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Personal investing

Investment lessons for sharing

Money is a polarising topic, yet it is an important subject that greatly influences all of our lives. Opening up the space for money conversations can ultimately give more people the opportunity to achieve long-term financial security – a goal that may seem out of reach to many in the wake of the COVID-19 pandemic and the financial devastation wrought by lockdowns. Sometimes you, or those around you, have valuable lessons to share or learn, and a conversation around the dinner table with your family, or over a coffee with a friend, can be life-changing.

In the spirit of Savings Month, Daniella Bergman reached out to client-facing people across the business for investment lessons that they would be willing to impart to get money conversations started. These short pieces provide a range of insights and hard-learned lessons, along with some strategies to consider implementing.

Despite the fact that it has become socially acceptable to talk about various personal topics, money conversations continue to be taboo. A survey of Americans compiled by US fund manager Capital Group found that people are more comfortable talking about a range of subjects from marriage problems, mental illness and drug addiction to race, sex, politics and religion than they are talking about money. Meanwhile, a study conducted in the UK by financial services group Lowell found that 25% of the respondents consider conversations about personal finances to be a no go, as they make them feel highly anxious. Interestingly, the majority of those polled by Lowell expressed the wish that society would make it easier and more acceptable to discuss personal finances more openly.

According to Prof. Viviana Zelizer, a sociologist at Princeton, taboos can be broken during times of crisis. Perhaps this global crisis of COVID-19 can inspire some changes in our approach to money conversations – especially in light of changes in spending patterns as a result of the pandemic. Dr. Sabine Krajewski, a senior lecturer and taboos researcher at Macquarie University, notes that once you talk about a taboo, it is the start of lifting it, and dealing with it.

start breaking the money taboo and turn money, saving and investing from being a source of stress into a more inclusive conversation

Interestingly, Capital Group’s research went on to reveal that people are willing to have conversations about money with financial advisers, their spouses and, particularly for millennials, their parents, other family members and friends. The stories below offer the opportunity to start breaking the money taboo and turn money, saving and investing from being a source of stress into a more inclusive conversation.

Yesterday, today or tomorrow

Chris Tisdall, Head of Direct and Private Clients

Each rand that flows into our lives (be that into a bank account or as cash into our pocket) offers us a financial choice: how to put it to best use. We can use it to pay off yesterday’s debts, to cover today’s expenses, responsibilities and luxuries, or save it for tomorrow.

It is useful to reflect from time to time on what proportion of our income we are allocating in these three directions. This exercise reveals as much about what we value as individuals as it does about the financial pressures we face. If we truly value something, then, over time, it should show up in our actions and behaviours. The paradox, of course, is that, if asked, we would all say that our futures are incredibly important to us, but for many, the proportion of our income directed to tomorrow simply does not align with this stated value.

We know that reducing pain and increasing immediate gratification are powerful behavioural drivers, but they keep our money tied up in yesterday and today. To overcome these, we need to do three things: We need to create and keep awareness of where our money is going, decide just how committed we are to our future, and put in place what is required to ensure that a value-aligned proportion of our income is directed there. That is to say, it starts with commitment and is followed by process.

In addition to containing our lifestyle, a process that reveals commitment includes debit orders, contributions to savings accounts for emergencies and short-term goals, and contributions to investment accounts – where our money has the time to grow faster than inflation – for medium- to longer-term goals.

Put a system in place for long-term goals

Nomi Bodlani, Head of Strategic Markets

What makes it difficult to prioritise our future is that it is very hard for us to relate to it. Research shows that when we think about our future selves, the activity in our brains displays similar patterns as when we think about complete strangers. So not only does long-term investing success require enduring short-term sacrifice, but you must do so for what seems like a complete stranger!

One of the best defences against our tendency towards immediate gratification and “present bias” is to make sure you have a system in place that makes it easier to prioritise long-term goals. Some practical ways you can create such a system include the following:

  1. Establish a plan. Armed with defined goals and an investment plan, you are more likely to stay the course. It is also useful to try and identify the obstacles that could derail your intentions, and how you will manage each one.
  2. Automate actions that align with your plan. Schedule automated investments in the form of debit orders and set up annual escalations in advance. Review your progress and your plan on a defined schedule, and avoid making decisions that are not triggered by your deliberate review or a change in circumstances.
  3. Commit to giving your decisions time and space. Be deliberate about distancing yourself from your emotions, or external triggers, when making decisions that impact your long-term plan. Always make sure to consult investment truths and trusted sources of relevant information.
  4. Seek expert advice. A good independent financial adviser can play the role of behavioural coach, guiding your decision-making and actions, and saving you from making costly mistakes. They can offer a rational, holistic perspective on your unique circumstances, and have the expertise and objectivity to help you make appropriate financial decisions that address your needs, without jeopardising your ability to cross the finishing line.

Doing nothing is sometimes the best course of action

Radhesen Naidoo, Head of Orbis Client Servicing in South Africa

During the COVID-19 pandemic, many investors who perhaps had only been investing or saving for the prior five to 10 years, had their first experience of market extremes and investor panic. At the end of March 2020, looking at one’s investment portfolio balance could have been quite sobering. As with all things, there are going to be ups and downs – but understandably, seeing the value of your own portfolio fluctuate stirs up emotions. It is only natural to want to do something, anything, to improve your position. However, these decisions can prove costly.

It is during these periods that precisely the opposite can be more rewarding. If you remained calm and did nothing when markets fell last year, you may be finding that you are in a better position today.

While markets will not stop being volatile, the long-term decision to stay the course has an important role to play in mitigating impulses to act. It is obviously easier to say this in hindsight, but nonetheless important to remember going forward.

Stick to your long-term strategy

Grant Pitt, Joint Head of Institutional Clients

Having worked at Allan Gray for more than 12 years, I am quite familiar with the negative effect behaviour can have on investment returns. This includes changing your investment at the wrong time rather than sticking to your long-term strategy.

During the COVID-19 sell-off of March 2020, conviction would have been tested with the sharp drop in asset prices. Trying to de-risk one's investment by “temporarily” switching to money market funds may have sounded appealing, but the future is always difficult to predict.

The rebound in asset prices proved to be stronger than anticipated and followed a V-shaped and not W-shaped recovery pattern despite a low probability of vaccines at the time.

In addition, once you de-risk a long-term investment, psychologically it becomes increasingly difficult to reinvest in the appropriate long-term strategy – particularly if the market doesn’t behave how you expect it to. It reiterated the message for me to stick to your long-term investment strategy.

Understand the true cost of short-term debt

Mthobisi Mthimkhulu, Manager of Private Clients

When I was younger, I was fascinated by the furniture stores’ printed advertisements. I would spend time going through the documents. The stores would advertise their entire inventory, and what stood out the most for me was the instalment payment plans. It almost made the items seem cheap, so I would spend time with my calculator adding up all the planned payments and would be shocked every time as the total payable was double, if not triple, the quoted cash price.

A few years later, our village got electricity and my grandmother decided to buy us a television. This was an exciting day; we didn’t sleep that night – we watched all the shows. Two years later, my grandmother was still paying for the same television, and I recall her fighting with the furniture shop about paying too much: She had paid more than R2 000 for this television, which had a cash price of R700 when she bought it. My grandmother just wanted to get her family a television and did not pay too much attention to the quoted interest rate and payment term.

This taught me a very important lesson: For most of us, debt is part of life and, when used to our advantage – like to buy a home – it can be an enabler. However, it costs money to have short-term debt like retail store account and credit card debt; it is cheaper to be patient, save, and buy goods with cash.

make sure you have a system in place that makes it easier to prioritise long-term goals

How to spend

Vuyo Nogantshi, Joint Head of Institutional Clients

Money lessons are typically about how not to spend your money, focusing on ways to maximise savings for “rainy days” and curb bad spending habits. I do not think there is anything wrong with this – bad money behaviour gets more people in trouble than should be normal.

However, I also think it is important to indulge oneself somewhat, to derive some pleasure from the effort of earning money. My money lesson is about how to spend.

If you must spend, try not to be impulsive; emotional spending can be destructive. When you do spend, be an active consumer – don’t accept the first price you see. Also, spend within your means and avoid utilising capital to spend for consumption.

That desired purchase is far more fulfilling when you know it will not follow you around letting you know how much less it could have cost you if you were smarter, and if it doesn't place an additional burden on your long-term finances.

Don’t succumb to lifestyle inflation

Faizil Jakoet, Head of Retail Client Services

Raise your standard of living at a slower rate than your increase in earnings. Redirect the difference each year to your investments, thereby growing the rate at which you invest. This is a great way to increase your rate of saving, without experiencing the impact on your everyday life.

If you grow your investment with a portion of your increased earnings before you absorb it into your budget, you are not really “giving up” anything and you won’t feel the sacrifice.

Look for positive financial role models for your children

Saleem Sonday, Head of Group Savings and Investments

Growing up in a large family from India, my great- grandfather was only able to afford for one of my uncles to receive a formal tertiary education at a reputable, albeit expensive, overseas medical school. Everyone in the family was expected to contribute financially to his education.

He would return home every semester and speak to us about his experience. He would also check in with us as kids to make sure we were attending school. He was the genesis for me to be diligent at school so that I would qualify for a formal education.

This was an important lesson and reminds me that children look for people who embody the things they see as successful and important, and often emulate their behaviour. The power of good financial habits of role models for your children cannot be overestimated.

Invest offshore consistently

Tamryn Lamb, Head of Retail Distribution

It is hard not to let emotion influence your thinking about your own country. As South Africans, we tend to shift quickly between pride and despair – feeling both in equal measures. Decisions regarding how much to invest offshore versus onshore tend to get swept up in this rollercoaster, so it is perhaps no wonder that investors struggle to adopt and stick to long-term strategies.

I tell my kids that when it comes to investing, you should make sure you aren’t buying two houses on the same street and that your portfolio is “travelling” more frequently than you are. Of course, while we all know the reasons why it makes sense to diversify by investing offshore, we tend to get tripped up by timing, with the most frequently asked question being: When is a good time?

The standard answer to that question is simple: Now. There are so many factors that need to be in place for there to be perfect alignment, so it makes much more sense to just get started on a long-term plan when your circumstances allow. Begin by determining what mix of offshore and local assets is right for you – which is a conversation best had with a great independent financial adviser. Then investing offshore in a regular pattern helps to smooth out currency volatility, reduce timing risk and make the question of “when” less important.

Most of all, don’t let your long-term plan get impacted by short-term swings in sentiment about the country. In 2020, the rand fluctuated from R14 per US dollar at the beginning of the year to around R19 during the peak of the pandemic, and then back down to R14.60 by the end of the year.

A number of investors panicked, making big shifts offshore following sharp periods of rand depreciation, incurring losses by using a weak rand to buy more expensive global assets. Sometimes it is better to ignore the noise around you; no reaction can be the best course of action.

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