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The time of year has come for one of the most beautiful mountain biking races in South Africa, the Cape Pioneer Trek. This race provides exposure to all the elements of nature and as a result it attracts every type of mountain biker out there.
The first group of contenders are usually highly competitive riders and have the ability to complete the first stage in the shortest time. The second group tries to compete at the same level as the first group, but only manages to do so at an average speed. Members of the last group know that they are slow and that they’re in for a much longer race, but they are mainly there to just have a good time.
Riders in the first group usually manage to finish before dehydration can set in, while those in the third group makes time to eat and drink while riding, thereby also managing to avoid dehydration in the process. Riders in the second group usually struggle with dehydration as they tend to ride slightly above their usual capabilities and do not necessarily consume enough fluids to compensate for their efforts.
I often use this as an example to illustrate the different types of investors, especially those who look after their own retirement funds. Even if you managed to get your market timing wrong over the last decade by investing shortly before the great correction of 2008 and held on to your purchases in our recent sideways market, you still would have achieved a return of more than 200% on the FTSE/JSE All Share Index since 31 May 2008. In light of this analogy, let’s take a look at three possible scenarios in terms of investment growth and the planning involved in each contender’s case:
The first investor is someone who focuses on investment growth (speed). He is willing to adapt his lifestyle in such a way that he can live mainly off dividends. Shares remain his main investment and although he has to endure more volatility, he mainly focuses on dividend growth.
The second investor would like to “ride” as fast as the first investor, but is not entirely satisfied with the lower income that accompanies a shares-only portfolio. He still prefers the growth of shares, but he will have to sell shares on a regular basis to supplement the income that accompanies his lifestyle.
The third investor aims to arrive before cut-off by beating an ordinary money-market investment over the long term, for example. He likes shares, but it doesn’t have to make up a very large portion of his investment portfolio. He does, however, require a higher income than that provided by dividends alone.
If the first investor retired shortly before the great correction of 2008 with an amount of R1m, and he invested all his money in shares with the intention of living off dividends alone, he would earn an average monthly income of roughly R1 700. The second investor decides that the magnificent growth on shares justifies a regular sell of units to make up for his elevated lifestyle that requires more than the R1 700 provided by dividends alone, and he withdraws 4% annually from his portfolio (roughly R3 400 per month) to compensate for his lifestyle. The third investor decides to take the “boring” route by investing in Local Multi Asset Low Equity Unit Trust funds, which happen to trade at around a 4% annual income rate, which means that he can also earn an income of around R3 400 per month without having to sell any units.
Upon first instinct, you would think that the magnificent growth earned on shares would leave investor one far better off than investor two, who in turn would have beaten investor number three quite comfortably, but you would be wrong. After this period, investor one’s total after-income portfolio value was higher than those of investors two and three, but this was mainly due to his willingness to adapt to a lower lifestyle. The third investor’s capital wouldn’t only be worth more than the second investor’s capital, but by exposing himself to an average of only 35% in shares, he also got far less grey hair than the second investor, considering the volatility the latter had to endure. The secret to success, therefore, lies in not living above your pay grade, but in rather “riding” at a pace that will always fall within your lifestyle capabilities.
Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 3 November edition of finweek. Buy and download the magazine here.
