In this article, we have a look at some of the most common misconceptions out there in the investment industry. Below are some examples of mistakes investors often make and hopefully I will clarify them for you.
- Unit trusts perform better than retirement annuities
This misconception is not really about unit trusts and retirement annuities, but more about investment products in general. We often find that people confuse investment products with investment funds. Examples of products are retirement annuities, endowments, living annuities, etc. The product will determine how the investment is taxed, whether you have a specific term in the investment, when you are allowed to exit, whether you may draw an income, how you may contribute etc. All the “terms & conditions” will be specific to the product. Think of the product as the package in which your investment comes.
The growth in your investment (the good stuff inside the package) will be determined by the underlying fund or asset class. The majority of investment products have unit trust funds as the underlying investment. A unit trust can be a low-risk fund like a money market fund, a high-risk fund invested on the stock market or any other combination of underlying assets. Some products allow you to invest directly into the asset classes, without the use of a unit trust. More about asset classes below.
- I need to have a share portfolio to make real money
There is a little bit of truth in this one because, over the long term, shares will most likely outperform other asset classes, but that doesn’t mean you need a direct share portfolio to get in on the action. Share portfolios are great for experienced investors who have the time to actively manage the portfolio, but most of us can’t do that.
A good unit trust manager not only has access to the same universe of shares, but they also have the ability to combine various asset classes into a portfolio that is a bit more diversified.
The four main asset classes that they can use are:
- Equities (shares listed on a stock market);
- Property (direct or listed);
- Bonds (loans issued by governments or corporates); and
These asset classes have different risk profiles and different tax treatments and if you want to invest in them directly, you may need larger investment amounts to make the investment worthwhile. An example of this will be if you want to invest in property directly – you will need sufficient funds (or finance) to buy the whole building.
This is why the unit trust industry is so popular; you can invest a small amount every month into a professionally managed balanced fund, that will give you access to a mix of all these and other asset types.
- I can start saving for retirement in my 30s
There are many assumptions that go into this one, but it is generally agreed in our industry that a 20-year-old who wants to retire at age 65, should put away roughly 8% of their salary. If you only start at 25, this number jumps up to 12%. Now let’s say you change jobs at 30, spend your savings from your employer’s retirement fund and now need to start from scratch. Now you need to save 18% of your salary every month and if you do this at 40, you need to save just over a third of your salary in order to still have enough by the time you reach 65.
These are scary numbers if you consider that most people only start working around 22/23 and very few (if any) people will earn an uninterrupted salary for 45 years from 20 to 65. This is why you see so many articles from financial advisors warning against withdrawing and spending your pension/provident fund when you change jobs. Most people have good intentions – I’m going to settle debt, I’m going to pay for studies, etc., but in reality, you are making it almost impossible to catch up again.
- Offshore investing is only for the super-rich
This hasn’t been true for a very long time. It has never been easier to invest offshore and we strongly recommend that you do. South Africa is such a small part of the global economy, that it would be completely silly to only invest locally. The rand depreciates on average around 6% per year, boosting your investment returns before you have even given the asset classes that we discussed before any thought.
Access to offshore investments can be through asset swap unit trusts or direct offshore investing. In an asset swap fund, you can invest as little as R200 per month in rands. The fund manager takes your rands offshore on your behalf, accessing a multitude of global investment options and when you want to withdraw from your investment, you will get back rands in your South African bank account. A nice and easy way to get instant offshore exposure.
Direct offshore investing involves using your annual offshore allowance to invest in a foreign currency. You will be able to receive the proceeds of your investment anywhere in the world in the currency of your choice. Lately, you can do this with starting investment amounts of around R30 000 and there is a very wide range of funds available to South African investors.
- I pay my advisor good money so that they can actively switch my portfolio every few months
This is by far the most frustrating misconception that advisors need to deal with. More so because it is so detrimental to their clients’ long-term financial success. Studies have shown that investors who show the best individual performance in asset managers’ client books are the ones who have passed away, or the ones who forgot that they had the investment in the first place…yes, this happens sometimes! The reason for this is because these investors did not panic and lock in losses when there was a market crash, and they did not get greedy and try to chase last years’ best performer.
You pay your financial advisor to help you set your investment strategy and ensure that you stay on track. If you and your advisor did a good job with this, there should be no reason to continuously switch from one fund to another. Switching should only be considered if there is a material change in your personal situation or a fundamental concern about a particular fund, in which case your advisor will find a replacement fund with a similar investment strategy.
There you have it – some of the most common misconceptions in the industry. I hope I’ve clarified it a bit and invite you to contact your financial advisor if you need any further help.