Too many choices

Zubeidha asks: I am finding it difficult to select the correct investment as I am overwhelmed by the fear of losing a great deal of money. I want to make a long-term investment. Could you please point me in the right direction?

Dershodra asks a similar question about where to invest a monthly amount in the long-term.

Maya replies: Studies by behavioural scientists show that when people are faced with too many choices they struggle to make a decision and tend to therefore take no action. I sometimes wonder if this is not one of the main problems with our savings industry — we simply have too much choice. We worry about not making the “right” choice and that there may be a better option than the one we have chosen. This often leaves us in limbo. We have to move past this indecision if we are to start saving.

You need to start breaking down your savings decision as follows:

1. The biggest influence on your final savings balance will be the amount you have saved. If you don’t start saving, you will have no savings!

2. Short-term savings of under three years should be in cash or cash-like investments.

3. If you are looking at long-term savings then inflation becomes your biggest enemy, not stock market crashes. At the current inflation rate, every 10 years your money halves in value. You have to invest in a growth asset that beats inflation over time — this means shares and property.

4. If you are seriously worried by the thought of opening your investment statement and seeing your savings halved by a stock market crash, select a multi-asset class fund like a balanced fund, flexible fund or an absolute fund with a CPI+5% benchmark. These funds allow the fund manager to move between equities (shares), property, cash and bonds and limit the losses from market volatility.

5. Select fund managers with strong track records. That means a fund that remains in the top quartile of its sector over a longer period of time. This fund does not have to be the best performer but must consistently beat its benchmark — otherwise you may as well invest in the benchmark. Consider fund managers like Coronation, Allan Gray, Investec and Prudential.

6. Fees are another major part of your decision; you need to look at the total cost ratio (TER) of the investment. A fund that has high upfront fees and high annual fees will erode your growth over time. Performance fees are also something you need to consider. If a fund manager only gets paid if they outperform (Allan Gray for example earns no fees if they underperform) this aligns the interests of the fund manager with the investor. However, when the fund is performing well the TER can be very high.

7. Passive vs active fund. As many fund managers underperform their benchmarks ( the JSE All-Share Index) there is a strong argument for just investing in index-tracking funds like the Satrix Rafi (see related articles — EFT vs Unit trusts). These are low cost and guarantee that at least you will get the average market performance. The downside in your case is that these are 100% exposed to the share market so the volatility (ups and downs) will be higher than a multi-asset managed fund.

8. Switching hurts performance. Numerous studies have shown that the average investor underperforms the fund he or she is invested in simply because they move in and out of the fund in an attempt to time the market. Once you have made a decision, stick with it (unless something dramatic has happened to the fund management) and remember that this is a long-term investment. Attempts to time the market by withdrawing your money when you get nervous will only hurt your long-term performance.

9. Even if you managed to select the best-performing fund, it will at times underperform, so don’t focus on short-term relative performance. Even if you invest in a fund with average performance, you will see your money growing far more than sticking it under the mattress.