Publications
Partners
A fox truly is one of the cutest animals and, in many cases, also a lot smaller than you would think. Many farmers, however, will tell you that the saying, “it’s the little foxes that spoil the vines”, is 100% true, and that these small animals can cause massive damage.
When it comes to managing our personal investments, we are often so focused on doing the “right” thing or following those who do, that we don’t realise that by eliminating small mistakes early on, we can increase our earnings.
This week I would like to discuss the five most important mistakes that I think many investors make when it comes to managing their personal investments (especially in shares).
1. Bad news leads to bad decisions
There is a saying that goes “the good news about bad news is that it sells”, and I have to wonder at times whether a single newspaper would have been sold if it only contained good news.
This brings me to my first “little fox”: Bad news can very often leave investors so worried, that they forget the fundamentals.
When we have a look at a long-term graph of the FTSE/JSE All Share Index (JSE) and we compare it to a negative event timeline, clearly one of the biggest mistakes without a doubt, would have been to sell out.
Following the Brexit announcement last year, as an example, news in general became so negative that quite a few investors decided to sell all their investments out of fear.
Four days after the vote, the JSE did indeed trade lower by 6.5%, only to normalise soon after, and only to trade at higher levels prior to Brexit around a month later.
2. Higher fees do not necessarily mean lower net returns
I firmly believe that if you monitor and manage your investment costs, you most certainly will benefit from it over the long term.
That doesn’t mean, however, that higher management fees are always a bad thing. Let’s use the SA General Equity unit trust sector as an example. Over the last 10 years, 13 fund managers managed to outperform the JSE.
Interestingly enough, their average total expense ratio (TER) over the last 12 months was nearly three times more expensive than the average TER of exchange traded funds in the same sector, so expensive may not always be better, but it definitely isn’t always worse.
3. Not being willing to wait at least 10 years
Annual average returns for the FTSE/JSE All Share Index over different periods
I often ask prospective clients whether they look at investments through a microscope or a telescope. Shares must never be looked at through a microscope, and although Warren Buffett recommends that a share should be kept forever, investors should, in my opinion, have at least a 10-year period in mind before investing in shares.
When we take a look at the graph showing the returns on shares over a one-, two-, six- and 10-year period, it becomes clear that the longer the holding period, the lower the volatility and the less the chances are for losing capital.
In fact, when you look at the JSE over the last 50 years, shares have never been negative over any 10-year period.
The worst your investment would have performed over any rolling 10-year period, is at 6% returns per year.
4. A market correction does not necessitate a correction in your portfolio
A market correction, or even a total collapse in the market, usually happens when most buyers fall away and prices are driven by sellers.
A market correction, therefore, is no good reason to sell your investments/shares. Let’s suggest that you have done your homework, you invested within your risk profile and nothing really newsworthy happened in the company in which you invested.
Why on earth would you want to sell? Out of fear?
Even if you invested in the JSE at the market’s peak in May 2008, you would have already outperformed money-market investments by 2012, and by 2015, you would have doubled your capital.
Even though history may not repeat itself, it just shows you yet again, that it’s better to focus on at least a 10-year period.
5. Impatience can cost you dearly
Just because a particular share or investment isn’t doing what you wanted it to do overnight, or even what other shares are doing at any given time, doesn’t mean that you should sell it.
Again, ask yourself whether anything newsworthy happened in the company you invested in. Let’s use Steinhoff as an example:
Steinhoff’s share price
If you invested in Steinhoff in 2010 around R21/share, you would have seen this share price fluctuate between R21 and around R28 until late in 2013.
If you became impatient and sold your Steinhoff shares during this period, you would have made a huge mistake, as Steinhoff’s share price shot up to R60/share a year later (end of 2014).
Although it may be difficult, good things do come to those who wait.
Schalk Louw is a portfolio manager at PSG Wealth.
CORRECTION: Please note that this article was corrected on 25 August 2017 under point 4: "A market correction, or even a total collapse in the market, usually happens when most buyers fall away and prices are driven by sellers."
