People often wait for big reasons to save. A house deposit. A new car. Their child’s education. Truth is, you don’t need a specific reason. Everyone needs savings eventually. For retirement, for surprises, and for opportunities.
The Self-Investor Challenge: Passive vs Active
Anyone can save money, but not everyone knows where to start. Many try doing everything themselves. Results often disappoint.
About 70% of professional active investors who frequently change their portfolios fail to beat passive indexes like the S&P 500. Successful investing needs precise timing. You need to know exactly when to buy and when to sell.
And as a result, investment management isn’t a hobby. It needs full-time attention for good results. Let’s be honest. Between work, family, and life, casual investors just don’t have enough hours to watch their investments properly. Even if you did, our own biases and heuristics can be our enemy. In this case passive investing beats active investing.
The Fee Factor
There’s a reason people pay fees. Good fees deliver value and make sense. Its not a terrible idea to pay somebody a 1% fee from your investment knowing that they’ll be managing it day in day out, year after year. Despite what many believe, reasonable fees don’t automatically hurt returns.
In fact, fees used to be much higher. Unit trusts once charged 5% before even adding performance fees. Things are much better now for everyday investors.
The 80/20 Investment Approach
You can’t manage everything yourself. But you can handle the important parts. Focussing on what you can control can still deliver great results.
Creating Your Core Portfolio
2 or 3 unit trusts or ETF’s is a great way to start investing. This offers great investment options with one big advantage: you can get your money when you need it. No fixed lock-in periods.
Unit Trusts & ETF’s pool a bunch of shares and stocks together based on different criteria. Instead of picking shares yourself, pay a fraction of the cost to let professional fund managers choose the best and place them in one fund for your to benefit from.
Whereas Unit Trusts gather stocks for specific fund strategies, ETF’s take stocks from specific sectors. They both serve the same function, choosing those with the expected gains while also limiting risks. So how do you know which 3 to get?
Diversifying Investment Styles
Choose different styles of UT’s and ETF’s. Each style works differently as markets change. Combining them smooths your returns and reduces wild swings. You can usually find out what a unit trust or ETFs style is by merely googling it. Here are 4 of the main styles.
- Value investing: Finding undervalued companies trading below their fair value.
- Growth investing: Targeting companies growing faster than average.
- Quality investing: Looking for financially solid businesses.
- Momentum investing: Following trends. Buys what’s going up, sells what’s going down.
Diversify Geographic Exposure
The numbers tell the story. Over ten years, the US index NASDAQ returned 423%. The JSE (Johannesburg Stock Exchange) All Share managed just 66%.
A feeder funds invests in offshore funds through local structures. You invest in rand, but the underlying assets are in foreign currencies. Its a simple way to access global growth without needing foreign accounts and having the hassle of moving money offshore.
Tax Strategy Essentials
Tax Free Savings Accounts are powerful wealth-building tools in South Africa. You can put in R500,000 over your lifetime, with annual limits of R36,000. The benefits are huge.
You can invest in fixed-interest products or the ETFs, or unit trusts we’ve already mentioned. Different providers have different minimum requirements to get started.
For best results, we’d recommend not withdrawing your TFSA investments for at least 10 years. This lets compound growth work without tax getting in the way.
The Reality of Investing
Perfect portfolios don’t exist. Markets constantly change. Even the best investors can’t time everything perfectly.
But the real goal isn’t making money in every market condition, that’s impossible. It’s about protecting your money across different environments.
Professional advisors watch all aspects of your financial situation. A good advisor will pot the market opportunities you don’t, and the hidden risks before its too late.
