Stick to your guns

Con­sis­tent in­vest­ment strat­egy breeds re­wards

Finweek English Edition - - Moneyclinic -

WITH PANIC GRIP­PING fi­nan­cial mar­kets world­wide, now isn’t the time for re­tail in­vestors to be de­vi­at­ing from their long-term in­vest­ment strate­gies or tak­ing their money out of the hands of pro­fes­sion­als. That’s the opin­ion of Trevor Abramowitz, of Alexan­der Forbes, who says pro­fes­sional and re­tail in­vestors alike who de­vi­ate from a sound long-term strat­egy will end up do­ing them­selves more harm than good.

For this rea­son he be­lieves in­vestors will en­joy a com­pet­i­tive ad­van­tage by buy­ing into unit trusts man­aged by ex­pe­ri­enced in­vest­ment teams.

Abramowitz says re­tail in­vestors need to be wary of try­ing the “do-it-your­self” ap­proach to in­vest­ing, which has re­ceived a lot of cov­er­age fol­low­ing the fall­out from the fi­nan­cial mar­ket cri­sis. “In­vestors who try and man­age their in­vest­ments for them­selves may end up be­com­ing over­con­fi­dent in their own abil­i­ties,” says Abramowitz, adding that will see those chas­ing greater short-term re­turns. In­stead, he ar­gues now’s the time when in­vestors will score from back­ing man­agers who have clear in­vest­ment strate­gies.

Last week, global stock mar­kets slumped on the back of con­cerns the Euro­pean Union would be un­able to gather suf­fi­cient sup­port for its bailout pack­age for Greece. That meant de­fault risks could spread to Italy, Por­tu­gal and Spain and which re­sulted in many in­sti­tu­tional and re­tail in­vestors pulling their money out of the mar­ket. Mar­kets were mov­ing be­tween 3% and 5%/day. Such wild swings will in­vari­ably con­cern in­ex­pe­ri­enced in­vestors, who re­main ner­vous af­ter watch­ing the mar­kets slump in 2008/2009.

How­ever, unit trusts have sta­tis­ti­cally re­mained a good way to see out mar­ket volatil­ity, says Nick Brummer, a di­rec­tor at unit trust plat­form In­ve­ston­ Brummer says: “Eq­uity mar­kets have shown im­pres­sive re­sults over the past five years. The two top per­form­ing funds have achieved 211% and 180% re­spec­tively over the past five years, which has helped to boost in­vestor con­fi­dence in do­mes­tic mar­kets.

“This strong per­for­mance helps ex­plain why unit trusts have gained so much in pop­u­lar­ity. Even over the past year – when there were huge lev­els of volatil­ity in the stock mar­ket – unit trusts have con­tin­ued to de­liver strong re­turns, with top per­form­ers de­liv­er­ing a re­turn of as much as 70%.”

Brummer says a key part of gen­er­at­ing su­pe­rior re­turns is to in­vest in fund man­agers who have tested in­vest­ment pro­cesses and a proven track record and to be able to find low-cost plat­forms for re­tail in­vestors to in­vest in.

There are few as­set man­agers in SA who bet­ter en­cap­su­late the con­cept of stick­ing to a tried and tested in­vest­ment for­mula than Al­lan Gray. As the graph shows, R10 000 in­vested in 1974 would now be worth R76m with div­i­dends rein­vested. How­ever, as the graph also shows, much of Al­lan Gray’s suc­cess only came af­ter a very av­er­age decade in the Eight­ies. There’s a les­son in that for in­vestors who want to chase the herd in mak­ing short-term in­vest­ment de­ci­sions rather than stick­ing to a sim­ple long-term strat­egy.

Per­haps what the Al­lan Gray graph best de­picts is the value of com­pound­ing re­turns and “stick­ing to your guns”. De­spite mul­ti­ple eq­uity mar­ket crises – in­clud­ing the tech bub­ble, the Asian cri­sis and the sell-off in 2008 – an in­vestor who has stuck with a man­ager with a clear in­vest­ment man­date will have en­joyed some ex­cel­lent re­turns.

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