Are you making a big investment mistake?

Sometimes, despite our best intentions, we make the wrong choices with our money. In fact, when you consider how long our lives are, and how many different options there are out there, mistakes are practically inevitable. 

But, the good news is, as long as you haven’t bet the house on a ponzi scheme, there’s pretty much no such thing as an irreversible mistake. And yet, new investors often feel like everything is riding on every decision they make, and this stops them from being confident in their decision-making.

In reality, if you put money into a regulated investment product and then discover later you’d rather put that money elsewhere, chances are you’ll be able to learn from the experience without paying exorbitant ‘school fees’ for the lesson. 

Let’s look at some of the common errors investors make, and then discuss what can be done to rectify them.

Investing too much in one place: overlapping investments, concentrating risk and inadequate diversification

On a high level, it is a good idea to consider the sum total of your assets and liabilities: where, in fact, is most of your money tied up? You, like many people, might be paying off a bond, which puts a lot of your capital in property. But then, if the majority of the rest of your savings or discretionary investments are tied up in a second property or in a few tech stocks, you are creating a situation of concentrated risk for yourself (and your future self).   

Another example would be investing in different investment products with similar underlying assets. For example, let’s say you are contributing monthly to a retirement annuity, and also investing via a tax-free savings account. If the fund(s) underlying your retirement annuity are weighted towards local equities, then having a similar underlying asset structure in your TFSA will mean you are concentrated in the local market, and more exposed to fluctuations there than you should be. Likewise, you might find your investments are too heavily concentrated in one sector (such as technology), or are too heavily weighted towards growth assets like equities for your particular timeline. 

In both these scenarios, a multi-asset fund such as the 10X Your Future Fund within the appropriate investment product wrapper might be a good option. These funds aim to diversify across asset classes, industries and geographies using an index-tracking approach that refrains from picking individual stocks.

Investing in the wrong investment product: not understanding the risks and benefits of different investment products

In this case, for whatever reason, you’ve chosen an investment product or products that do not align with your financial goals, risk tolerance, or time horizon. Or, you’ve misunderstood the impact of the legislation surrounding a particular product. Let’s examine each of those in turn.

If you have disposable income at the end of every month, and instead of examining all the options available to you, you’re simply putting that money into a fixed-term deposit with your bank, it’s possible you’re not going to see nearly as much return on that investment over the long term. Had you chosen to explore a low-cost equity-focused ETF within a tax-free savings account (that term is often confusing: TFSAs are actually investment products, not savings products per se), it’s possible that in three to five years, you could make substantially more money than in the former situation.

However, fully understanding the impact of the legislation surrounding a product is also important. Using the above example, if you knew you were likely to use that money in the medium term (say, in five years time), it’s possible a TFSA isn’t actually the vehicle you should be considering. A tax-free savings account is a phenomenal investment product because all growth and withdrawals are tax-free; which means, over the long term, you can realise a lot of value from it. But, there are legislated limitations: you can only put R500k into a TFSA in total, and only R36k every year. And, so withdrawing a large portion from your TFSA after a few years doesn’t allow you to capitalise on the potential growth of those contributions over the longer term, and you won’t be able to ‘replace’ that money again (if you put in R100k over those 5 years, and then withdrew that plus whatever the growth was, you can only put in another R400k).

Likewise, when contributing to a retirement annuity, you need to understand that the money you are putting in there (outside of limited potential savings pot withdrawals under the two-pot legislation) is not available to you until you are 55 at least; this can be a very good thing, in that it helps you save for retirement, but might also limit how much you want to contribute. On the other hand, RA contributions lower your taxable income and you will therefore see money back from SARS each year you contribute. Furthermore, that money is protected from creditors, whereas unit trusts for example are not. Unit trusts themselves offer flexibility in contributions and withdrawals, but carry tax obligations that a retirement annuity and a tax-free savings account do not. So again, understanding the interplay of these products in their ability to offer you the future you want is key.

Investing with the wrong provider: high fees and underperformance

Fees are the single biggest predictor of the success of your investments. Why? Because successful investing relies on utilising the compound interest of your investments over time, and high fees compound against you. Pair high fees with underperforming funds, and you have a recipe for investment disaster.

Did you know that a 1% difference in fees can mean as much as 30% less in retirement? Retirement annuities are often a target for this discussion, as traditionally the industry has charged exorbitant fees (3% or more) for a product that hasn’t helped South Africans have any confidence in their retirement. At 10X, we use strategic asset allocation and index-tracking to offer a low-cost retirement annuity that consistently beats market benchmarks. And we use this strategy successfully with our other low-cost products that produce real returns like our living annuity and preservation fund as well. If you feel you could be paying too much for returns that aren’t cutting it, ask your provider or broker for the effective annual cost of your investments, and then use our EAC calculator to see whether we could do better for you.

You can also get a free comparison report specifically tailored to your timelines and financial goals from our investment consultants, free of charge. There are no call centres at 10X, just experienced professionals ready to help you.

Investing for the wrong reasons: emotional decision-making

While being human undoubtedly has its advantages, we’re also prone to making potentially life-changing decisions based on fear, greed, or lately more than ever, FOMO (the fear of missing out). Our natural inclination is to give preference to opinions and trends reported by sources we feel are authoritative, and so when Apple and NVIDIA hit trillion-dollar valuations we feel like we’ve invested in all the wrong places.

The cure for the ills produced by our emotional surges is to understand the core principles involved in successful investing:

• Time in the market is more important than timing the market
• Index-trackers typically outperform active managers (see S&P’s comprehensive SPIVA research if you’re doubtful about this)
• Low fees mean better net returns
• Markets might dip, but they also rebound
• Understand what products are right for you, what is possible given your lifestyle and savings capabilities
• Have a plan, stick to it, and review it regularly

Neglecting Retirement Planning

Stock picking can be fun (if potentially highly emotional), but the data is against you. The probability of your portfolio of individual stocks, crypto and avocado farm investments outperforming a low-cost, diversified index tracking solution with strategic asset allocation isn’t great. And what are you doing speculating in a complex industry as a layman when you haven’t thought about or planned for your retirement?

First, take care of your future self. You need to consider contributing regularly towards a retirement annuity (even if your company has a pension fund, but especially if they do not), and maintaining an emergency fund in case of unforeseen expenses. From there, a tax-free savings account or unit trusts might be a good option. Only when you’re confident of your financial plan providing for your future life-after-work should you consider investing or speculating on the fringes of the industry.

Practical steps to rectify investment errors

Making sure your portfolio is balanced

At 10X, we’ve taken the worry out of balancing your portfolio, while also ensuring the best possible chance at performance. We pride ourselves on providing funds that cater for all financial situations, and we’ve designed our diversified, highly performant funds so that your money is always in the best place, regardless of your life stage. We like to think of it as ‘investing on autopilot’, and while you’re always free to choose where to put your money, we like to think we’ve taken away the stress of that decision.

Switching investment products or providers

If you’re paying too much and/or your investments are underperforming, you need to take action. Understand the steps involved in transferring investments from one product or provider to another, including considerations for potential transfer fees, tax implications, and market timing. While you’re at it, get a free, no strings attached comparison report from 10X.

Increasing contributions

Regular contributions are required to give any investment the best chance at providing for you in the future. Also, regularly reviewing the amount you can safely contribute is key: as time in the market is important for compound interest to be the most beneficial, you might need to make up for lost time. Or, you might need to save more than you think right now, to be able to retire when you would like. Either way, it’s better to contribute as much as you possibly can (and even make some sacrifices in the short term to get it done) right now, than spend your golden years stressing about money and not having enough to live the life you want.

Consult with an experienced professional

Many people end up spending a significant portion of their investment returns on advice from financial professionals. At 10X, we don’t give you advice. Our experienced investment consultants give you the facts, so that you can make your own mind up, and be your own investment hero. There are no call centres at 10X, just experienced professionals, ready to help, free of charge. Just get in touch.