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The illusion of return

Review your portfolio at least once a year.

I had an interesting conversation with a prospective client recently. He wanted a review of his portfolio and recommendations on how he could improve his financial position. I noticed in the portfolio two retirement annuities (RAs): one worth over R650 000 and the other just over R100 000. He expressed some disappointment at the performance of the smaller RA, but was a lot happier about the performance of the bigger RA. He was contributing over R6 000 a month to the larger RA.

It seemed a bit odd that he’d be happy with the performance of the larger fund given how much he was contributing on a monthly basis, but he then explained that he had started with a smaller contribution which grew over time at a rate of 10% p.a. The investment started with an initial monthly premium of R2 000 a month 12 years ago.

I probed a bit further because given the performance of the market over the duration of the policy, I would have expected the value to be a lot more. So we decided to do a proper calculation to what the return was, because while he was satisfied with the portfolio, I was not convinced. In the end we calculated that he contributed just over R552 000 to the policy in total, and that the compound annualised growth rate of the policy was a meagre 4.1% p.a. – he earned less than inflation over the period and had, in fact, created no wealth from the investment.

He was very confused by the discovery that what he thought was a great investment was in fact a dog. How was it that he could have been under the impression that he was making money? Part of the answer was in the fact that he had been contributing to the fund for a long time, and he had lost track of how much he had actually contributed in total. Twelve years is a long time to keep track of how much he was contributing. Over that time his income had increased faster than the contributions, and so the investment became less significant in his overall budget.

The other reason that he was under the impression that his portfolio was doing well was because of what he read on the fact sheet of the fund he was invested in. Over the years the fund had reported good returns which the client was pretty happy with. However, those returns were before admin and other fees, and they were for lump sum investments not monthly investments. For example, the JSE All Share index (Alsi) delivered around 53% p.a. for the past three years, while a monthly investment in the Alsi over the same period is up around 24%. It is only the first premium that is invested for the full term; every subsequent premium is invested for a shorter period. Again, this was an important fact which the client did not take into account. Reading the fact sheet every year gave him a false sense of comfort around the performance of the investment.

The main detractor from performance was fees. He was invested in an expensive, old generation RA and the underlying portfolio was an expensive life fund which is not subject to the same disclosure requirements as unit trust funds. However, this was masked over the long term by the method of performance reporting and by the client not being fully aware of the extent of his contributions over the period. The result is that he developed a false sense of security about the performance of his investment.

This situation highlights the importance of reviewing one’s portfolio on at least an annual basis. This way potential issues can be detected a lot earlier and there is little scope for illusions to appear.

COMMENTS   9

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Old style RAs? *sick face*. I’m so glad they brought out Unit Trust RAs.

I suspect that “reputable” insurance companies ripped their clients off with hundreds of millions of Rands through the peddling of these old order RA’s. To say the least they were downright deceitful. In my case I cancelled every single policy I had with my insurance conglomerate and invested elsewhere where the damage has been repaired

“the JSE All Share index (Alsi) delivered around 53% p.a. for the past three years”. Which Alsi is this gentleman talking about?

Do the same with your portfolio, zero to the opening price on 1 jan each year. The statements that the brokers send out are rubbish. Who is interested in your Richmont that you got for R3.00 30 years ago and is now R106. Start each year at zero growth and review every 3 months.

Today these very same insurance companies have now re-branded themselves as INVESTMENT HOUSES. They are running a legalised PONZI scheme. My children and other family members will not invest with these large companies. I am a retired person and thank god that at the age of 56 I had made all my policies paid up and cashed in most of the policies. The cashed in policies were invested with Coronation and Alan Grey. I am 64 and will keep on investing in unit trusts.

Agree with you have advised my children to invest in unit trusts and never touch them. I also cashed in all my stuff at 55, paid the crooked Old Mutual the fine and invested elsewhere. Made the fine back within 6 months. They are really a bunch of crooks, they know they are needed for the guy who cannot save himself. So they prey on these people.

“The main detractor from performance was fees.”

Well now there is a quote from an financial advisor worth paying attention to. Old RA’s, new RA’s – they all charge fees. Stop investing through an advisor into products layered with costs. Your average product has advisor fees, management fees, admin fees, performance fees, platform fees, stockbroker fees, bid/offer spreads and more. Most of these fees are unnecessary. Go with TFSA’s, retail savings bonds, direct shares and ETF’s. The only exception is when your employer is matching or contributing to a retirement fund for you. For the rest, start early, go direct, invest regularly and enjoy the benefits.

“Review your portfolio atleast once a year”

The irony in that statement.
The story being told here is of a fella who probably did exactly that, and got their fingers burnt, yet the same message continues to be preached about.

Ask anyone to dissect and perform an autopsy of the Springbok’s loss to Japan, and you’ll be gobsmacked at how knowledgeable they are on their sports, but ask them how THEIR money , that THEY wake up every morning to earn is doing, and you get a blank stare.

Read, Learn, Learn, Read and learn some more, because, for as long as you entrust your money with these finance houses while you rest on your laurels, you will get taken for a ride.
Don’t just review that portfolio at least once a year, but know it in and out, track it’s performance, fees, etc regularly and be bold enough to voice a concern.

agree with both Wolliwolta & Barney , theres nothing like believing a financial advisor only to discover your return on a 5 year endowment is little more than your total premiums, does not matter the life co or lisp you use -always less than inflation return because savings returns are depleted by all the 3rd parties involved , an Allan Grey return of 11% plus p.a over 5 years
in my case =4.6% return to me , so yes read & read some more and take ownership of investment decisions, better to lose some money on your own decision/research than pay an advisor for this privilege

End of comments.

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