When investing, just ‘KISS’

Feel free to reach out to PSG Wealth Manager Patrick Duggan directly.

There’s Beauty in Simplicity

As we grow up and experience more of the world, we learn that a topic usually becomes more complicated as we delve deeper into it.

For example, supply and demand is a concept most of us can grasp quickly, but having a deep understanding of how these variables are affected by changes in interest rates, inflation, and trade relations requires further study.

We also find that for those who push past a certain point in any discipline, things seem to simplify again. The detail fades away, you unlearn some of the complexities that don’t seem to matter, and you’re able to distil the subject into the few key points that matter.

True simplicity stems from a thorough understanding and appreciation of the subject. When shared, this simplicity allows the rest of us to make sense of the world without becoming an expert in every field.Every great teacher or writer has this quality. Richard Feynman’s writing can make anyone appreciate the key lessons in physics, and he’ll make you laugh. (Who would  have thought physics could be humorous!)

Complexity For Its Own Sake

“Avoid complexity. Investing isn’t like gymnastics, there’s no extra points for difficulty.” Ed Borgato

Unfortunately, we too often encounter complexity where simplicity is needed. In many cases it’s used to confuse, leaving the recipient with little understanding, and keeping them reliant on the expert.

The financial industry is no exception. Experts highlight the low level of financial literacy and advocate for financial education to be included in the school curriculum, but few contribute to the necessary changes. Most industry players are complicit by using complexity to spread fear and reliance on an industry that is happy to sell a product without having the buyer understand what they are getting themselves into.

The media creates the crisis of the day (or fans the flames), while the financial machine stands ready with the solution that would have solved the previous crisis but has little chance of being suitable for the current challenge.

If there’s anything we’ve learned from the history of the financial markets, it’s that there are a few key lessons that will always apply. Once you approach every new crisis with this knowledge, the world becomes much simpler.

Simple Is Better

Money, too, can be simplified if desired. If it’s complexity you want, then financial product providers will give it to you. There’s a product for every financial fear you might have. But starting here is likely to lead you astray. You’ll need to work out what these mean for you and the lifestyle you want to have. A new crisis might make you second-guess your tactic, taking you back to square one.

A true understanding of money allows you to expand your knowledge of your situation and the life you want to live.

A strategy can then be built on a simple understanding of the concepts of spending less than you earn, investing for your unknown future, providing for short-term expenses, compound interest, and historical market returns, combined with old-fashioned discipline and patience.

We have found that people find the above process easier when it’s facilitated by a caring financial adviser who can educate, encourage, and hold them accountable.

Products may be required, but they’ll be put in their  rightful place.

The choice is yours

In many aspects of life, we can choose between simple and complex. Sadly, complexity is frequently perceived as clever and sophisticated. It’s easy to dismiss a simple strategy when a complex one will make you look smart. With financial matters, nothing could be further from the truth.

The real tragedy is that many people are unaware that financial simplicity is an option. They accept the complexity sold to them with the result of often being overwhelmed and a lack of understanding. In many cases, this leads to disengagement, which itself compounds into long-term consequences.

In our experience, simple and done is almost always preferable to complex and perfect... Clients acting and engaging in their financial affairs leads to a proper understanding of how their decisions will impact their  long-term future.

How can your plan be simplified to remove the unnecessary?

As Ben Carlson, author of A Wealth of Common Sense:

Why Simplicity Trumps Complexity in Any Investment Plan’ suggests, apply a little common sense, and use these easy-to-follow rules to keep it simple:

1. Have a plan that you can stick to through all markets

Creating a plan ahead of time will allow you to take your inherent emotions out of the equation. An investment plan is much more important than what funds or markets you invest in. Having a process will keep you from trying to predict what the market will do next week, next month or next year.

2. Don’t speculate, invest

I’ll let Benjamin Graham handle this one: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

And John Bogle, founder of Vanguard says “By absolute, mathematical definition, speculation is a loser’s game and investment is a winner’s game.”

3. Dollar (Rand*) cost average

This isn’t as fun as putting a big slug of cash in the market at once and seeing your investments rise. But the downside is you could also lose a lot using this strategy. So, invest periodically, either monthly or bi-weekly depending on when you get your paycheck. When the markets are down, you’ll be buying more shares of the funds you invest in. When the markets are higher you will be buying lower amounts of shares. This will keep you honest from making emotional short-term decisions.

4. Don’t try to time the market

Do you have a friend or family member who loves to tell you about the times that they go to the casino and win big? It was because of their superior skill in the game. Think back to how many times they’ve told you about how much they lost.

Probably never. Because we only like to brag about winning. The same thing applies when investors time the market.  They love to tell you how they sold out at the top. But did they also buy back in when the market fell? More likely they held out even longer and missed the rebound. Timing the market requires being right twice – when you get out and when you get back in. You must get the timing right and the direction right. That’s a lot harder than it sounds.

5. Stay away from individual stocks unless you have time to do the homework

You should only invest in individual stocks if you have the time to put in the research and follow them consistently. Even then it is a tough job. If you do decide to invest in individual stocks, make sure it’s only with 5-10% of your overall investment balance so you don’t spread yourself too thin on a few stocks.

6. Have goals in mind with your investments

You should set ranges of outcomes to benchmark yourself along your investment journey. If you plan to retire in 30 years, produce a reasonable goal for capital you’ll need to retire comfortably based on a variety of market returns and saving assumptions. That way you can check your progress along the way to see if you are on the right path to hitting those goals. If not, save more. If you are, stick to the plan.

7. Diversification matters

Diversifying by asset class and within markets is an easy way to spread your bets and lower the risk of major losses. A stock can go to zero. An entire index of stocks cannot. There are times when diversification across markets gives you an advantage by having investments that zig when others zag, even though everything might go down at the same time  (like in 2008).

8. Rebalance

Within your investment plan, you should have an asset allocation plan by dividing your investment funds and asset classes into certain target weights. At least once a year (more if you want to stay closer to your risk tolerance) rebalance to those weights so you don’t stray from your plan. Most fund companies offer automatic rebalancing of your funds, so you just set it up and forget about it.

9. Don’t pay attention to the short-term market movements

It’s good to know what’s going on with your investments but markets rise and fall for several reasons, and they are not always what the headlines say. If you want to know what’s going on find a reliable market observer who has a successful track record.  Don’t watch CNBC. They are a sound-bite network and are usually preaching the wrong investments at the wrong time. Even the well-balanced prognosticators they have on the network don’t get enough time to make their point. It’s like listening to sports radio with people shouting over each over to make their case. Ignore the short-term noise and focus on attaining long-term goals. Is a short-term drop in the value of your retirement portfolio going to matter to you by the time you retire in 10, 20, or 30 years?

10. Match your risk profile and time horizon for all investments

Should I buy Apple stock now? I get this question all the time. I won’t know until you tell me how long you plan to hold it for. Also, will this be a long-term holding in a retirement account or a short-term trade in a taxable account? Do you have a plan for when to sell? A price or valuation target? Are you going to sell if the stock falls? Or buy more? If you can’t answer these questions you haven’t thought about how this or any investment fit your personal investment profile. Your decisions should be based on more than will this stock go up this year.

11. Save at least enough for the company match in your 401(k) (a 401(k) is a retirement savings and investing  plan offered by employers*)

If you don’t know how much to save for retirement when you’re just starting out, at least put enough in to get your company to match. That’s a nice 100% return on your money no matter how the markets behave. From there, put aside just enough so that it’s a little painful to save. You’ll grow into it.

12. Review your investments periodically

Don’t look at your investment accounts every day because that can be counterproductive. If you’re hanging on every tick in the stock market, you’ll drive yourself crazy and make short-term decisions. But it helps to look at your balances and performance on a quarterly or semi-annual basis to make sure things are going according to plan. This helps with your periodic review of your goals. Make sure to aggregate all your accounts together in one place for a broad overview of all your assets.

13. Don’t ever buy a product that makes a promise for an exact return number per year

We’ve all had people tell us about the can’t-miss investment opportunity that their advisor got them into. They tell you they can get 10% a year and never lose money. Or they were promised 8% a year and they’ll never have to touch the principal balance. My first question when I hear about these “investments” is what are the fees you are paying? And is it even possible to take out from your principal balance? Be very suspect when someone makes you a precise investment promise. More than likely, they’ll end up rich on your fees and you won’t know what your limitations are on the investment until you really need the money. If they can really guarantee you that return, why would they share this strategy with you?

Sometimes knowing what not to do is half the battle.

14. Automate

Technology offers so much simplicity with our investment accounts. You can set it up, so your 401(k) plan automatically takes money out of your paycheck every time you get paid. You can also automate your savings to your IRA or taxable investment account on a periodic basis. As I said before, rebalancing your target asset allocation is as simple as setting up an automated trigger on your fund company’s website to make the changes for you to get back in line with your investment plan. Automate these saving and investment decisions and you take the emotion and hassle out of your hands and worry about more important things in your life.

Office news

Christo Oosthuizen has joined our team!

We have recently welcomed Christo to the extension of our Melrose Arch practice in Johannesburg. Christo is a 19-year veteran in the financial services industry, with 12 years of experience advising high-net-worth private investors. He completed his BCom degree in Risk Management at the University of South Africa and his Post Graduate Diploma in Financial Planning at the University of the Free State. He provides tailored advice to every client and strives to establish lasting, trustworthy relationships, guiding them through their unique needs. Christo is married to Mariska,  a medical doctor. They share three lovely children. In his free time, he enjoys mountain biking, fishing, and playing the guitar.

We look forward to adding his expertise to our team!

PSG Wealth Melrose Arch team