In the journey of investing, the path to financial success is simple but not necessarily easy. It involves getting the right investment advice (customised to your needs) – and managing the ongoing emotional rollercoaster (which is often fraught and volatile). Money, does after all bring out the best and worst in us! The CFA Institute did a wondeful piece on the top 20 most common investment mistakes to avoid. We have summarised that into 15 timeless strategies to ensure long-term investment success. It offers insights not just on avoiding pitfalls but on embracing practices that lead to sound financial health. From setting realistic expectations to understanding the importance of professional guidance … these 15 investment principles encapsulate the wisdom that every investor, novice or experienced, should keep at the forefront of their investment strategy.
1. Realistic Return Expectations: The Foundation of Sound Investment Advice
Setting realistic expectations is at the heart of prudent investment advice. In the unpredictable world of market returns, it’s vital to understand that no investment advisor can promise certain returns. A diversified portfolio tailored to your individual financial goals is key. While equities are the asset class that have delivered the best long-term returns (excluding crypto as a relatively new form of asset) – with the S&P 500 delivering annualised returns of 11.89% p.a. since 1990 (in USD), and the JSE top 40, 15.83% over the same period (in Rands) – understanding returns aren’t linear and are extremely volatile is critical. If you look at the distribution of US stock market returns going back 200 years (to 2020) via the diagram below this becomes clear.
The caveat on the returns of the JSE Top 40 is that the Rand has depreciated from R2.62 against the Dollar … to around R19.00 to the Dollar in that time frame. And that our resource sector is not nearly as vibrant and successful as it used to be (which speaks to one of our future points – don’t base your investment decisions on past performance).
2. Set Clear Goals
One of the most valuable pieces of investment advice is to have clear, achievable goals. Your investment strategy should be a roadmap to your life’s ambitions, not a reaction to the latest market trends or investment fads. It’s easy to be swayed by the latest buzz and hype. Chasing returns never ends well. A customised investment strategy aligned to your long-term goals is the most predictable way of achieving what is important to you.
3. Target Returns Above Inflation
Inflation can silently erode investment returns. Good investment advice includes strategies to protect your portfolio against inflation, such as considering assets that historically outperform during inflationary periods. That’s why understanding real returns and what that means is critical. In a South African context, to achieve financial independence, requires achieving an Inflation Plus 5 return over an investment period of about 40 years (while investing 15-20% of your income). As a retiree, having to manage your capital for a period of 30 years plus also means you need sufficient allocation to inflation-beating assets or your run the risk of outliving your capital.
It’s clear in the charts above how equities and property in South Africa have delivered the highest inflation beating retuns over the last 30 years. But! SA Property (outside of the Western Cape) has been in a steady decline for the last 10 years. South African shares had two great decades in the 1990s and 2000s – but since then have also struggled as our economic woes started to accelerate. Cash (after taxes) show that you’re essentially going nowhere. And in US Dollar terms as the Rand has depreciated – how much poorer are we from a global purchasing power perspective?
4. Stay Humble and Keep an Open Mind
Sound investment advice often involves being aware of one’s limitations. Overconfidence can lead to risky decisions. Trying to be a market-timing genius is impossible (even the pros don’t manage it consistently). A humble approach and willingness to seek professional advice can be more rewarding. There is a reason some of the best investors of our times like Warren Buffett, Peter Lynch and Ray Dalio come across as humble. There is a lot of hubris amongst investment professionals. If anything sounds too good to be true, it almost always is. And stay open minded. We don’t know what the future holds so just because something worked before, doesn’t mean it will do so in future. Work with an independent investment advisor you can trust and who is aligned with your vision and goals.
5. Reframe How You Think About Risk
Underestimating risk can be detrimental. Investment advice should involve a realistic assessment of your risk tolerance and capacity. But most people only think of risk when an investment falls in value (often simply a function of volatility – and not necessarily permanent). One of the biggest mistakes you can make, is not taking enough risk and therefore not having enough money to achieve your goals (like retirement). Excessive risk taking or speculating is also not wise – but make sure you have sufficient allocation to growth assets in your portfolio (equities etc.) – to achieve those inflation-beating returns you need.
6. Diversify Correctly ... is Timeless Investment Advice (but not overly so)
Diversification isn’t just a buzzword; it’s a cornerstone of sound investment advice. A diversified portfolio helps balance risk and reward, but beware of over-diversification, which can water down your potential gains. The chart below compares the returns of different asset classes (in USD) going back 30 years, in a period that US inflation is about 3.28% on average. Equities and Real Estate have delivered the strongest returns (like we saw with SA assets), with long-dated US government bonds also doing relatively well in a period where interest rates have steadily declined. But cash as represented by your average money market fund has not outperformed inflation – which illustrates why leaving money in cash does not generate long-term wealth. Therefore blending these assets for example in a way that reflects your goals/needs – could lead to superior risk-adjusted returns over time.
What this also tells us is that US investors have achieved better inflation-beating returns than we have in SA. Investing in US shares for example has delivered returns of about Inflation Plus 7 – compared to SA where equities have achieved returns of about Inflation Plus 5. That’s why having sufficient exposure to offshore investments today is so important.
7. Overtrading Ruins Returns
Patience is a virtue, especially in investing. Excessive trading can lead to higher costs and unexpected risks. Remember, adjustments to your portfolio should be more about learning and less about constant trading. A big red flag, is a portfolio manager that excessively trades (unless that is an inherent part of their mandate like certain hedge funds and quant funds). Over-trading your portfolio will almost inevitably lead to disappointing returns. That doesn’t mean changes should not be made. But those should fall within the framework of your overall strategy, not on short-term sentiment.
8. Investment Advice on Market Timing: Avoiding the Highs and Lows
A fundamental piece of investment advice is to buy low and sell high. However, emotional reactions often lead to the opposite. Stay focused on long-term objectives and resist being swayed by short-term market fluctuations. Most investors underperform the funds or strategies they are invested in, because they are swayed by short-term fluctuations and cognitive biases. Switching at inopportune times and staying out of the market through fear are two prime examples. That’s illustrated by the graphic below. Even if it shows the behaviour of US investors, you can bet it applies to South African investors as well. Investment success is usually measured over decades. Not months and a few years. Staying invested is almost always the best strategy.
9. Rebalance periodically
Rebalancing is a crucial aspect of investment advice. It ensures your portfolio aligns with your risk tolerance and goals. Periodic rebalancing can help maintain your intended asset allocation.
10. Don't Ignore the Impact of Fees (and be tax efficient where appropriate)
Effective investment advice always considers the impact of fees and taxes on returns. Neglecting these can eat into your profits. Work with a financial advisor to structure your investments in a tax-efficient manner. But at the same time, tax consequences should never be your primary consideration. And be aware of all the costs of your investment and how those can eat into your returns. A good financial planner will help you with both. That’s why we’re firm believers in a fixed and flat-fee approach.
11. Past Performance is Exactly That
One common mistake in investment advice is chasing past performance. Remember, past performance is not indicative of future results. Focus on your strategy and goals, not historical returns. A seductive past performance record has no bearing on future returns. Understand where the world is moving and plan accordingly.
12. Underrated Investment Advice: Avoid Media and 'Noise'
Investment advice for navigating market noise and media bombardment: stay the course. Because a trader or analyst on TV/the internet has a view or makes a call, doesn’t make it right (or a good one). Making a decision on an economic forecast is also a recipe for disaster! Look at how many economists and pundits were calling for a recession and terrible market returns at the start of the year (and the S&P 500 is up about 15% so far and the Nasdaq around 30%). Stick to your investment plan. Paying too much attention on the short-term and recent performance is also not helpful. Measuring how your investment is performing in 5-year increments allows for a more balanced view.
13. Emotional Investing is Dangerous
Emotionally driven decisions can be costly. Reliable investment advice promotes rational decision-making, based on research and analysis, rather than emotions like fear or greed. Behavioural finance and the psychology of investing are fascinating fields. A good financial planner is worth their fee alone, if they can help you get out of your own way and stop you making catastrophic investment mistakes (like trying to time markets, or switching in-and-out of investments at bad times).
14. Make a Start and Stay the Course
You need to make a start. It’s easy to make excuses about why now is not a good time. ‘Markets are expensive.’ ‘I’ll wait until markets recover.’ ‘There are bad things happening in the world.’ There never is a perfect time and always something to worry about that makes conditions less than ideal. And then once you’ve started – be disciplined and stay the course. As we like to remind our clients – investment success is measured over decades. Below is a very helpful image that shows a likely range of returns for a well-diversified investment portfolio – and that how the longer you stay invested, the more predictable (and less risky) your investment becomes. The risk of losing money in the first 5 years is distinctly possible – but by year 10 that risk is almost zero. And over 20 years – you could generate a return of anything between 5.8% p.a. and 16% p.a.
15. Know Your Investment Performance
Educating yourself about investing is invaluable. And knowing what returns your investments are actually getting and how that tracks to achieving your goals is critical. Do you know how your retirement funds are performing? What about your other investments? And how does that translate to your long-term plan and what returns you need to be achieving? Staying informed and educated will go a long-way to achieving success.