Steven Nathan, CEO of low-cost investment company 10X Investments highlights the three biggest investment anomalies and how to avoid them.
When asked why the majority of South Africans fail to reach their retirement goal, most industry players will cite factors such as saving too little, starting too late, low preservation rates or a lack of portfolio diversification. Unfortunately, they often fail to mention the devastating effect that undisclosed fees, lack of ethics and wasteful active management have on retirement savings. While there are naturally common mistakes we should avoid, there are several other oversights that investors are unknowingly making that hamper their chances of a decent retirement. These are the factors that the industry doesn’t want to highlight, mostly because they are partly responsible for their manifestation.
You love Warren Buffett, but ignore his advice
The current system promotes hundreds of different, often complex, investment products managed by mostly underperforming fund managers and hedge funds with high fees that are endorsed under the guise of independent advice by investment consultants.
Multi-billionaire Warren Buffett’s single biggest take-out message from the Berkshire Hathaway Inc AGM in April 2016 was: “Don’t pay for investment advice ‒ buy a low-cost S&P 500 index fund instead. Market-beating investment consultants were usually a ‘huge minus’ for those following their advice. Passive investors will likely outperform ‘hyperactive’ investments recommended by consultants and fund managers. These arrangements eat up capital like crazy.”
Investors face a real problem trying to figure out what advice they should listen to. Before you pay another rand in fees, I urge you to question the costs charged by expensive money managers and consultants.
The traditional investment system mainly results in an enormous wealth transfer away from savers to the industry. This situation persists despite the overwhelming and continued evidence that most fund managers destroy value compared to a low-cost index fund.
You keep doing business with companies that abuse your trust
The South African retirement fund industry is littered with companies fined for unlawful and illegal practices. These range from bulking retirement fund contributions by taking interest from member payments without disclosure, pension surplus stripping and undisclosed commissions. The list goes on and on.
In 2015, the South African financial and investment industry received a regrettable D PLUS for poor disclosure by the Morningstar Report, which noted that South African advisers and brokers have no legal obligation to act in the interest of investors ahead of themselves. They can make any recommendation they feel is appropriate without considering equivalent products available that are more suitable for the specific investor.
Despite these immoral and often illegal activities, people continue to entrust billions of rands to these investment companies. Even more concerning is that most people, trustees included, don’t really know where their money is invested, or what they’re paying in total fees.
You continue to search for patterns where none exist
Active fund managers argue that their skills enable them to outperform the market return, but research is proving once again what passive managers have known all along – it is simply not possible for most funds to outperform the market.
In South Africa, over 95% of investments are in actively managed funds, with the expectation – or hope – of earning a market-beating return. But according to research commissioned by the State Street Corporation in the United States, only 1% of institutional investors were able to beat performance benchmarks once costs were deducted.
This isn’t a surprise for Eugene Fama, a professor of finance at the University of Chicago and recipient of the Nobel Prize for economics, who has proved that it’s impossible for fund managers to outperform market returns, due to efficient financial markets, unpredictable stock-price movements and costs.
So take the time and do your research. Seek out independent, objective advice yourself. At the end of the day, you have the single biggest stake in your investment.
10X Investments (10X) is an authorised financial services provider, a licensed retirement fund administrator and investment manager. 10X provides a range of simple, effective, low-cost solutions to retirement investors.