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Expo: Cost is important, but is it the place to start when choosing an investment?

Index tracking is about more than just low fees.

SANDTON – Over the last few years, the cost of investing has become an increasingly important issue. Investors and advisers are paying more and more attention to what they are paying, and what they are getting for those fees.

This is one of the reasons that index tracking is growing in popularity. It offers an accessible, low cost option to gain diversified exposure.

Speaking at The 2016 Money Expo CEO of Sygnia Asset Management, Magda Wierzycka, said that investors should be very conscious of the long term effects that high costs will have on their wealth.

“Costs are a major determinant of how much you are going to retire with,” Wierzycka. “Don’t ever underestimate the compounding effect of costs.”

While fees are undoubtedly important, strategist at etfSA, Nerina Visser, said that investors should however be careful about making costs the most important determinant of where they invest.

“To start at analysing costs is the wrong place,” she said. “The first thing you need to ask is what do you need form the investment, and what you are trying to achieve. The next step is to look at what type of exposure will do this for you. It’s about identifying the kind of assets that you need to reach your goal. If you are using index tracking products, you then need to ask what index will actually give you what you require. Only then you can look at the range of exchange-traded product providers or unit trust funds that track that index and how well they do it. The analysis of costs comes much further down the line.

“So as much as the cost argument is important, it is not the starting point,” she said. “I think it leads to inappropriate investment decisions.”

Helena Conradie, the CEO of Satrix, added that a simple focus on costs can also create confusion in an investor’s mind when they are trying to make sense of where to invest. The debates around which products are cheaper don’t necessarily help clients to make appropriate choices.

“We as an industry make one mistake, which is that we can confuse the investor,” Conradie says. “There are so many strong brands here, but it’s not about us, it’s about you the investor. We don’t say don’t use active managers, don’t use asset allocation, do this, do that. As a client, we are offering you another instrument in your tool box. These debates are factors that you need to take into consideration, but don’t make them your focus point.”

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One place to start in assisting the investor is to ensure that they do not need to dig all over to try and find and understand costs related to an investment. The return should be the only place to look. Tell me how much CASH would come back into my bank account after a year for every R100 CASH that left my account when I made the investment. ALL returns to be measured the same way. Works for tax. I earn X, I pay Y tax – simple. Then I can look at history, nature, future expectations etc. and make a decision only based on those unknowns.

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