Ultima has been one of the pioneers of the fee-based approach in South Africa. Our commitment to you, our client, is to keep on refining the model to ensure that you continue to benefit from its value-adding offering.
If investing is a journey and not a once off decision, why do many investors and fund managers spend all their time trying to predict short-term movements of markets? Why are we so unsettled by volatile markets? Even with all the daily information about markets investors still react irrationally to sudden market swings by either selling their investments at the bottom or staying in the market too long at the top.
There seems to be a paradox of investing namely the fact that the future is always uncertain although investors are always looking for certainty. The way investors go about looking for certainty can be very interesting and sometimes also amusing!
Following the crowd seems to be one-way investors perceive that they are making the correct decisions. They think that if everybody else were bailing out of the markets they would feel safer also bailing out as opposed to be the only ones left behind. Timing the markets like this is a sure way of losing money in the long run. Research has proven that the key to long-term sustainable growth of an investment portfolio the correct asset allocation is, i.e. how many cash, gilts, property and equities to have in the portfolio. This approach is more a process than a once off decision. Getting it right will richly reward the prudent investor.
Regular financial advice and rebalancing of the portfolio is necessary to make sure one asset class outperforming the others won’t skew the portfolio towards that particular asset class. This rebalancing should be done without the prejudice to one favourite asset class influencing the asset-mix decisions.
Setting realistic financial goals and benchmarking them appropriately i.e. using inflation as a target will help to shift investor’s focus from short-term performance and volatility. The role of the financial coach should be to guide investors on this financial journey by helping them overcoming the urge to overreact when markets are extremely volatile. Providing them with reliable financial advice and data of how markets reacted over time and putting current volatility in long term perspective will go a long way in calming investor’s fears.
Having said this though, it never fails to amaze how some investors will, against all reasonable warning invest their hard earned savings in money schemes promising exorbitant monthly returns. This resembles the other end of the investment spectrum namely greed. Promises of high returns and friends already receiving such returns is enough to convince even some sceptic investors to throw caution to the wind and invest with their friends and family in unsustainable investment offerings. The media and financial regulators often warn the public that this type of investment schemes are certainly unsustainable in the long run and that it is usually the last investors coming on board that often suffer most.
Another interesting fact is that it is usually investors in the same area that get caught in these schemes as they convey the news of the scheme by word of mouth to their families and friends. Again because greed is here the primary emotion, people fear losing out more than they fear losing their money until it is often too late.
Recent studies has shown that another typical mistake investors make is choosing to sell the wrong share in a portfolio when they want to realise some cash in a portfolio. A study of 10 000 investor records showed that the share that has performed best was sold by the majority instead of the share that performed worst. The share that performed better, on average kept on outperforming the one sold by 3.4%. We all tend to fall into this trap as no one likes to admit making a mistake when buying, or we seem to be sure the share has fallen to it lowest levels and are set for a rebound. On the other hand we feel that the better performing share has given us a nice profit and are probably set for a turnaround downwards so our decision to sell the better performer are therefore justified. With all the latest technology to our disposal we still can’t seem to win at the investment game. We keep on making irrational investment decisions and are lured by promises of making a quick buck. While this is going on investment markets have done remarkably well over time while investors have failed dismally. Maybe we should look elsewhere to find the solution to investment success.
The wise counsel from Warren Buffett, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is sound financial planning and intellectual framework for making decisions and the ability to keep emotions from corroding that framework”, is as true today as ever before. Our problem seems to be finding the right investment framework and sticking to it. Doing this will prevent us from following the crowd because we will be determining our own destiny by setting realistic goals and focusing on them.