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Why good clients achieve great investment outcomes

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Why good clients achieve great investment outcomes

We often get the question; “Why do some clients achieve better investment returns than others?” While we don’t believe that there is a silver bullet – each of us is unique after all; we do think that the following dos and don’ts shared with us by financial advisors help to explain why some investors do better than others. This is not meant to be an exhaustive list of key behaviours that separate their more successful from their less successful counterparts, but rather food for thought.

What to do

  1. Start by understanding and documenting your personal and financial goals, your investment time horizon, and your personal tolerance for risk. Often this is best done together with a professional financial advisor, who can then also provide you with a baseline – ‘you are here, you want to be there’ – and help you to monitor and adjust for your progress. And it is important to measure your progress against this plan, not your peers.
  2. Set up an emergency fund – we suggest targeting six months of income in a money market account. This is not an investment, but rather a savings vehicle for you to use in case of an emergency, preventing you from having to access expensive credit or your long-term investments.
  3. Match your growth asset exposure to your time horizon and thereby also maximise the benefit of compound interest. Most of us have an investment time horizon that spans several decades. We should therefore have a high weighting to growth assets (local and offshore equity and listed property), at the expense of defensive assets (local cash and other fixed income assets).

The following table summarises the very long term real returns (I.e., after the impact of inflation, which averaged 4.9% per annum) for the period 1900 – 2019 offered by different asset classes:

Figure 1: Long term real returns – 1900 to 2019

Source: Cambridge Judge Business School, Global Investment Returns, Dimson, Marsh & Staunton dataset

If you compound these real returns over different time horizons, you can clearly see why Albert Einstein describes compound interest as the “eighth wonder of the world” – R1 000 growing at 7.1% p.a. real over 20 years yields R9 646 but at 1% p.a. real, grows to only R3 147. A real life example is Warren Buffett, who at 90 was worth $81 billion, but a staggering $70 billion of this wealth came after he qualified for retirement benefits in his mid-60s!I

In fact, there is a reason why the book from which much of the source data for the table above is titled “Triumph of the Optimists” by Elroy Dimson, Paul Marsh and Mike Staunton. This study of 101 years of global investment returns provides compelling evidence of the reward that investors (optimists) get for bearing the risk of investing in equities.

4. Maximise any tax benefits available to you via investment and retirement product wrappers; for example, tax-free savings accounts, retirement annuities and preservation funds. Once again, you will be compounding a higher starting amount.

5. Preserve your accumulated retirement savings when you change jobs. This is critical to your ability to retire comfortably. In short, to comfortably maintain your standard of living in retirement you need to have saved approximately 20 times your final annual salary (pre-tax). To do so, ideally, you need to start early and stay invested, There are no quick fixes to a lack of, or interrupted retirement savings.

6. View your investments holistically. Take the overall cost of investing into account but be aware that long-term outperformance can be achieved with investment manager skill, resulting in meaningful additional returns for the patient investor.

What not to do: recognising that sometimes in investing what not to do is more important than what to do!

1. Don’t panic and interrupt your compounding period. Yes, a market correction is a scary thing to live through, but often the recovery is swift. Anyone who sells out in panic will miss the majority / all the recovery. An analysis of bear markets over the past 50-odd years shows that the best action is to do nothing and remain invested (Cash costs money over the longer term; https://ninetyone.com/en/south-africa/how-we-think/insights/cash-costs-money-over-the-longer-term).

The following chart demonstrates the benefits of staying invested. In this chart, Mo’ Money invested R10 000 at the peak prior to each of the last nine bear markets (a total of R90 000) and compared that to Lo’ Money who made the same investments at the peak, but then at the trough he panicked and switched his accumulated investment to cash for a year before switching back into the market. The results are astounding. Over 50 years Mo’ Money’s investment grew to approximately R48.6 million (an annualised return of 16.1%) compared to Lo’ Money’s R4.6 million (an annualized return of 10.4%).

Figure 3: Time in the market versus timing the market

It is also worth noting how a 20%+ fall in the market loses much of its immediate significance over time. Take, for example, the almost 40% market collapse during the Russian Debt Crisis in 1998, and how, in the long term, it barely registers on the chart above.

2. Don’t be too conservatively positioned; defensive investments don’t protect you from inflation over the long term. As we discussed earlier, you need to embrace the long-term outperformance offered by growth assets.

3. Don’t be too extreme in your portfolio positioning; for example, being 100% exposed to South African equities or 100% exposed to global equities. Historically there have been periods where South African equities have meaningfully outperformed offshore equities, and vice versa. For example, over the last decade, the FTSE/JSE All-Share Index (ALSI) returned 7.8% p.a., while global equity markets delivered 15% p.a. However, the prior decade saw these numbers almost reversed, with ALSI returning 15.7% p.a., versus global equity markets delivering 8.8% p.a.

4. Don’t review your investments too often. Don’t look at their performance on a daily, weekly, or monthly basis. In fact, even though you receive statements on a quarterly basis, it is often best to simply take note and move on. Rather sit with your advisor annually to debrief on the year passed, make sure that you are on track, and adjust your plan if necessary.

5. Avoid market hype. Don’t be distracted by what your friends and colleagues are investing in; or be influenced by social media frenzies and market hype.

In conclusion, as difficult as it is for all of us at times, trust the financial planning process and your investment partners, and be patient. Consistency and good investment behaviours compound meaningfully over the long term, resulting in great investment outcomes for good investors. The optimists will triumph. DM/BM

Author: Paul Hutchinson, Sales Manager, Ninety One


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