Exert control and grow your wealth - STANLIB tell you how it's done

As an average saver and investor you can’t control investment markets … but you can control yourself. Try it some time. You’ll be surprised how good the results can be.

That’s the fourth quarter investment tip from STANLIB, South Africa’s largest unit trust company and a keen observer of investor behaviour at critical times in the equity market cycle.

We’ve recently entered one such phase and STANLIB is concerned that retail investors will repeat the typical mistakes associated with periods of increased volatility.

Recently, some sectors (financials for example) have dipped quite markedly. Yet economic fundamentals remain sound and many investment professionals believe equities are still the asset class with most upside potential, given a little patience.

The question is: How will the consumer respond?

Says Kim Zietsman, head of single-manager unit trusts at STANLIB: “Market weakness can deplete wealth, but so can destructive investor behaviour. When both variables are negative, investments take a double hit.

“You can’t change the market, but you can change your response to it. Get that right and you have twice the chance of making money when markets become wealth-enhancing.”

US equity markets between 1983 and 2003 illustrated the doubling effect. They achieved average annualised growth of about 13% in that period, but the average investor enjoyed only half of that.

The market didn’t halve the individual’s wealth-building power. The investor did that to himself through wealth-depleting behaviour.

How do you avoid destructive tendencies like this? Zietsman has compiled a list of ‘stop orders’ to help you exert control …  

Stop outsmarting yourself … you can’t time the market. Nobody can. The best days in the market often follow periods of steep decline or sideways drift. In 2001, US equities in the S&P 500 lost 11.9% and went down another 22.1% in 2002, but in 2003 were up 28.7%. In China, equities lost 24.7% and 14% in 2001 and 2002, but were up 87.6% in 2003. The lesson? Get in and stay in.

Stop getting so emotional … fear of loss is stronger than confidence in success. After suffering loss, we retreat. When memory fades, we re-enter the market, missing the intervening period of solid wealth accumulation. Confidence often soars just before a market slide. Beware the feelings of fear and exuberance – they deceive you every time.  

Stop being impatient … investors who make money commit to the long term. That means three to five years in the case of equities, the asset class with the best historical record for wealth creation. Switching across funds, categories and asset classes on the basis of quarterly results compounds your costs with no assurance of success.

Stop being unreasonable … for reasonable results you have to set reasonable goals. Many people fail to set proper targets because they don’t examine their real needs. Look seriously at your situation. Call in an adviser for third-party objectivity. It’s no use adopting an aggressive investment plan if your core need is capital preservation.

Stop being so one-tracked … spread risk by spreading your options. Consider a range of asset classes: equities, property, fixed-interest, onshore and offshore. Alternatively, use an asset allocation product for built-in diversification. The market won’t continually favour one single asset type or one investment style. Rather than placing a single ‘bet’ and moving it around as markets shift, use a diversified strategy and stick with it.

Stop lying to yourself … you CAN afford to save. You CAN stick to a long-term plan. Some unit trusts are accessible for R50 a month. Make a household budget, see where you can save and commit to sensible long-term investment. Use a monthly debit order to entrench the habit.