Money just got tight

Steven Nathan, CEO at 10X Investments.

The one small thing that can make a big difference.

The end of the year means something a little different to each one of us. However, there is one thing that applies across the board - money starts to get tight. More often than not people are paid their salaries earlier in December, which means it’s a longer than normal wait for the January pay cheque.

“While your income is the same, overall expenditure during December is often higher than usual,” says Steven Nathan, CEO at 10X Investments. “With this expected money shortage, it might be a good time to start thinking of ways to get more value from your expenses…”

Nathan points out that one of the areas few of us think to examine is our long-term investments. “This is because it’s so hard to see ‘savings’ in this scenario. You’ve committed to investing the money either through a unit trust, a retirement annuity, or some other investment vehicle. You’ve have made the necessary sacrifices in your budget, so where’s the saving to come from?”

The answer to this is that it is in the fees. He explains that it is those small, seemingly inconsequential amounts charged on your investment value. “The amounts are so small, and pretty hard to see, that one hardly notices them. In fact, most people aren’t even aware of that they’re paying fees.”

The tale of two brothers

“The thing is, the cost of your investment (the fees) can have an unexpected and dramatic impact on your final return,” Nathan says. To better illustrate this, here’s the story of two brothers: Josh and Marc.

Josh and Marc were born barely a year apart, and practically grew up as twins – Marc even held off studying for a year so he could attend varsity with Josh. However, things changed after varsity. They both got similar paying jobs, but in different provinces. Life changed, and so did their behaviour.

Marc decided that he needed to start an investment portfolio and approached a financial advisor. With the help of his Financial Advisor, he put together a complex array of investments that would give him the best return for his investment.

Josh, after doing a little research, chose a different path and decided to go directly to an investment company. He invested his money into a high equity, low cost index tracking fund, leaving it alone to simply grow with the market.

About 20 years later, Marc and Josh were catching up and the subject of investing came up. Marc shook his head, explaining that after 20 years he would have thought his investment would be a lot bigger that it really was. He had, after all, been following his Financial Advisor’s advice and moving with the various trends. Josh shrugged and told him about his investment.

Not only had he outperformed his brother, but he had done so by quite a bit. They sat and worked out that if they both continued the way they were, Josh would end up with around 40% more after a further 20 years of saving.

Take the small step and make the switch

The facts were simple, points out Nathan. “Because Josh invested in an index tracking fund that simply tracked the market, he was able to eliminate a whole host of costs. By keeping his costs low, around 2% less than his brother, he got to keep more of the returns he gained. Over time, those extra returns compounded, simply adding more and more to his investment.”

He adds that what also worked in Josh’s favour is the fact that around 75%[1] of active managers, like the ones Marc was investing with, are unable to outperform the average market return after fees. “All the time Marc was chasing the best performing funds and managers; he was most likely buying high and selling low. Josh simply gathered the market return, not trying to “beat” anyone else.”

Luckily for Marc, and anyone else looking to optimise their savings, it’s never too late to switch to a low cost, index fund. Nathan says that this is one of the few switches recommended. “Switching providers should be a relatively simple procedure. Switching a unit trust is pretty straight forward. You disinvest, receive your balance, and you can reinvest - all within days.”

He continues by explaining that switching a retirement annuity, if you move from one investment company to another, should take around 4 weeks. “This will realistically double if you are moving from a life insurance company to an investment company, due to the slightly more complicated set of procedures that the life insurance company must perform to facilitate the switch.”

If you have what is commonly referred to as an “old school Retirement Annuity (RA)”, you could be looking at some form of penalty for moving. “However, paying the penalty might still be worth it, if you have time on your side. Due to the massive long-term impact higher fees have on your final investment return, taking a financial hit now could be gained back, and then some, over reasonable time,” points out Nathan.

“The approaching New Year is all about reflecting on the year that’s gone by and starting fresh. Give yourself the best present ever, and cast an eye over your investments. Ask how your money is being invested, and find out how much you are paying for that investment. Taking note of that small thing will make a world of difference in the long run,” Nathan concludes.

Aimed at exposing the high investment fees that South Africans are being charged by retirement funds, 10X Investments recently launched the #StopDaylightRobbery campaign.