Five simple rules for successful investing
There are a lot of smart people spending a lot of time and money trying to convince us that investing is hard. They want us to believe that only those blessed with unique insights, knowledge, experience and some sort of divine gifts from above can possibly be qualified to tackle the mighty beast.
I believe this to simply not be true.
So I was pretty pleased to hear someone who is inside the belly of the beast agrees with me. Speaking at a recent Bidvest Bank breakfast I attended last week, Adrian Saville, CE of Cannon Asset Managers, said he believed anyone could be a successful investor if they were disciplined and followed some basic rules.
1. Buy the index
The greatest trick that asset managers ever pulled was convincing the world that they could beat the market. But stats don’t lie. In the US, for the five-year period ending 30 June 2018, 76.49% of actively managed large cap funds were beaten by the market (S&P 500 index). In South Africa, 88.65% of funds were outperformed by the market (S&P South Africa DSW) over this period.
Saville says the investment industry is full of smart people trying to beat each other. “It’s a loser’s game. If you are allocating money to funds trying to beat the market, the odds are stacked against you. Rather just buy the market and your work is mostly done.”
There are plenty of passive investment options available in South Africa. ETFSA, Satrix and CoreShares are just some companies offering Exchange Traded Funds (ETFs) locally.
At present, I am invested in a number of ETFs, including ones that track the MSCI World Index, emerging markets, as well as the Japanese and European bourses. For the ETFs I have purchased with locally domiciled funds, I have gone through ETFSA (fees are low, but their admin is not great). For money that I have taken offshore (Reserve Bank approved), I have invested mostly in ETFs through Vanguard.
One potentially tricky aspect of going the index fund route is choosing which one to invest in. Saville says that for local investments, he recommends an equally weighted index rather than the Satrix 40, which is too heavily weighted towards a couple of large cap shares.
Alternatively, a good option is an actively managed passive fund, whereby the fund manager selects and manages these indexes for you.
2. Reduce fees and tax
An investment of R1000 (assuming an investment return of 8.4%p.a. net of fees, tax at 30% and fees of 2.5%p.a.) will be worth R627 414 in 25 years time. If that same R1000 is put into a tax free investment fund, it will grow to R867 819. And if that same R1000 is invested in a tax free investment fund with only a 1% fee, it will be worth R1 106 078 at the end of the 25 year period.
Fees are often the most damaging, yet most overlooked aspect of investor returns. And there are plenty of them. A quick look at most investment statements will reveal that there are investment fees, advisor fees, administration fees and whatever “other” means.
Saville says he has seen some investor statements with effective annual cost (EAC) – which is the sum of all these fees added together – totaling as much as 20% in some extreme cases. That’s a fifth of the assets wiped out by fees per year. That’s just robbery, plain and simple.
Passive funds are generally way cheaper than active funds. Locally, the fees charged by ETFs are usually below 0.5%p.a. locally. The Cannon Asset Managers passive range of funds (which combine equity indexes, bonds and cash) charge 0.65%p.a. Saville says the extra cost is for the asset allocation, index selection and due diligence it provides).
Internationally index funds are even cheaper. Last week a US based asset manager launched an index fund that actually pays the investors to invest in it!
3. Start early
According to Saville, time builds the biggest futures. R1 000 invested monthly at age 45 (assuming returns of 8.4%p.a. and fees of 1%) will be worth R1.1m at age 70. However, R1 000 invested per month at age 30 and age 15 will be worth R4m and 14m respectively at age 70. R1 000 invested each month from birth will be worth a staggering R47m at age 70. That’s the power of compound interest.
4. Get your asset allocation right
You’ve probably heard the oft-repeated adage that asset allocation accounts for 90% of returns. While that’s actually not strictly true (the study on which it is based actually stated that asset allocation accounts for 90% of volatility in returns), asset allocation is a significant determinant of returns.
While this is probably the most challenging of the rules to understand and apply, it’s not rocket science. More risky assets (i.e. stocks) when you are young and can afford to ride out the market rollercoaster, less when you are older. Also be careful of being recklessly conservative too, which happens when you invest too heavily in low volatility, low return assets when you still have plenty of time left until retirement.
5. Stay the course
The results of research done by Dalbar Inc., a company which studies investor behaviour and analyses investor market returns, consistently show that the average investor earns below-average returns. For the twenty years ending December 2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. However, the average equity fund investor earned a market return of only 5.19%. This is mostly due to illogical investor behaviour, like panicking during a market sell-off or chasing past performance.
So formulate a strategy, allocate your assets and then try and try to forget about them, except to check from time to time whether your asset allocation is appropriate for your time horizon.
That’s not always easy to do, especially when FOMO (fear of missing out) is a real thing.
As Warren Buffet says – investing is simple, but not easy. But by staying disciplined and sticking to these five basic steps, you will do far, far better than most.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.