Don’t be intimidated by investing – here’s how to do it
24 February 2016
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Welcome to the latest edition of Old Mutual Live Business, my name is Chris Gibbons. So, you’ve decided to invest for the future, maybe for your retirement or your children’s education or maybe you’re looking to fund the new car or an overseas trip. You’ve heard that stocks and shares are the way to go, but don’t know much more than that, so where do you start?
Is this something you can do on your own? Do you need an advisor? How do you decide just what to put into this share portfolio? We’re joined now on Old Mutual Live Business by Gregg Sneddon whose Cape Town based company is called The Financial Coach. Gregg, welcome, thanks for your time. I want to start investing, my buddies all tell me around the braai that stocks and shares over time give the best returns, where do I go from here?
Give investments a chance to grow
Gregg Sneddon: Hi Chris, I want to pick up on that quickly and that is you’ve just mentioned investing and time, over time. The first thing to stress is that if you’re going to invest in shares, you need time. Before you commit any money, make sure you’ve got time to ride out the ups and downs. By time I’m thinking at least 10 years.
If you’re needing to access this money in periods shorter than that, then stocks and shares or equities are probably not the best way for you to go, there are other ways to do it. Assuming you’ve got time and you’ve got a long term track record, then yes, you can be buying equities. I am not a fan for the average investor of investing into a share portfolio. I think you can do a lot better by buying something called a Tracker Fund.
What is a Tracker Fund?
CG: Okay, before we get to Tracker Funds, is that different from a unit trust and what’s a unit trust?
GS: Okay, a unit trust is a trust fund where you as the investor purchase units and it’s a very efficient, cost effective transparent, flexible way to invest money. A Tracker Fund could be a unit trust fund, or it could be an exchange traded fund which is something you buy and sell on the Johannesburg Stock Exchange or on a stock exchange.
A unit trust is just an investment vehicle, an exchange traded fund is an investment vehicle and you could get, we need to distinguish, I guess, between an active and a passive fund. A Tracker Fund is what we call a passive fund. It’s effectively or essentially managed by a computer and if you buy a Tracker Fund that tracks the whole of the share market, you would end up owning every single share on the share market.
CG: When I hear on the radio someone saying: the JSE is up 1% or the JSE is down 1%, my Tracker Fund will match that exactly?
GS: Exactly, there’ll be a small tracking error because there’s a small fee involved, but essentially your Tracker Fund will do exactly what the market does whereas if you bought an active fund or if you tried to buy and sell shares yourself, you would, instead of buying the whole market, you might pick five or six or ten or fifteen.
Then your performance, your return would be completely different from the market. It might be worse, it might be better. Statistically it’s going to be worse, especially after fees. For the average investor, I would advocate buying a Tracker Fund.
Can you control your own shares portfolio effectively?
CG: Before we make our decision, my buddies tell me that they make their own selection of individual shares, at least for some of their investments and their banks offer them an affordable way of doing this online. They do their homework, they decide which shares to buy, which shares to sell and they take care of themselves. Isn’t that an option?
GS: Of course it’s an option, but who really has the time and the expertise to do all the research? The average investor does not have that and I think there’s an excitement and kind of a bit of bragging rights, oh, I own X share or I bought this share today and I sold this share.
To me it’s a little bit like going to the casino. You don’t hear of the chaps who lose money at the casino. You only hear of the winnings and those are very few and far between. To buy and sell shares, it’s a zero sum game. For every person that makes money, you’ve probably got about 10-15 people that are losing money, that’s just the way it works.
So, internationally, fewer than 25% of professional investors, that’s portfolio managers, manage to beat the market and when you take fees off, it’s even less. I’m stressing, the average investor just go and buy yourself a good Tracker Fund.
You can set up an online trading platform and there are many that are available, check out all the fees, check out the costs involved, check the terms and conditions, but I can guarantee, you’re going to be better off long term by buying a passive Tracker Fund.
Can I invest overseas?
CG: You buy the market of course the costs are so much lower. Tracker Funds, do they just apply Gregg to South African shares or can I also get exposure to overseas markets?
GS: Chris, you can get a Tracker Fund to just about anything, anywhere in the world. The cheapest Tracker Fund that I’m aware of in South Africa lets you buy the whole JSE for R200 a month and has an annual fee of 0.2%. That is just, that’s unbeatable, in my opinion.
You can buy an offshore Tracker Fund which buys, I think it tracks the MSCI World Index which is about the top 2000 shares in the world, give or take. You could buy that for R200 a month as well. To me, you just can’t beat that. You want good long term, solid long term returns at low fees, that’s the way to go.
CG: The markets seem to be very volatile right now and they have been for a while, sharply up one day, sharply down the next, how do I know when it’s the right time to buy?
Is there a perfect time to buy?
GS: I don’t think anybody knows and anyone who tells you that they know, run far away from them. There are certainly times when the market is more expensive and there are times when the market is cheaper and there are times where nobody knows. That’s why we stress the importance of time when it comes to investing.
You need to have time. Obviously the final return will be a function of the initial price that you pay and the lower the price that you pay the better the return will be long term. But that’s why it also makes sense to invest on a monthly basis via a debit order or a regular contribution because then you’re doing something, what’s called rand cost averaging.
You’re buying through the highs and the lows and over time you’re kind of averaging out the price. So, the market is incredibly volatile at the moment, but we need to remember, as investors, that this is what the market is like. We’ve just had 7-8 years of fantastic returns and we’ve forgotten how risky markets can be.
The risk of you losing money from the share market is about 20% in any given year, but it hasn’t happened for so long that we’ve forgotten that it happens and now when it’s happening, we’re all panicking, it’s not the time to be panicking.
If you’ve got more cash, maybe it’s time to be buying, so when the market crashes or falls or tumbles, I guess the best way to view it is the market is having a sale. If you were prepared to buy a share that was trading at R50 and you thought it was good value and it’s now trading at R45, well, it’s even better value. If you’ve got some more money, go and buy.
How do know you is shares are fairly priced?
CG: Just come back to the question of pricing. A good investment always starts out with paying the right price. How do I determine whether a share or an entry into a Tracker Fund is fairly priced or not?
GS: Chris, I think you’ve got to do a lot of homework and that’s why I advocate a Tracker Fund for the average investor. The average person doesn’t have the ability or the tools to go and check it out and even if they do, you know; you’ve got something called a price earnings ratio which is taken as a kind of general indication of the value or the price of a share. The higher the price earnings ratio, the more expensive the share.
We’ve got some shares on the Johannesburg Stock Exchange with price earnings ratio which are over 100x. The average long term price earnings ratio for the JSE is round about 12x. So a share trading at 100x P/E is expensive and yet you’ve got people who are still calling it a value share because they think it’s going to continue going up forever and ever and ever. Just think back to the tech bubble in 2000, you had tech shares which were trading on 100 multiple and many 100 multiples and we all know how that ended.
The bottom line is, the higher the P/E ratio, the more expensive the share is generally. So, do your homework and even when you’ve done your homework, I’d be cautious because just because it’s a high P/E doesn’t mean it’s necessarily expensive or just because it’s a low P/E, doesn’t mean it’s cheap. There’s a reason it’s a low P/E and maybe it’s one to avoid. So, for the average investor, go and buy the Tracker Fund where you don’t have to worry about things like that.
CG: Gregg Sneddon of The Financial Coach talking to us from Cape Town, Gregg, appreciate your time on Old Mutual Live Business.