What the retirement industry wants you to believe.
The investment industry can be confusing at the best of times, and misleading at the worst. There’s a lot of complexity out there that has made people believe that investing is hard, and that paying high fees for advice is the only way to make good investment decisions. We disagree. We want to help you make the best investment decisions by busting the following common investment myths.
Myth: Costs don’t matter.
10X Fact: Costs matter the most!
Costs have a dramatic impact on your long-term savings outcome. But this only becomes obvious once fees are seen in their proper context.
The proper context is the long term investment return above inflation, called the real return. A realistic real return expectation for a High Equity Portfolio is 6.5% above inflation. Every 1% in fees thus reduces your real return by almost 15%. More importantly, this compounds over a 40-year savings period so every 1% in fees you save increases your real return by 30%! Most individual investors pay total fees of around 3%, which is 2% too high. Saving 2% in fees will increase your final investment by 60%.
* National Treasury, Charges in South African retirement funds, July 2013.
We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.– Morningstar® FundInvestor SM Study 2016.
Morningstar is a leading investment research company.
Myth: Top fund managers can reliably beat the market.
10X Fact: Index funds outperform managed funds.
Investing is a zero-sum game, before fees: all investors together can only earn the average or market return. For one investor to do better, another must do worse. After fees, it becomes a losing game as all investors together earn the market return less total fees paid.
The odds of beating the market return consistently are low: less than 1 in 5 fund managers do so after fees over 20 years. The odds of picking the winning fund manager are also low: studies show that irrespective of past performance, future performance is virtually random.
Investors who rely on active fund managers are speculating. It is like playing Russian roulette – but with only one chamber empty!
"1 in 5 fund managers fail to so": "SPIVA Statistics & Reports, Dec. 31st 2015"
Most individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.– Warren Buffett
Myth: The more choice the better.
10X Fact: Choice is confusing and expensive.
Investment choice — the ability to pick from a selection of funds and fund managers – penalises investors in two ways.
Firstly, choice adds to costs, but not to the return. Few investors exercise choice as over 80% of investors with choice end up in the default portfolio. Secondly, those few investors exercising choice tend to make poor choices. They focus on recent performance; they buy what has done well, and sell what has done poorly. This often amounts to a ‘buy-high sell-low’ strategy.
You pay for investment choice, whether you exercise it or not. The added cost lowers your return and your final pension. You would be better off with just one optimal solution.
Buying funds based purely on their past performance is one of the stupidest things an investor can do.– Jason Zweig, Wall Street Journal
Myth: Stock market volatility creates investment risk.
10X Fact: Your investment risk is not meeting your investment goal.
The investment industry and the media fixates on short term stock market returns with daily “expert” market commentators and forecasts. The industry equates stock market fluctuations with risk.
However, no-one can predict where the stock market is going in the shorter term (anything less than 3 years) and stock market returns are always unpredictable and volatile over shorter time periods. However, longer term returns are far more predictable and less volatile.
Your investment risk is not having enough money when you need it, in other words failing to meet you investment goal. You can fail to achieve your investment goal because you saved too little, your return was too low or your fees were too high. It’s really no more complex than that and stock market volatility has nothing to do with your investment risk.
You must manage your investment risk by having a defined goal and a sound financial plan to meet your goal. A financial plan comprises of a savings plan (how much to save and for how long) and an investment plan (where to invest your savings).
No one knows where the market is going – experts or novices, soothsayers or astrologers. That’s the simple truth.– Fortune Magazine
Myth: My money is safe with a big institution.
10X Fact: The retirement industry hides poor outcomes/high fees through low transparency.
The retirement fund industry is not transparent. Investment managers do not report total fees, and only disclose the net investment return. Investors accept this in blind faith and disengage from the savings process.
But to make informed decisions, you require full disclosure. In particular, you need to know all fees, as total cost is the single most reliable predictor of your fund’s future performance. Your annual statement should therefore disclose the rand amount of all fees paid and quantify the impact of total fees on your projected investment balance at retirement. This information will engage you and allow you to make informed decisions.
The retirement fund industry is characterised by poor disclosure, which can contribute to high charges and harmful inertia, as consumers are not able to compare products.– Pravin Gordhan, Finance Minister.