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The best ‘guess’ for SA macroeconomic indicators through 2010

05 February 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

On Wednesday, 3 February 2010, we attended an Association of Savings and Investments SA (ASISA) presentation of Collective Investment Scheme (CIS) statistics for the final quarter of 2009. It’s at meetings like these that you uncover the ‘big’ numbers edi

Do you care how many unit trusts you can choose from? Does it help to know which fund is the top-performer on a quarterly basis? And is a pie chart telling you where CIS investment flows end up really helpful? Statistics are only useful if you want to know the history of the industry, or if you’re the kind of investor that likes to follow the herd. We’ll shelve the statistics for another article and rather focus on the consumer perspective shared by ASISA deputy chief executive, Peter Dempsey.

Making sense out of the numbers

The statistics highlight a number of interesting trends. Top of the list is the growth in so-called direct investment. “There’s been quite a dramatic increase in the amount of investment done by private individuals into CIS,” said Dempsey. Five years ago consumers were directly responsible for approximately 18% of the inward investment into the CIS industry – today they account for more than 28%. On closer inspection we learn that these consumers prefer the security of money market and other fixed income unit trusts. Is their caution appropriate?

To answer this question we need to determine why consumers choose to purchase unit trusts without the assistance of a financial adviser. Direct investors require a certain level of sophistication to make investment decisions, including the asset class, fund, sector and which management company to choose. Dempsey observed: “The non-advised consumers are avoiding costs.” But in doing so they are also foregoing the returns they could be earning with a more balanced unit trust portfolio.

Direct investment is also subject to the full spectrum of behaviour driven mistakes. Dempsey referred to the tendency for unit trusts to attract huge inflows in the days after being named top-performing fund in a particular sector. Non-advised investors – and to some extent financial advisers – use hindsight to pick a future performer. “Hindsight is a very dangerous mechanism to use when making investment decisions,” said Dempsey. It’s a strategy destined to fail. Extensive studies confirm that an investment (this year) in last year’s worst-performing unit trust fund would outperform a similar investment (this year) in last year’s best fund over 10-years. Ironically, the study to confirm this relied on hindsight to reach its conclusion.

Another investor error is referred to as the ‘following of funds’. Investors exhibit typical herd mentality by chasing the most popular unit trust category based on latest statistics. “Your investment time horizon is a key part of your financial portfolio,” noted Dempsey, repeating the oft-used ‘time in and not timing the market’ phrase. An inappropriate time horizon typically results in a poorly structured portfolio… Investors have to understand the trade-off between risk and reward. “The moment the reward goes up, there’s higher risk; the longer the time period, the lower the risk,” he said.

A four-step practical budget

What should consumers do? Dempsey kicked off the advice section of his presentation with this handy disclaimer: “Whatever I say today does not constitute advice in terms of the FAIS Act!” He mentioned there were plenty of financial models in use and that his guide was a simplified cross-section of financial protection every consumer should aim for. You can complete a basic financial assessment by considering your needs under four simple headings. These include reserve funds, risk and disability cover, medium term goals and long-term wealth creation. Dempsey took a look at each of these ‘headings’ in more detail, suggesting the product most appropriate to fulfil each need.

Your reserve fund should cover financial emergencies – such as motor vehicle repairs, broken appliances etc. A reserve fund provides a buffer to handle items not included in your monthly expenditure budget and should amount to between one and three month’s salary. You might choose to keep your reserve funds in a bank transmission or savings account, in a money market unit trust or other suitable savings instrument. Your main concern should be to ensure immediate access to the funds.

After a complete assessment of your individual circumstances you should take care of your ‘risk’ needs. Life and disability cover is essential if you have dependants. You should also make sure you have some form of medical insurance (by joining a medical scheme) and, if possible, purchase cover for your assets. Protecting your household contents and motor vehicles under the ‘risk’ heading is a sensible strategy. Saving for medium term goals such as holidays, a new car or university fees is best accomplished with general equity unit trusts or endowment policies. And long-term (five to 30-year) goals can be achieved with general equity unit trusts, asset allocation unit trusts, endowment products and retirement annuities.

Products for retirement

The financial planning process doesn’t end when you retire. You have to apportion the wealth accumulated over your working life in a sensible fashion. There are many financial products to help in retirement. Dempsey said a sensible retirement portfolio could include unit trusts (including income, money market, general equity and asset allocation funds) and living and guaranteed annuities.

Editor’s thoughts: Non-advised investors are adding risk to their investment strategies without the necessary additional return. Rather than struggle through the investment morass on your own, you should approach a certified financial planner to give you pointers. Start early – get sound financial advice – and retirement need not be a daunting event. Would you add anything to the four steps introduced in today’s newsletter? Add your comments below, or send them to

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