Few investors believe that intermediaries add any real value. Given that anyone who offers investment advice has to be licensed and is required to provide appropriate advice, my response to this is a series of questions:
- Do you have knowledge of investments?
- Do you have investment experience?
- Do you have time for research and to obtain information?
- Do you understand how fund managers operate?
- Do you know that past performance is no benchmark for the future?
If you are able to answer yes to all the above, then you may very well be able to do it yourself.
Investment decisions should never be based on how investors are feeling – whether negative or positive – but, rather, on fundamentals. Unfortunately, if the information corresponds with their current beliefs, they may act on it.
The danger of this is making an emotional decision and, although strategies may need to be changed from time to time, investors who act on their interpretation of advice may well miss the next bit of advice, which puts a different spin on what is happening in world markets, and change their thinking.
Find a strategy that works
Interest rates are at an all time low and, in a strengthening Rand environment with a positive inflation outlook, they could go even lower. Investment thinking is that offshore offers no value. However, global investment should be part of any sensible investment strategy – just look at how international investors diversify their investments. But, investors who listen to and follow the herd remain steadfast in the belief that the Rand will remain at current levels indefinitely.
It’s imperative that investors find a strategy that removes all the short-term information from the equation. While it’s impossible to predict what’s going to happen in the short-term, by taking a longer term approach, all the volatility and confusion becomes muted.
The starting point should always be: What are you trying to achieve? Your answer will determine the risk you are prepared to take and the nature of your asset allocation. To determine this, the value of each asset is taken, totalled and the percentage is calculated. You also need to understand the asset mixes within your retirement fund, endowments and unit trusts to be able to determine the underlying investments of each of these structures.
Surprisingly, many investors are unaware that equities may make up between 50% and 65% of their retirement funds.
Having done this, one must be satisfied with the split of assets and, in particular, the exposure to equities, not in terms of your risk tolerance but, more importantly, aligned to your requirements for future growth.
Keep your eye on the ball
This exercise needs to be repeated regularly to recalculate and realign the asset mix. Individuals are paranoid when they see equities fall, but sometimes don’t realise that equities may comprise only a small portion of their total assets. A good example is that if your portfolio is 40% in equities and the market drops say 10%, it’s only on this portion it would appear as a major loss – on paper – but in the broader context it’s negligible.
The process is complicated and, therefore, I revert to my opening statement giving the reasons why investors should utilise the services of a financial planner – especially as there are now so many different products to choose from. To summarise:-
- Life assurance / disability and dread disease – costs, benefits and guarantees differ.
- Retirement Funds – easy to decide on how much to invest but how can you change managers if there’s been regular underperformance?
- Annuities (fixed) – shopping around for the best rate and (living) – investment returns are critical.
Financial advisors will charge between 0,5% and 1% per annum to manage your portfolio, but they will need to report on even those assets they don’t influence, to ensure the correct asset balance.