JOHANNESBURG – Navigating the markets can be a daunting task at the best of times, but during spells of uncertainty and volatility investors may have the urge to make rash and emotional decisions.
Johannes Burger, CFP® and private client advisor at Autus Private Clients, expects the year ahead to be tough for local investors.
Here he shares five financial principles that can help to keep investors on course. Keep in mind that every investor’s financial needs are unique and that it is advisable to consult a professional before making investment decisions.
1. Review your personal budget, revise if necessary and increase positive behaviour
Compiling a budget is the starting point of any individual’s financial planning process, Burger says.
Essentially, this is a simple exercise of reviewing income and expenses, and considering options to earn more and spend less (and implementing it).
Burger says investors should evaluate how they spend their money and improve their financial behaviour where necessary. Depending on personal circumstances this could include increasing debt repayments and allocating more money to investments where possible.
A few simple steps could make a significant difference, he says.
2. Don’t waste time or energy on predictions
Burger says predictions about where the rand is heading, which fund manager will be the best performer or whether local shares will outperform offshore markets are, in many respects, a futile exercise.
Even the experts don’t consistently get these calls right.
He says investors should rather go back to the basics – what their investment goals and investment time horizons are.
Research shows that investors need exposure to shares and listed property if they want to outperform inflation in the long run, he says.
“This is not a prediction. It is merely a decision about asset allocation.”
3. Stick to your plan
Burger says at times markets will be volatile, conditions uncertain and most headlines will be negative.
Investors and financial advisors often become nervous in these situations and may want to change course, but it is important to consider the investment goals and to stick to the plan.
If the goal is saving for retirement, investors should consider how much they would need to save (with the help of a financial advisor if necessary). It is also important to use realistic assumptions about investment returns going forward. Although some unit trust funds have delivered 25% per annum over the past few years, a more realistic assumption would be a CPI plus 4% figure, Burger says.
US market research group Dalbar’s 21st edition of the Quantitative Analysis of Investor Behavior, shows that although the S&P500 rose 13.7% last year, the average investor in equity mutual funds only saw returns of 5.5%.
Burger says this is in part the result of investors who switched between funds in an effort to chase a better performance. Essentially it means that investors were selling low and buying high – the exact opposite of what they should have been doing.
For those who are saving for retirement, a market correction should not be cause for concern as it offers the investor an opportunity to buy units cheaper without trying to time the market, he says.
4. Understand and manage fees
Understanding investment fees are important. However, it should not be considered in isolation, Burger says.
Investors should evaluate asset management and advice fees within the context of the growth and service they receive, he says.
In general, a passive manager will charge a lower fee than an active manager, but all fund fact sheet returns are quoted after fees. Ultimately the investor wants the best after-fee return over time. Therefore the fee should be considered in the context of the actual return.
Merely comparing the total expense ratios (TERs) of various managers when making investment choices could be a dangerous exercise, he argues.
Not keeping all your eggs in one basket is important to diversify risk between investments, asset classes, geographies and companies.
While the debate around active and passive investing can become quite emotional, investors do not necessarily have to choose between the two. In some instances, it could be a smart move to include both strategies in an investment portfolio. Each strategy has pros and cons.
With active managers, an investor could also consider diversifying between larger managers and boutique managers if it matches the financial plan, he says.