Question:
I'm a 22-year-old graduate and have recently started work at a top motor manufacturing company within their graduate program. I live with my parents and therefore have a lot of disposable income at hand.

I'm thinking of investing in the Satrix40 and Satrix Divi and wonder if it's a good idea. My idea was to invest a R1000 lump sum in each with monthly deposits of R300 thereafter.

How well do you expect these shares will perform this year? Is it a good idea to invest in DBX trackers this year taking in to consideration that Europe is having a terrible time economically?

What do you think about the FTSE 100 ETF and Eurostoxx 50?

Answer:
Decisions, decisions…

There is no doubt that the complexities and choices in the investment landscape have grown exponentially over the years. Thankfully, however, there are a few investment principles that have stood the test of time and remain as relevant today as they did in the yesteryear when retail investing was still in its infancy.

Over the years, investors have done a superb job of timing the market spectacularly wrong! The two lessons we can learn from this is that timing the market is a hopeful and seldom fruitful activity. Also, if we want to become successful investors, we need to suppress two dominant emotions: fear and greed.

A clear trend that emerges over the decades is one of chasing the market in a Bull Run. This is where most investors eagerly decide to participate when the ol’ bull is long in the tooth and on his last legs and ignore the cautious bear as he quizzically peeps out from behind the tree. This greed-induced state of optimism is gradually replaced by a gripping fear as you look down on the trusted bull that’s now belly up at your feet and you observe the damage of a ravenous bear that’s just raided your camp supplies. It is normally at this stage that one makes the decision to sell out of the market. We witness record inflows at the market’s highest point and record outflows at its lowest point. The strategy of buying high and selling low becomes a classic wealth destroyer.

So, if we can’t time the market correctly how do we make money? The mantra 'it’s not about timing the market but time in the market' is one that steps up boldly to the fore. Understand that every asset class (cash, bonds, property and equities) behaves in a very particular way. Rule of thumb suggests that the higher the risk (volatility) of the asset class, the higher the expected returns and history stands as a worthy witness to this rule. To focus on the short-term volatility of an asset class and react to this will undoubtedly result in missing out on the long-term returns.

Diversification is also a key determinant in the success or failure of a sound investment strategy as well as a handy mechanism to curb volatility. Much is said about diversifying by prudently spreading your risk across all asset classes. Although these words ring very true, this also suggests that we should all be exposed to all the asset classes and no-one should be exposed purely to equities. Remember, once you understand the behaviour of equities and embrace the volatile nature in return for long-term gains then the diversification argument takes on a new look. Now you need to ensure that your wealth is not exposed entirely or even heavily weighted towards any particular stock, industry or sector.

So, do the eat-well/sleep-well test: If you want to eat well down the line and can still sleep well in times of market volatility, then equities could well be the ideal home for your money. If not, then start looking towards the other less volatile asset classes to smooth out your ride – even if it is at the expense of some returns.

With all this said, where does this leave you? Well, let’s apply the principles outlined above to your scenario.

Firstly, with regards to your question of exactly which fund to put your money into, one could argue the merits and disadvantages of Exchange Traded Funds as well as the quality and performance of various fund managers. However, in the end, what is important is that you are investing in a fund that is representative of the asset classes you would like to have exposure to and you are comfortable with how they will behave.

One very useful principle you do have in your favour as a recurring investor is that of rand-cost averaging. What this essentially means is that, as the market loses value, you will be acquiring more units per rand giving you positive gearing when the market does recover. So to relate this to your question of one-year performance, firstly you should never look at periods of less than five years with equities due to their short-term volatile nature. Secondly, let’s assume that equities show a flat performance for the whole year. That will mean that you get the benefit of buying 12 months worth of shares at current prices.

Finally, should you be looking towards offshore? Well, the general rule is that one should invest in the currency you are planning to spend in. So, unless these funds are destined for the funding of a European trip, my answer would be 'no'. Historically, taking on the added currency risk has not resulted in superior returns to local investing.

As with many investment-related decisions, you would be wise to seek out professional financial advice from a suitably qualified planner. She or he will assist you in implementing a meaningful investment strategy that encompasses the principles above and is aligned to your overall financial goals and objectives. Best of luck!

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