Is playing it safe the riskiest move when saving for retirement?

In recent years, more and more investors have begun to question whether the foundational principles of investing still hold true. Many are no longer convinced that taking on risk is being adequately rewarded, and it is an understandable concern. But, when we take a step back and examine the long-term data, the answer becomes clearer. In this three part series, we explore why the core principles of investing remain as relevant as ever, and why equity exposure continues to be a cornerstone of long-term financial success - both when saving for retirement and when drawing an income in retirement.

Time in the Market Still Matters

Over the past 20 years, South African asset classes have largely done what we’d expect them to do. Equities have comfortably outpaced inflation by more than 6% per year and cash has offered a modest 1% annualised premium. This natural order of returns has also played out across the major Association for Savings and Investment South Africa (ASISA) multi-asset categories, where moving up the risk spectrum from income to high equity has consistently rewarded investors with higher returns.

If you were genuinely invested for the long haul, this outcome is reassuring. Despite the inevitable short-term noise and market fluctuations, the long-term relationship between risk and reward held, and for those who stayed the course, the payoff has been meaningful and worth the patience.pull, but given the impact it can have it is certainly a variable worth working on.

But, the last decade was different

When we split the past 20 years into two distinct decades, the contrast is striking. The first decade rewarded investors for taking on risk; the second, not so much. In fact, over the last 10 years, only global equity markets managed to meaningfully outperform South African inflation. Yet, for much of that period, investors saving for retirement were quite limited in how much they could allocate offshore. Regulation 28 of the Pension Funds Act

previously capped offshore exposure at 30%, with an additional 10% allowance for the rest of Africa. It was only in early 2022 that these limits were consolidated and increased to a single 45% offshore allowance.

Against this backdrop of muted local returns and limited offshore exposure, many investors strongly questioned the value of equity exposure in their retirement savings – and ultimately voted against equity exposure ‘with their feet’. The ASISA multi-asset income category has seen net inflows of over R100 billion over the past five years alone, while the multi-asset high equity category has experienced net outflows exceeding R10 billion over the same period.

But, was derisking a smart move for your retirement savings?

To illustrate how this shift in sentiment has played out for investors, let’s review our case study - Thandi. At 35 years old, she had already accumulated R1 million in her preservation fund and is contributing 20% of her annual salary towards her retirement savings. She is invested in a multi-asset high equity fund, well aligned with her long-term investment horizon. But after years of muted performance and listening to friends and family derisking, she also began to question whether staying the course still made sense.        

To test the impact of de-risking, let’s look at how Thandi’s preservation fund would have performed had she made the switch to income at different points in time: 10, 7, 5, 3, or even just 1 year ago, compared to staying invested for the long term.

According to the results tabled above, the last decade is the exception – and by a very small margin compared to the outperformance enjoyed by the multi-asset high equity category over the other periods. But what about her monthly contributions to her retirement annuity?

While the multi-asset high equity category may not have outperformed multi-asset income funds over the full 10-year period, Thandi’s outcome tells a different story. Because she continued contributing monthly to her retirement annuity, she benefited from rand-cost averaging, i.e. buying into the market at various price points, including during periods of weakness. This meant that more of her contributions were exposed to the strong recovery in recent years. As a result, her overall investment in high equity ended up outperforming the income alternative, despite the broader 10-year trend. It’s a powerful example of how consistent contributions and time in the market can work in your favour, even when headline returns suggest otherwise.

Inflation is the silent killer of wealth – don’t get caught without equity

Over time, inflation erodes purchasing power and diminishes the real value of savings. The only asset class that has consistently outpaced inflation is equities. This isn’t just a statistical quirk, it is the fundamental nature of equities. They represent ownership in businesses that grow, innovate, and adapt. Bonds and cash, while useful for stability, simply don’t offer the same growth potential. For investors with long-term goals - like retirement - equity exposure isn’t optional. It’s essential. The past decade may have tested investor confidence, but it hasn’t rewritten the rules. The fundamentals - particularly the role of equity in delivering long-term growth - remain intact.