Ten crucial lessons on investing in South Africa

*This content is brought to you by Carrick Wealth, leaders in wealth and capital management

By Steve Brooks* 

Investing is serious business and can be fraught with pitfalls for part-time novices and professionals alike. Mistakes are sometimes made, but those of us who learn from them are better equipped going forward. Steve Brooks, Director at South African investment and wealth management firm Carrick Wealth, has over 25 years’ experience in the wealth management industry, from the UK and the Middle East, to Hong Kong and Singapore. He shares with us a number of investment mistakes that are often made and important lessons he has learnt over his career.  

It should, however, be stressed that these are his personal views and should not be construed as professional advice. As each person’s circumstances vary, one should always consult with a professional financial planner. Here are Steve’s lessons.

Lesson 1: The one thing above all that everyone will agree on, is that no-one has all the answers and every expert can, and will, get it wrong at some point. But it can be learnt from and corrected.

Lesson 2: Take economists’ predictions with a pinch of salt. I have sat through hundreds of seminars of top industry economists and investment gurus and it’s often the same – justifying why they got it so wrong last time, and why this time it’s different.

Lesson 3: There will ALWAYS be ‘an unexpected turn of events’ whether it’s Brexit, war, famine or even Donald Trump. So, the question that rattles around in my head is, if everything is uncertain, why do we try to predict the future? We can’t, but we can at least factor in possible or likely future events and potential future variables.

Lesson 4: Diversify. I will come back to this shortly, but it still amazes me how many people have heard this term a thousand times yet are still not diversified. Diversification includes geography, currency and asset class.

Lesson 5: Seek Independence. Stock brokers always predict that stocks will go up each year, and bond brokers predict bonds rising, property experts forecast property increases, and so on. This shouldn’t be a surprise. But if their advice is not impartial, why listen? You need to seek advice from an Independent Wealth Manager.

Lessons 6: Everything that goes up, must also come down. So, don’t panic when stocks fall and don’t get carried away when things rise sharply. Too many investors will buy and sell on emotion instead of logic. Be patient.

Lesson 7: Ignore what people around you are saying, especially when it comes to how much money they have made in a specific fund. Just like gamblers, people often only tell you of their ‘wins’.

It’s what they don’t tell you that matters.

Lesson 8: Before you look to make money, you should first look to protect what you have. Two of the biggest threats to your money – often overlooked – are inflation and taxation. One person recently told me he makes 12% p.a. guaranteed returns on his property. But when we deducted tax, running costs, management fees, rates and periods of time when the property had no tenants etc, his net return was only around 3% p.a. After we deducted inflation at 6%, he was actually making a 3% loss p.a. And that’s even before I raised the topic of estate duties.

Lesson 9: KISS – (Keep It Simple Stupid). This is why I believe I have always maintained good steady returns. I start with asset classes that have always outperformed inflation in the long run. I then compile a portfolio of these asset classes (diversification) where one will typically go up when the other goes down, therefore smoothing out the volatility. For example, I hold both gold and stocks in my portfolio. When stocks crash, gold tends to spike. Yet both these asset classes grow well in the long term. Also, when one spikes, I transfer some gains to cash, and when one drops, I invest more cash in that asset class because it’s cheap.

Whilst this a very simplified explanation of how I, or discretionary fund managers that Carrick use, construct a portfolio, the fact is that this strategy has consistently worked. Portfolio creation is obviously more complex and may include bonds, cash, structured notes, property and so on, but the principle remains the same.

Lesson 10: Examine the costs but don’t let the tail wag the dog. ‘Expensive’ doesn’t mean better, nor does ‘cheaper’. Seek value for money. There are times to be ‘active’ and times to be ‘passive’; and times for exchange-traded funds (ETFs) and times for unit trusts. In fact, some economists predict that ETFs could be the cause of the next financial crisis.

Finally, here are some questions to ask yourself:

• Do you know which ETFs are physically-backed and do you know which active fund managers consistently out-perform their indices?
• Do you know which structures to put your investments into, i.e. the ones that will be tax efficient for estate duties, or for capital gains tax or even for income tax?
• Do you know how to truly diversify your portfolio, not just here in South Africa but overseas too, in different markets and currencies?
• Do you know how to pass on your investments to your spouse and children in the most tax-efficient manner?

If the answer is NO to any of these questions, do you have a trusted professional adviser that can take care of all of this for you – one that has both local and global exposure? Is your trusted professional a true independent wealth manager or is he a tied financial adviser that specialises in life insurance?

If you have any questions, please feel free to contact me at [email protected].  I will be happy to help.

• Steve Brooks is a Director of Carrick Wealth and a highly experienced investment and wealth management professional with over 25 years ‘experience. He has worked in the financial services industry in the UK, Middle East, Hong Kong, Singapore and South Africa. Steve holds a Diploma in Personal Financial Planning (Dip PFS), is an accredited European Financial Adviser (EFA) and is a Certified Associate of the Institute for Bankers, South Africa.