt a more active investment management practice, especially in South Africa. “Retirees would do well to insist on regular reviews with their financial adviser or when there has been a significant movement in economic or market conditions, when worldwide or local events such as changes in the bank rate or major stock exchange values or recession could trigger uncertainty leading to increased risk and potential loss or reduction in asset values."

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