Tips for managing your portfolio, especially in uncertain times.
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. In this issue I’d like to have a look at five such mistakes I think many investors make when it comes to managing their personal investments, especially in share portfolios.
1. Bad news leads to bad decisions
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 compare it with a negative event timeline, clearly one of the biggest mistakes would have been to sell. The US presidential election is approaching fast, and I can’t help but think back to their previous election. With the surprising news that Donald Trump defeated opponent Hillary Clinton on 8 November 2016, the Dow Jones Industrial Futures immediately declined by about 800 points (or more than 4%), only to see the index jump by 256 points the next day. In fact, today, nearly four years later (by 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 have regretted doing so today.
2. Higher fees do not necessarily mean lower returns
I passionately 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 ten 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 (ETFs) 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 ten years
When we take a look at the graph showing the returns on shares over a one-, two-, five- and ten-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 ten-year period. The worst your investment would have performed over any rolling ten-year period, would have been at 4% per year (excluding dividends). If you add dividends of around three percentage points to your returns, your worst performance would have been 7% per year, provided you had properly monitored your share portfolio over a ten-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. Let’s say you’ve done your homework, you’ve invested within your risk profile and nothing newsworthy happened in the company in which you invested. Why on earth would you want to sell? Out of fear?
Even if you had invested in the JSE at the beginning of this year, and watched your investment decline by nearly 30% upto 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 sold your shares, as the market is now back to the levels seen at the beginning of this year.
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. Let’s use the S&P 500 over the last 20 years, as an example. If you invested R10 000 in the S&P 500 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 ten years. An impatient investor most probably would have cashed in their 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 be patient right now, but good things do come to those who wait.