Don’t put off sorting out the little mistakes

When it comes to managing our personal investments, we are often so focused on doing the “right” thing or following those who do, that we don’t realise that by eliminating small mistakes early on, we can actually increase our earnings. This week I would like to have a look at five such mistakes that I think many investors make when it comes to managing their personal investments, especially in share portfolios:

1. Bad news leads to bad decisions

Graph 1: FTSE/JSE All Share Index and ‘tragic’ events (source: PSG Old Oak & Iress)

There is a saying that goes “the good news about bad news is that it sells”, and I have to wonder at times whether a single newspaper ever would have been sold if it only contained good news. Bad news can very often leave investors so worried, that they forget the fundamentals.

When we have a look at a long-term graph of the FTSE/JSE All Share Index (JSE) and we compare it to a negative event timeline, clearly one of the biggest mistakes without a doubt, would have been to sell. The USA’s Presidential Election is fast approaching and I can’t help but to think back to their previous election. With the surprising news that Donald Trump defeated opponent Hillary Clinton on the 8th of November 2016, the Dow Jones Industrial Futures immediately declined by about 800 points (or more than 4%), only to see the index growing by 256 points the next day. In fact, today, nearly four years later (up to and including 6 October 2020), the same index is trading roughly 64% higher in US Dollar-terms. Investors that acted on the “bad news” by selling, would definitely have regretted doing so today.

2. Higher fees do not necessarily mean lower net returns

I firmly believe that if you monitor and manage your investment costs, you most certainly will benefit from it over the long term. That doesn’t mean, however, that higher management fees are always a bad thing. Let’s use the SA General Equity unit trust sector as an example. Over the last 10 years, only six fund managers managed to outperform the JSE. Interestingly enough, their average total expense ratio (TER) over the last 12 months (at an average of 1.46%) was nearly three times more expensive than the average TER of exchange traded funds in the same sector, so expensive may not always be better, but it definitely isn’t always worse.

3. Not being willing to wait at least 10 years

Graph 2: Average annual returns for the FTSE/JSE All Share Index over different periods (source: PSG Old Oak & Iress)

I often ask prospective clients whether they look at investments through a microscope or a telescope. Shares must never be looked at through a microscope, and although Warren Buffett recommends that a share should be kept forever, investors should, in my opinion, have at least a 10-year period in mind before investing in shares.

When we take a look at the graph showing the returns on shares over a 1-, 2-, 5- and 10-year period, it becomes clear that the longer the holding period, the lower the volatility and the less the chances for capital loss. In fact, when you look at the JSE over the last 34 years, shares have never shown negative performance over any 10-year period. The worst your investment would have performed over any rolling 10-year period, would have been at 4.0% returns per year (excluding dividends). If you add dividends of around 3% to your returns, your worst performance would have been 7% per year, provided you had properly monitored your share portfolio over a 10-year period.

4. A market correction does not necessitate a correction in your portfolio

A market correction, or even a total collapse in the market, usually happens when most buyers fall away and prices are driven by sellers. A market correction, therefore, is no good reason to sell your investments/shares. Let’s suggest that you have done your homework, you invested within your risk profile and nothing really newsworthy happened in the company in which you invested. Why on earth would you want to sell? Out of fear?

Even if you invested in the JSE at the beginning of this year, and watched your investment decline by nearly 30% up to the end of March, the only way you would have made a loss would have been if you had let fear get the better of you and you had sold your shares, as the market is now back to the levels seen at the beginning of this year. Even though history may not repeat itself, it yet again shows us that it’s better to focus on at least a 10-year period.

5. Impatience can cost you dearly

Just because a particular share or investment isn’t doing what you wanted it to do overnight, or even what other shares are doing at any given time, doesn’t mean that you should sell it. Again, ask yourself whether anything newsworthy happened in the company you invested in. Let’s use the “darling” of many investors’ portfolios, the S&P500 over the last 20 years, as an example:

Graph 3: An investment of R10 000 in the S&P500 from 31 December 1999 until now (source: PSG Old Oak & Iress)  

If you invested R10 000 in the S&P500 at the beginning of 2000, your investment value would have varied constantly between R7 500 and R12 500. In fact, you would have been heartbroken to see the value below the initial investment value after the first 10 years. An impatient investor most probably would have cashed in his loss, and in doing so, would have missed out on a portfolio that would have been worth more than R65 000 today.

It’s easy to understand that investors are panicked and impatient, especially with the noise and turbulent times we have experienced so far in this rollercoaster year. It may be extremely difficult to patient right now, but good things do come to those who wait.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

 

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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