| Every day we investors have yet more investment choices piled onto our already overloaded buffet plate – we know that we’re not going to be able to eat them all, and have to make some choices – so what do we do? Put a little bit of each on our plate and hope for the best? Pick the juiciest, the most talked about, the longest history? Unless this is your day job, doing all that analysis to find the best fit will take months, and then you will have to start at the beginning because everything has changed. The financial behavior when there are too many choices is known as “choice overload” or the “paradox of choice.” This phenomenon occurs when an abundance of options makes it difficult for individuals to make decisions, leading to decision paralysis, anxiety, and dissatisfaction with the choice made. Rather than feeling empowered by many options, people often become overwhelmed, resulting in procrastination or poorer decision-making, and even regret after the choice is made. This behavior is well-documented in behavioral finance and consumer psychology (so you’re in good company if you relate) and is especially relevant in investing where too many investment options can cause paralysis or suboptimal decisions. |
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| With that in mind, let me have a stab at simplifying things for you: Money market – this is a good place to start saving (the precursor to investing). Saving is usually short term and capital preservation is key. Because of the need to be more conservative with your funds you’re going to get a lower return, and unless the interest is ploughed straight back into the investment the capital won’t grow. It’s a great place for an emergency fund, for example. Investment is long term, and where you can expect above inflation returns over the long term (otherwise, why bother, right?) Bonds, secured, guaranteed and longer-term investments – these typically give you a higher rate of ‘interest’, but the same caveat of ploughing back returns applies, if you want capital growth. These assets are used extensively in ‘balanced’ investments and pension funds, but retail bonds and participation bonds are also accessible to the average investor. These are somewhere between savings and investments – usually depending on their objective. You are ‘rewarded’ with a somewhat higher return for locking your investment away for 3-5years. Unit Trusts – these are probably the most popular ‘investment’ assets that we all use, and when they were introduced opened up investing to everyone with good diversification – not just those who had the critical mass to invest in a portfolio of at least 15-20 stocks (to get the diversity and not end up with risk from asset concentration.) There are now over 1,833 Unit trusts and 70 ETFs (we’re supposed to call them Collective investments, but the name has never stuck) in RSA. Globally there are tens of thousands of Collective investments and around 8,000 ETFs, with 1,500 added this year alone. These Collective Investments run the full gamut of pure equity, pure money market, commodities and other sectors, balanced (pension fund compliant). ETFs now track everything under the sun, and many of them are no longer ‘passive’ – one of their major selling points when they were first introduced. Make no mistake, AI is going to make this even easier to take over the ‘expensive’ role of human active managers, so this trend will continue to expand. All UT is a bunch of shares that have been bundled together (called a wrapper in the industry) so that you participate in slices of that bundle, and don’t have to have the several million upfront to build a diversified portfolio. You don’t own any of those shares outright, the same with ETFs, it is another way to ‘share’ in a diversified portfolio, at low cost (little or no human intervention). Both these options are both great when you’re building up your wealth portfolios and do not have the critical mass – yet – to be more involved (and you may not have any other option in a company pension). |
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| Share portfolio. Today anyone can own their own share portfolio, here or offshore, without having to go through a stockbroker, and this has increased rather than decreased in popularity over the last decade. Even for a beginner investor, this is a great place to get your feet wet and perhaps understand some of the volatility of the market and just how difficult it is to ‘pick-a-share’. This is one of the reasons ETFs have become so popular. Even active stock managers battle to beat the ‘market average’, so you might as well just buy the tracker. Professional asset managers will use ETFs in a portfolio, for example if they want exposure to gold for example (without buying bricks of the shiny stuff and having to store it, insure it etc.) or in poorly understood markets that have growth potential (say in China). Professionals might also use trackers to ‘park’ funds if there is no clear direction or buying opportunities available. Mixed Asset investments, Bespoke portfolios: This is where it becomes even more tricky for an individual to DIY. Anyone and their uncle can open a stock broking account, but when you want to add bonds, commodities, pref. shares etc. into the mix to mitigate the volatility or get the asset to produce an income it is a lot more tricky. Not only do some government bonds and corporate bonds come with high minimum buy-ins (a minimum R1m for each) but you need to know what proportion to buy of each asset then when and at what price to buy and rebalance them. This doesn’t mean that you have to buy UT, you can use (approved) bespoke and discretionary managers – especially for funds governed by the pension fund act (which, for many of us, forms the bulk of our investments – RAs, pensions, preservers, Living Annuities). The good news is that because you are now getting rid of those ‘wrapping’ fees I talked about earlier, fees often come down and you have much more transparency in terms of how your funds are invested (not the top 10 shares that are disclosed on the UT fund fact sheet aka minimum disclosure document). Your UT fees can go as high as 2%, with even more added as ‘performance fees’, with averages around 1,3%. Some company pensions also allow employees with the ’critical mass’ to go into bespoke portfolios. If you use the same bespoke asset manager to look after your flexible portfolio, then they can invest the entire portfolio holistically – increasing the offshore component for example, if the 45% that you are restricted to in an RA/pension/preserver is inadequate for your long-term objectives. |
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| Offshore investing: As your investment journey evolves, you will probably have added Rand denominated offshore funds to all of your investments, but hopefully there will come a time when you invest ‘properly’ offshore using the SARB approvals. (Please indulge me in a quick rant here. RSA is one of only 30 countries in the world that still have exchange control restrictions. Included in the list are Algeria, Angola, Argentina, Armenia, Belarus, Cameroon, China, Cuba, Ethiopia, Ghana, India, Iran, Libya, Morocco, Myanmar, Mozambique, Namibia, Nepal, Nigeria, North Korea, Russia, Samoa, South Africa, Sudan, Tunisia, Ukraine, Uzbekistan, Venezuela, and Zimbabwe. Kenya lifted exchange controls in 1995 for example.) Most of the large FSPs in South Africa have an offshore presence, usually in the Chanel isles or Isle of Man (IOM), and they have made it easy for Saffers to invest there and have UT/Mutual funds available. At Rexsolom we have taken a different approach, and frankly, if our clients have gone to the trouble of getting SARB clearance, why place the funds in an entity where the head office is domiciled in RSA, and under RSA government oversight. We have chosen to invest our clients out of Switzerland, which is tax agnostic, does not require probate (the Channel Isles and IOM do) and is defiantly not under any RSA government oversight. Sure, it’s an outlying chance that this could be a problem, but with the current government’s penchant of diving into the Nat governments policy dumpster and dragging up things like prescribed assets (from the 1970s), who knows what else they might find? (Who remembers the Financial Rand?) Investing is a journey over your lifetime, and as you accumulate more, you get more choice, hopefully I have helped you upskill yourself a tad. You’re welcome to contact me for a quick zoom session if you need more help. |