Three financial professionals share their tips.
Three financial professionals share their tips.
Teach your kids, save for retirement and be informed.
I’ve learnt a lot from my parents and grandparents about money management. When I was about ten years old, they bought 50 Rembrandt shares and invested R1 000 in a unit trust for me. I therefore learnt about concepts such as dividends, unrealised profits and earning interest from an early age. I also experienced how much an investment can grow when you actually save.
This is something I encourage all parents to do. Help your kids to invest and make the whole family part of money management. When I was a child our family had open discussions about finances and I learnt a lot about investments from an early age. Be open with your family and your life partner about your finances.
When I started working at Sygnia I also learnt a valuable lesson. Company policy required that 16.6% of my cost to company was to be invested in a provident fund. I was still in my 20s and at that time I probably never would have invested that much for retirement. However, as I wasn’t used to receiving it as part of my salary, I never missed it. Now, when I look back and see how much this investment has grown, it was one of the best financial decisions of my life (even if I was forced into it).
Try to save money before you can spend it. A debit order from your account into an investment before it becomes part of spending money, can be a life-improvement choice. Always remember, it is never too early (or late) to start saving for retirement.
I also believe that you should not stand back and let someone else control your finances. It is good to have an investment- or fund manager and an expert financial advisor, but to make informed decisions you should also acquire some basic knowledge. Educate yourself. Read financial magazines and material about investing and money management.
Lastly, always keep in mind that it is time in the market that matters and not timing the market. If you look at your investments on a daily basis and check every percentage point as it goes up or down you will just stress yourself unnecessarily.
If your financial goals change or you are unsure about your investment growth, you can discuss this with your advisor, but don’t put yourself under the pressure of trying to beat the market every day. Good investment growth never goes hand in hand with emotional decisions.
Your investment risk should match your investment goal and investment time period.
Personally, I am a risk averse individual, so I understand investors who are very cautious. However, I do believe it is necessary to consciously think about risk.
Every investment goal has its own risk match. You may not necessarily like risks but you have to realise that there is a certain amount of risk that might be required to meet that goal.
When it comes to retirement investments for example; you have the time in the market to take on more risk if you are still young.
If you are too conservative in your approach, your investment may deliver consistent returns but in the longer term it will not meet your investment goals. You won’t be able to claim back the growth you have lost.
If on the other hand you have a short term investment goal, such as saving for a deposit to buy a house, your focus will be capital preservation and a little growth. You have to match your investment risk to your goal. If the risks are too high over the short term, it can erode your capital significantly.
With every investment choice you make, you have to accept that there will be certain amount of risk. When you balance this risk correctly with your investment goal and investment period, you will be rewarded.
Never invest in something that you don’t understand.
I received this advice early on in my career, and on the occasions when I did not follow it, I often regretted not heeding this very basic, but sound counsel.
Over the years I have bought the odd share for myself, but more often I have reviewed a wide range of investment managers and investment strategies. First as a consulting actuary, then later as an investment consultant to retirement funds and over the past dozen years as a multi-manager and a manager of various fund of hedge fund portfolios, I frequently encounter new funds and new managers, many of which initially appear compelling.
The managers may have slick presentations and point to impressive past returns (many of which may be simulated or have been delivered on small amounts of assets).
When I was younger, I bought some shares on an IPO simply on the basis of a ‘hot tip’ from a friend, without the foggiest idea of what the company did. I should not have been surprised when the share price plummeted following the listing, I had no idea why. Often it is not enough to just hear good advice; sometimes you need to earn the scars as well.
As a multi-manager responsible for selecting managers to manage large pools of assets I see a lot of pitches for new products and new asset managers. Often, these managers point to impressive track records and it is very tempting to be seduced by a fund’s great past performance – it is strange that we get few unsolicited approaches for products with terrible track records; those are just buried.
So, no matter how seductive the pitch and the numbers that we are presented with, we have to dig into the processes that the manager follows and try to assess the skills of the team that supposedly delivered the past return numbers, otherwise we simply cannot have any conviction about what we might expect in the future. (There may have been the odd case in the past where I invested with a manager without doing sufficient research, but I will keep those examples close to my chest. As they say, fool me once – shame on you, but fool me twice, shame on me).
We are obviously in a very privileged position as we encounter dozens of new investment products every year and have met with hundreds of investment managers around the world over the years. What can the average investor do?
It is quite simple really. It is easier to understand what to expect from a diversified portfolio of shares than it is to understand what to expect from a single share. It is easier to understand what to expect from an asset class as a whole or from a balanced portfolio than it is to understand what to expect from any one manager.
So, if you want to reduce the risk of investing in assets that you have little understanding of, diversify your investments or use a professional to select your investments for you. If you like to buy shares directly, make sure that you own shares in at least twenty different companies.
If you do not want to pick your own stocks invest in more than one manager’s portfolios and try not to be seduced by the managers with the best, most recent returns or those with the largest marketing budgets. You would do well to consider funds that simply track the market index at low cost. Finally, if you do not want to be tasked with selecting which asset classes to be in at different times, use globally-balanced portfolios that can access a wide range of different local and foreign asset classes.
I have learned that it is far better to let some potentially attractive opportunities pass me by if I do not understand them adequately, than to invest based on false hope and crossed fingers.