Taking emotion out of investment decisions
Timing of the markets is like trying to catch a falling knife, you are very likely to catch the blade and do yourself a nasty injury. It is much more sensible to take the offending investment out of the knife block and dispose of it gently and safely – and make money in the process.
Every one of us has and seed of greed in our brain, dying to be watered, germinate and sprout. Some of us give it more love and attention than others, then act surprised when it turns into a full blown monster. Wanting to milk the markets for every last drop of growth is a very human 'greed' response and can really damage the value of your portfolio in the long term. If you try and time the very top of the market, you are likely to do one of two things: Bail out every time there is a little wobble, only to pour back in when it starts climbing up again, often above the level that you bailed out at. Or... You do that for long enough you start to think the downturn will never come and forget to bail out when the big one comes, having potentially lost some great recovery days.
Just as the stock market can sink like a stone in a day, it can rise on a rocket too. Missing on those couple of ‘rocket’ days, while you lick your wounds from the drop, can literally halve your potential growth in a year.
So… What is the best strategy?
- If you have a ‘dog’ in your portfolio – whether a Unit trust/CI or share, ask yourself – would I buy that share/CI today? Obviously you only invest in something that is going to go up, right? So if the answer is no, sell it and put it into something that you believe in. Hanging onto it when you wouldn’t buy it now is an emotional decision, not a rational one. Here’s a tip. Investments really don’t have feelings and they are not going to be ‘hurt’ if you junk them. At the moment a lot of people are hanging onto Resources shares or Collective Investments that have performed appallingly over the last 5 years. Is the sector primed for the take-off we’ve been growing cobwebs waiting for? Probably not. The oil price isn’t going back up to over $100 any time soon, and the big consumers of iron, coal, aluminium, platinum (China, India) just aren’t growing anything like they were a few years ago. We have settled into a 'new normal'. Yes, the general equity sector in 2015 is unlikely to shoot the lights out in 2015, but it is probably a better bet than resources. In fact any sector is probably better.
- If it is a long term investment (more than 8 yrs) and it is keeping up with its peers. Sit on your hands. By all means compare it to the benchmark, the index and its peers from time to time, but let it grow. If it is a long term investment and not in a prescribed retirement fund ( Retirement annuity for example) then a ‘passive’ investment in an ETF may make more sense than paying fees to an asset manager for a little bit of extra, only to give it back in fees.
‘N Boer Maak ‘n Plan
The best way to handle the ups and downs in life is to be organised and informed. It will stop you getting up in the middle of night with the cold sweats because you don’t know what will happen if things go pear-shaped, you lose your job or something like your bond payments go through the roof.
Unexpected expenses: There is no getting round it, you need a place where you can get money quickly if you need it. One way that my clients mitigate this is by having a credit card that is kept only for emergencies. If you’re disciplined enough to do this, and not use it for day-to-day expenses as well, it isn’t the worst idea in the world. Even better, pick a credit card that gives you interest on a positive balance and build up your safety net there. When it’s big enough, put it into a real savings account. Make sure you know what the annual fee is – if it’s too high shop around for one that is cheaper. You are probably going to get a better interest rate from a pure savings account or savings pocket. You’re going to need 3 months worth of your family expenses, so work out how you’re going to put that together. If you have ‘access’ to your bond, check how easy this is. Things have changed over the years and you might well find that accessing that ‘excess’ isn’t so easy any more.
Getting retrenched/fired/forced to resign: Know your rights – at the very least it might gain you a couple of extra months of income. You can ‘insure’ yourself against retrenchment, but this is expensive and short term. Know what UIF or settlement you can claim in all cases before accepting ‘resignation’ instead of being fired or retrenched. Understand the implications to your CV if you get fired, it may pay you to fight it or resign. Know your rights w.r.t your provident fund and group life cover all the time. Being clueless can impact on your wealth long past the event has faded into a distant memory. Your reputation is your greatest asset, don’t trash it in a fit of pique or angry social media post.
Long absence from work: Companies are legislated by law to give you a certain amount of leave and sick leave – but once those are exhausted they are either going to look to group disability cover to pay your salary, put you on ‘unpaid leave’ or get you ‘boarded’. If your company doesn’t have group temporary ( first 2 years) and permanent disability – then get it yourself. If it only has permanent disability you could be without an income for 18 months or more. Can you sustain yourself and your family for that length of time?
‘Secret’ investments: It is important that least a couple of people know where all your investments are, especially if some are offshore. I am not saying that these are illegal at all, it is just very difficult to find investments your family or executor has no idea about. I personally know of at least one case where a young businessman died suddenly in a botched hijacking and although his wife knew he had several substantial offshore investments, they never found them. At very least put a list of them with your will, and lodge the will in a bank vault away from prying eyes.
In terms of FAIS, (the act that regulates financial advisors) an advisor is required to do a ‘risk profile’ for a client, specifically when it comes to investment. This regulation was clearly put in place to safeguard inexperienced clients from gung-ho brokers who had previously taken the life savings of little old ladies and put them into high risk investments, usually with the expressed desire to get their claws on fat upfront commissions. So… It’s a vital component of a financial plan – right? It isn’t that simple, and in fact can come with risks of its own.
Most of the ‘cookie cutter’ risk profiles that brokers use (Robo-Advisors) quite frankly do nothing more than cover the broker’s ass with the Financial Services board if the investment goes pear shaped and the client lays a formal complaint.
So what is important to consider?
High profile doesn’t equal great product.
I spent many years in marketing, and understand that brand awareness is the holy grail of market share, but we all know that doesn’t necessarily equate to a quality product. One way or another you’re paying for that label, that glossy packaging, those premium time advertisements. Financial products are no different, just much harder to compare. We are human, we equate high profile ‘noise’ with success and quality.
So, just out of interest let’s compare the performance of some high profile Equity Unit Trusts (Collective investments) with the ‘cheap’ SATRIX ETFs, and see how much bang you’re getting for your buck. Coming off the first equities snot-klap of the year (over 3% drop in the JSE yesterday) the timing couldn’t be better as investors reconsider the ‘asset allocation’ of their investments.
Year on year, as of 5/1/2015 (and thanks to yesterday’s ( 6/6/2015) nasty little correction) the ALSI is sitting at 5%.
Discovery Equity -5.4% (yes, that is a negative sign in front of it)
Allan Gray Equity 5.3% (before fees)
Coronation Equity 5.4% (before fees)
SATRIX ALSI 5%.
This is interesting. Obviously Discovery equity is the outlier here, and frankly has been for far too long. I don’t like placing my clients on insurance platforms, preferring to use LISPs, so Discovery Equity has never been one of my fund choices, but this performance is ‘disappointing’.
All the others are about the same right? Not so fast… That is performance before fees that start at around 2.5%, and are usually closer to 3% – except for the ETF of course, those fees are closer to .5%. It’s those fees that pay for the heavy advertising campaigns. So now the Collective investments are giving you a return of around 2.5%, and ETF around 4.5%.
You’ve all heard that story about a plumber’s client riling at the R1000 call-out fee for a problem that was resolved in less than a minute by one quick tap of a hammer – right? R1 was for the hammer tap, the other R999 was for his expertise in knowing where to tap. The same is true of your investment advisor. You should be paying them to pick the right combination of investments for you, and monitor them.
Changing entrenched spending patterns
Often the biggest gap between getting by and accumulating real wealth – irrespective of what you earn – is the gap between your ears. It is a small gap, and it is often very difficult to forge a new path, and stop the steady trickle of money out of your pockets.
One of the reasons for this is that change of any sort is deeply uncomfortable. If you want your New Year’s resolutions to be more than January’s to do list, then start thinking about wealth differently.
We all work hard for our money, so changing spending habits is almost always is seen as a sacrifice. It’s not unlike trying to lose weight or quitting smoking, it has that nasty emotion attached that you’re going to have to do without. It is complicated by the fact that you can’t stop doing it altogether (not unlike eating) so it’s not as though you can go cold turkey and tough it out like smoking or drinking.
When can you do it yourself?
When it comes to managing one’s personal finances, there are a number of different strategies, some more effective than others. Trying to navigate the murky waters of policy benefits, tax structuring or investment choices is increasingly difficult, and it makes sense to get some help. I am a ‘DIY queen’ so I can relate to the desire to do as much as I can myself, especially if I can save a buck or two. This inevitably has grown out of years of being ripped off. We’ve all been there; the electrician who insists everything is broken and quotes thousands of rand for a ten rand job; the doctor that writes up a prescription for flu instead of patting your hand and telling you that ‘this too will pass’; the broker who sells you an investment, with a chunk of upfront commission and you ever heard from them again with the added bonus of a nasty penalty if you try and stop it. Once you have had one bad experience it is sorely tempting to do it yourself in future – and just like other DIY, there are things that you can easily do yourself, others not.
So let’s have a look what you can do yourself, and more importantly where you can save money by doing it yourself: