How to avoid the poor house
Some investment errors that could significantly dent your savings
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. • Biznews.com was founded and is edited by Alec Hogg. Twitter: @alechogg and @biznews.com
1. AVOIDING INVESTING WHEN MARKETS LOOK VOLATILE