How to avoid the poor house

Some in­vest­ment er­rors that could sig­nif­i­cantly dent your sav­ings

Weekend Witness - - Money - JACKIE CAMERON

SOME of the most heart­wrench­ing tales I have heard have come from el­derly people who en­joyed com­fort­able life­styles dur­ing their work­ing years yet are now liv­ing in penury.

Of­ten I have ended up meet­ing these people — for­mer bank man­agers, teach­ers, en­gi­neers — be­cause they are vic­tims of scams. It is usu­ally a last re­sort to turn to the me­dia. Sadly, there is lit­tle to be done other than warn oth­ers of a haz­ardous scheme.

How­ever, there are many more people who are suf­fer­ing fi­nan­cially, not be­cause they’ve been ripped off or have never saved, but as a re­sult of in­vest­ment mis­takes. Here are some money er­rors that could sig­nif­i­cantly dent your long­term sav­ings. Fi­nan­cial ad­vis­ers of­ten cau­tion clients that it is a bad idea to avoid in­vest­ing when con­di­tions look scary. Even though your re­turns bounce around, it is bet­ter to be in the mar­kets than out. JP Mor­gan has an in­ter­est­ing chart that il­lus­trates what hap­pens when you lose out on the good days.

Miss­ing only the 10 best days over a 20­year pe­riod slashes your re­turns by roughly half, com­pared to the re­turns en­joyed by the per­son who in­vests and ac­cepts that the ride will be bumpy over two decades. The more good days you miss, the worse your re­turns will look.

The JP Mor­gan chart looks at the S&P 500, which you can eas­ily ac­cess from South Africa. How­ever, the prin­ci­ple ap­plies to South African in­vest­ments too: over the long run the in­vest­ment jour­ney looks smooth, pro­vided you hang in there.

[JP Mor­gan Screen Shot 2014­03­21 at 11.35.58] 2. BE­ING TOO CON­SER­VA­TIVE WITH YOUR AS­SET­CLASS SE­LEC­TION We are of­ten told that one way of avoid­ ing a scam is to be wary of re­turns that look too good to be true. Iron­i­cally, avoid­ing po­ten­tially high re­ward, higher risk in­vest­ments can of­ten be just as prob­lem­atic as pick­ing in­vest­ments that make you look greedy.

You are less likely to lose money if you in­vest in fixed­in­ter­est as­sets such as cash and bonds, or in­vest­ments with a heavy weight­ing in these, but your re­turns will look dis­ap­point­ing when you con­sider pur­chas­ing power. Al­though your cash will look like it has grown, it will get you far less than it would have pre­vi­ously be­cause re­turns have not out­paced the rate of in­fla­tion.

For an ex­am­ple, look at the unit trust ta­ble com­piled by the As­so­ci­a­tion for Sav­ings and In­vest­ment South Africa. As you can see, in­vest­ing in eq­ui­ties, or shares, is con­sid­ered riskier, but has the best re­turns in the long run. In­vestors in cash have had re­turns that have done lit­tle more than keep pace with in­fla­ tion, while low­risk portfolios have clearly lost out com­pared to gen­eral eq­uity funds. Bear in mind that you could eas­ily live at least 20 years af­ter you have re­tired. With this long­term in­vest­ment hori­zon, you should have a siz­able chunk of your in­vest­ments in eq­ui­ties, even af­ter you have stopped work­ing.

[Screen Shot 2014­03­21 at 11.38.44] 3. COSTLY PROD­UCTS All in­vest­ments have costs at­tached to them, whether you can see them or not. The South African fi­nan­cial ser­vices sec­tor has no­to­ri­ously opaque fee struc­tures, as we were re­minded when Trea­sury re­leased pa­pers on the state of the re­tire­ment in­dus­try ear­lier this month.

A fee of one per­cent to three per­cent a year might not sound like much, but you have to add this up over the life of your in­vest­ment. As Steven Nathan, CEO of 10x In­vest­ments, says: an in­vestor pay­ing an an­nual fee of 0,50% each year will re­ceive dou­ble the re­tire­ment in­come as some­one pay­ing an an­nual 2,5%. He says 2,5% is the aver­age fee paid by savers into de­fined­con­tri­bu­tion re­tire­ment funds.

Van­guard Group founder John Bogle puts it an­other way. If you pay 2,5% in fees, about 80% of the re­turns gen­er­ated end up in the hands of the man­ager, in­stead of yours, over a typ­i­cal in­vestors’ life time.

As­sum­ing you don’t have a clear idea of what your in­vest­ments are gen­er­at­ing in fees, be pre­pared for the like­li­hood that they will dis­ap­point you sig­nif­i­cantly when the time comes to start liv­ing off your sav­ings. Plan to save even more than you think you should to make up for the short­fall.

And, pay close at­ten­tion to charges. Magda Wierzy­cka, CEO of the Syg­nia group, said re­cently that fi­nan­cial­ser­vices com­pa­nies can live com­fort­ably off less than one per­cent in fees. Syg­nia and 10x are ex­am­ples of in­vest­ment providers that of­fer lower­cost op­tions. 4. CHOP­PING AND CHANG­ING We are of­ten tempted to chop and change to chase bet­ter re­turns. If you keep cash­ing in and out of in­vest­ments, you will lose money, largely be­cause there are charges in­volved with en­ter­ing and ex­it­ing in­vest­ments. This ap­plies to all as­set classes, from shares to property. Watch what you sign. You may have given your bro­ker or ad­viser per­mis­sion to trade on your be­half and he or she may be buy­ing and sell­ing over­en­thu­si­as­ti­cally, which will most likely erode your re­turns and boost his or her in­come. There are of­ten penal­ties as­so­ci­ated with ex­it­ing in­vest­ment prod­ucts.

Don’t just blindly buy and hold, though. Keep your eye on your in­vest­ments. There will be sit­u­a­tions when it is best to take a profit or cut your losses and run. • was founded and is edited by Alec Hogg. Twit­ter: @ale­chogg and


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