Money tips: How to avoid going broke in a fast-paced world – Dawn Ridler

Thirty years ago brokers were making big money selling endowment policies and other products on the promise that you would enjoy a huge windfall after sacrificing part of your salary each month to put into one of these vehicles. Compounding of returns was hailed as the miracle behind the exponential growth you could expect to receive at the end of the investment term. But these savings haven’t delivered. This is partly because of staggeringly high costs, levied by financial services companies, that have eroded your wealth – but also because the world has changed at an ever-faster pace, leaving these products behind. Johannesburg intermediary Dawn Ridler explains why long-term is no longer a very long period of time in the investment world and why knowing the nuances of the gold price will no longer impress your friends around the braai. – Jackie Cameron

By Dawn Ridler*

In a world of short-termism, be a contrarian.

Dawn RIdler
Money expert Dawn Ridler

It’s not your imagination, the world is getting faster. Lifecycles of technology are ever shorter, and one cannot help but think that ‘built-in obsolescence’ has become the norm in hardware and appliances – forcing you to buy-up or replace every 2 to 3 years. Apps now have a shelf-life of months. Gone are the days when your trusty Nokia could be dropped from a second-floor building, run over by a car and still work. Nowadays they break if your cat sneezes on them. If you manage not to break the phone then the battery seems to die rapidly after the second birthday. Day-traders in currency and stock markets are now so prevalent they have the power to bounce currencies all over the place – and unfortunately, our currency is one of their favourites.

Long-term is now seen as five years, not ten or fifteen. Investors are addicted to the day to day movements in stocks looking for reasons why, when there is often none. Occasionally there is a dramatic move in a stock in the double-digit percentage range, usually for a specific reason, those we need to know about. Steinhoff, Sasol and African Bank come to mind. Every day, irrespective of which radio station you tune into, you get the exchange rates and gold price. In a vacuum they are meaningless (you probably don’t even hear them anymore unless they come with some perspective), trends are important, but that means looking beyond today and putting those meaningless numbers into some sort of order, and seeing if there is, in fact, a trend.

Only gold bugs care about the gold price anymore, it is just a nice comfortable reminder of the good old days when we were king of gold. Not even 5 years ago, a well-respected investment advisor told me he would never employ anyone who didn’t know that day’s gold price – in my opinion, the price of bread or milk is way more important.

We live in an econo-political world, you can’t understand what is happening in the economy without looking at politics. Even ‘pure’ business channels like Bloomberg understand this and economic news is scrolled side by side with political news. Unfortunately, stock markets are not perfect and open to manipulation and companies can play dirty and get away with it. So-called market analysts can publish a bogus report that drives down a stock – a stock they have ‘shorted’ (and SA Inc has been caught out more than once).

If you’re not familiar with this little game of ‘shorting’ it goes like this: A trader believes a stock is going to fall in the near future, so he borrows the stock, sells it immediately and waits for the stock price to fall before the time is up, buys it at the lower price and returns the shares to the borrower, pocketing the difference between the high selling price and the lower buying price. This is usually risky and requires quite a bit of skill – which brings in the shady ‘analysts’. Sure they usually get caught out and might be banned – so they make sure it is a big payday. It is called ‘shorting and distorting’.

One of the most difficult things about investing wealth (once you’ve wrapped your head around concepts like diversification of asset classes, alignment of yield and objectives or realistic volatility and returns) is to stop fiddling and let it do its work. If you obsess over every share price movement or exchange rate wobble and adjust your portfolio accordingly – you are not going to have a happy ending. If you love the thrill of being a day-trader, hive off excess capital and play to your heart’s content. The odds of succeeding are not much better than gambling and will probably give you the same highs (and lows).

Stocks move in fits and starts, they never move in a nice straight line. If you panic and sell, you are probably going to sell at the bottom of that little correction – because there are highly sophisticated ‘algos’ or programs that will have reacted before your fingers touch the keyboard. You will also have incurred ‘trading costs’ in selling out (and then buying back in – usually also too late).

That doesn’t mean that you ‘buy and hold’ forever. Macro trends in the economy will dictate just how much stock it is prudent to hold as a percentage of your portfolio. For most of my clients right now that is probably the lowest it has ever been, less than 50%, and closer to 40%. In the past ‘growth’ or long term investments had as much as 75% in stocks (and if property is included, even higher).

The divvying up of your investments into the various asset classes is the real skill – knowing what to put where, and when to move it. If you can do this magic, then you can go the ETF route to bring down the costs (but make sure the index is properly diversified, our stock exchange is very top heavy and move in just one stock – Naspers – can give you nauseating volatility. ETFs in this country are expensive when you add it up. Unless you have the investment savvy and sophistication to ‘balance’ your own portfolio, you’d be better off with a low-price balanced fund (low cost is 0.6-1% and unfortunately excludes many of the well-known funds).

  • Johannesburg intermediary Dawn Ridler, MBA, BSc and CFP ®, has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.

Also by Dawn Ridler:

Four Retirement Annuity (RA) traps to avoid. Quick wealth-building tips.

Why you should love Retirement Annuities: wealth manager

Wealth preservation: How to draw your retirement income

Tax-free investments: Do Retirement Annuities make financial sense?