My biggest investment mistake
MANY FACTORS THAT CREATE A FALSE FUTURE It’s all about saving and investing, and putting the money to work. But there are too many miscalculations that get made.
The journey to financial freedom starts and ends with saving and investing. The only way to walk this path is to spend less than we earn and put the difference to work.
Here are a few personal case studies from individuals who learnt the hard way. Chris: “As soon as I started my first job, I took out an RA. The broker recommended a ‘medium risk’ portfolio and locked me into a 15% pa premium increase for the next thirty years, “to keep abreast of inflation”. The R1 million illustrative nominal maturity value at age 55 seemed like a fortune.
“He made no mention of any early termination “penalties”, or fees (above 3% pa). Even if he had, I wouldn’t have considered how they’d reduce my maturity value (by 26%). I also didn’t think about the purchasing power of R1 million in 2018 and how investing in a medium rather than a high equity portfolio would diminish my longterm return.”
Chris was duped into buying an inflexible high-cost, low-return savings product that would barely pay back his premiums one day, adjusted for inflation. Projecting the maturity value in nominal rather than inflation-adjusted terms created a false future. Richard: “My discretionary portfolio holds my favourite shares, ‘buy and hold’ stocks with a solid long-term growth record and decent dividend yields. Although I spread my money across industries, countries and currencies, it proved to be insufficiently diversified. The collapse of the MTN share price left its mark.
I own preference shares, which delivered a tax-free cash flow until government started taxing dividends I’ve not been disciplined in reinvesting dividends. My portfolio has grown decently, but nowhere near the average market return.”
As far as your serious money’s concerned, avoid stock-specific risk and invest in a broad index fund instead. Declan: “On leaving my former employer at 29, I cashed out my retirement fund and bought a car. I didn’t consider this would only cost me my savings, and also the future return thereon. This money would have grown six or seven-fold by retirement.”
Younger employees don’t appreciate the long-term value of early savings. The first two years’ contributions already fund 10% of your pension.
Steven Nathan is CEO of 10X Investments