WARREN INGRAM: How to manage your investments in 2020
Fear and uncertainty is very destructive for your long-term wealth creation
There is so much uncertainty in our lives right now. Between domestic politics, economic recession, rising crime, Brexit and the overvalued US stock market, I can understand why investors are selling out of shares and investing in cash.
Sadly, fear and uncertainty are terrible influences on your financial planning. People become very short-term in their thinking and their tolerance for volatility collapses. This has a massive cost for investors and is very destructive for your long-term wealth creation.
Switching to cash?
It seems like investors are selling out of balanced funds and equity funds at a massive rate. I am guessing that they are fearful of future events such as the possible downgrade of SA by Moody’s in 2020 and general uncertainty around the world.
Load-shedding and Gwede Mantashe’s lack of action on authorising new power producers are certainly major problems for the country but they are not the end of the SA stock market.
The best performing equity unit trust in SA delivered more than 30% to its investors for the 12 months to November. Sadly, investors withdrew more than R200m from this fund in the month of November. In fact, they have been selling out of the fund in most months of the year. This is not rational behaviour.
You can’t control … much
Very often we try to take control of uncertainty around us by trying to exert control over our investments.
I recently met a retired businessman who was complaining about the poor returns of his investments. He told me that he had instructed his financial planner (thankfully not from my business) to change his unit trusts into “something better”.
He explained that in his business career, he would never persist with a strategy that wasn’t working and had adopted the same approach with his investments.
Asked about his investment cycles and whether he considered these in his investment decisions, he said that he did not allow for excuses, as “good fund managers will always find a way to deliver, just like good business managers”.
The idea of selling out of a fund that is performing badly but in line with the stock market is in my view a terrible idea. Stock markets move in long cycles and if your fund is performing in the same way as the whole stock market, then don’t change the fund, just wait for the cycle to turn.
Trying to go against a stock market cycle is as useful as peeing into a hurricane. You are likely to have a bad outcome and will have no impact on the hurricane.
Investors (and all South Africans) need to realise that we have very little control over investment markets, economic conditions and political events — especially in other countries. Instead of wasting energy on getting angry with our politicians and Eskom, we should spend our energy on constructive issues that we can control. For most of us, the issues we can control include what we spend, how our money is invested, our debts and (sometimes) what we earn.
Review your investments
If you are unhappy with the performance of your investments, here are some factors to consider before you change anything.
How have your investments performed in comparison to their peers?
If you have money invested in a general equity unit trust, it is important to measure your unit trust in comparison to the stock market and to other general equity funds. The JSE has delivered a total return of 13% for the year to November and 5.2% per year over five years.
The average equity fund has delivered 7.5% over the year and only 3% per year over five years. When you review your fund, consider how it has performed in comparison to these two measures — you might be pleasantly surprised.
How much do your investments cost?
Costs have a massive effect on your investment performance over the long term. It is almost guaranteed that the lowest cost funds will be good performers over long periods of time. You should aim for fund or investment costs of 1% per year as a maximum and advice costs of 1% per year as a maximum. As your portfolio value grows, your total costs should reduce accordingly.
Do you have any index investments in your portfolio?
According to S&P Global, 90.32% of SA equity funds underperformed the index over a five-year period. In the US, 78% of funds underperformed the index. It is becoming very hard to understand how financial planners can ignore indexation for their clients. At least a portion of your money should be in an index-tracking investment.
Today’s top performer is not going to be tomorrow’s top performer
Top-performing funds are unable to maintain their performance over time. In the US, of all the funds that were in the top 25% of their category in year one, only 3% of these funds were still in the top 25% by the end of year five. That means it is not a good strategy to chase the top performer, as there is a very small chance that it will still be tops in five years’ time.
In summary, be patient and don’t make changes for no reason. Consider your investment costs very carefully and review your relationship with financial planners who are not considering indexed investments for a portion of your portfolio.
• Ingram is a certified financial planner and wealth manager at Galileo Capital.