It feels like every second advertisement we see espouses the virtues of choice. We’ve become conditioned to believe that choice is always a good thing and that the more choice we have, the better life is. This is just not true.
Fund managers are essentially saying there are different strokes for different folks, that fund A is more suitable to this person, and fund B is better for that one.
At 10X Investments we don’t buy it. We have a single group of funds that follow one, single strategy. We believe it’s the best strategy, a strategy that works for everyone. We believe this because we’ve tested and back-tested it over more than 100 years, and it has worked without fail. If we offered a choice, one of those options would have to be a second-best.
Why don’t other investment companies offer just their best strategies or funds? Because their best performer one year will not be their best performer the next year. They know that if they have 40 or 50 different options, one of those options is likely to do well each year, and that is all they need to market themselves.
Where does this leave Joe Public? In South Africa there are more than 1,500 unit trusts alone. How can the average investor possibly know which one to pick? How do seasoned fund managers know which to pick?
Being faced with too much choice can be blinding. It can make us feel ignorant about products that are already quite complex. We become even more alienated from how they work and what they are supposed to do. This makes us more reliant on “experts”, such as advisors, who make a very good living off our money. The bottom line is that too much choice puts people off.
The result is that many of us totally outsource our retirement savings plans. This serves the investment industry very well. But investors, like you and me? Not so much.
Here are four steps that will help you cut through the noise and narrow your choice down to the funds you should be looking at. This shortcut starts by understanding that these 1,500 funds are all just variations of portfolios of the same four types of investments: Cash, bonds, property and equity.
These can be divided into defensive assets (cash and bonds) and growth assets (property and equity.) Defensive assets are generally used for short-term investments as they achieve single digit returns most of the time and have low volatility (risk).
Growth assets are generally used for the long run because, while they achieve double digit returns most of the time, they tend to experience high volatility in the short run.
It is very important to be diversified across all types of investments as it lowers your risk. The allocation between defensive assets and growth assets will determine if you achieve your investment goal or not.
If you are investing for the short run, you want to have a higher allocation towards defensive assets, ie mainly cash and bonds, with a little allocation towards growth assets for diversification.
If you are looking to invest for the long run, for example for retirement, you should have a high allocation towards growth assets, such as property and equity, with a little allocation towards defensive assets for diversification.
So if we were investing for retirement, we would look at those 1,500 funds and look for funds that have the majority of the fund invested in growth assets. You will find that there are only around 250 funds that fit your required asset allocation between growth assets and defensive assets.
The next step is finding a fund that has a long-term track record to match your long-term investment goal. You will find that there are only about 70 that have a 10-year track record.
You can further sort these funds by looking at their returns over the years, but do not stop there. While you have sorted them between top performing and lower performing funds, those are not the actual returns you will receive. You still need to remove costs before you can truly know which funds you should be looking to invest your life savings in. While there tends to be a fraction of a percentage difference between returns of the top 10 funds, there can be a 3% difference in the fee you pay to achieve those returns.
These few steps will help you not be blinded by choice. If it still all seems too much, 10X investments offers a free analysis and comparison service.