So in the spirit of checklists here is my list to help you identify why you DON’T need an investment advisor:

1.    You understand how to identify and define your investment goals.

Sounds simple enough but we are not just talking about identifying a bland statement like:

 “I want to save for my children’s education!”

We mean knowing how to measure the future value of those objectives so that you have a clear target to aim towards.

For example: Education at a public primary school level (Grade 0-7) today costs around R133 536.00 and the cost of education goes up on average by 8%* a year. By the time my 6 month old starts school his primary school education, it is therefore likely to cost me R211 905.00

You repeat this exercise for his high school and tertiary education needs and we are looking at a combined cost of about R1 370 000.00 over the next 18 years. Of course if we want to send our boy to a private school this figure is likely to jump to R 2 132 000.00*

2.    You know how to calculate what you need to do to reach those goals.

 So I now have a figure to aim towards but do I know what it is going to take to get there?

How much must I save and what returns will I need to earn from my investments to reach my goal?

The answer will depend on a number of variables some of which include:

Whether I am making a lump sum investment now or whether I will be making monthly contributions on an ongoing basis. Of course it could be a combination of both.

EXAMPLE: I have no initial lump sum and I can afford to put away R1000 a month. I decide I want to save for my son’s public high school education which will start in 12 years time and it is estimated to cost a total of R306 000 for the five years at an estimated R61200 a year.

I will therefore require an average return after fees and taxes of 11.16% assuming I make my contributions at the start of each month to get to my target of R306 000 in 12 years time.

 Of course this means I will have saved for the entire high school fee at the start of the five years when in reality I will only be paying out R61200 a year. This not only simplifies the calculations but this is probably a more prudent approach as I will probably change the asset allocation once I have reached my goal so as not to land up with any shortfall as a result of market movements during the fee paying period.

3.    You know which asset classes will provide you with the best chance of achieving your required returns.

So I now know that I must target an after tax and fee average return of 11.16% each year for the next 12 years to reach my goal.

But which asset classes will give me the best chance of achieving that return and what are the risks associated with each option?

Average returns from shares or equity investments in South Africa have historically been around 12.5% a year since 1900. For bonds and cash that return drops to 6.8% and 6.0% respectively.

It becomes fairly clear that if I opt to invest in cash and bonds then the probability of me achieving my goal is very low indeed.

However, if I invest in shares or equities which deliver the best long term returns, I must accept that over shorter time periods, share returns can deviate from this average quite substantially. This means shares become less and less suitable for objectives that are short term in nature. (Less than 5 years)

The bottom line is that I need to take on enough risk to achieve my investment objectives but I need to understand the risk-return profiles of each asset class to manage my expectations over the short term.

 4.    You know the tax consequences of your investment activities and can structure your strategy accordingly.

As mentioned above I need an after tax and fee return of 11.16%.

That means that I must try and minimise the tax I am charged on my investment returns to maximise my real returns.

Basic rules would be to try and avoid income tax in favour of capital gains tax where possible. This means avoiding trading in and out of investments – the general rule is that if I hold an investment for 3 years or longer before selling it I will pay capital gains tax which is likely to be significantly lower than my marginal income tax rate.

I know I will pay dividend withholding tax on any dividends I receive and income tax on any interest from cash or bonds.

I must make sure I utilise tax allowances on interest income and capital gains as well as any special provisions the Treasury allows for specific types of investment like Retirement Savings.

 5.    You know which are the best or most appropriate product providers and or platforms to use to implement your strategy.

I must decide if I am going to manage my investments directly myself or if I will be ‘employing’ a professional fund manager to do the job for me by buying into a unit trust or fund.

For direct stocks and ETF (Exchange Traded Funds) investments I will need to open a stockbroking account. This may also be the most cost effective option for large once off lump sum investments.

If I opt to go the route of investing in funds or ETF’s there are platforms called LISP’s (Linked Investment Service Providers) where I can buy into a number of funds from different investment managers or else I can go to an investment management company and buy funds directly from them. Investing in funds or ETF’s is probably the most sensible option if I am planning on making monthly contributions.

Each different option will have different costs associated with them and I will need to understand what these are.

6.    You know how to translate your strategy requirements into specific products in a cost efficient manner.

So now I know what type of investment I want and what type of asset allocation I will need to achieve my return objective, I must identify which product (fund) or products will provide me with that exposure.

There are literally thousands of funds available to me over a variety of different classes and I must know how to indentify ones with the appropriate asset allocation, performance target and fee structure to help me meet my objective.  Importantly, my required 11.16% average return must be after fees have been taken into account.  

Balanced Funds (High equity, Low equity), pure equity funds, flexible funds, fixed income funds, money markets are just some of the categories of funds that I can look at which will give me an indication of the type of asset allocation I can expect from each.

 7.    You have the patience and discipline to stick with your investment strategy during the tough times.

Patience is required to give my strategy a chance to work. Frequently we highlight a 10 year investment objective and invest in long term assets accordingly but at the first sign of a sell-off in year one or two we abandon our plan and return to the safety of cash. This type of mistake results in a buy high and sell low pattern which is incredibly wealth destructive and is likely to derail any long term investment strategy.

I must therefore be able to avoid emotional decision making and have the discipline to stick to my plan when short term market fluctuations have me feeling like things will never get better. This is equally applicable when we make large short term gains and the temptation is to sell and try and time the market for better re-entry levels – typically we never get back in.

Discipline also involves putting money away for investments on a regular basis and delaying the instant gratification of new cars, more clothes, expensive holidays or bigger houses.  

One of the single biggest challenges in successful investing is not in identifying the right strategy to achieve our target but in actually executing the strategy as we should.

 8.    You understand how to monitor and amend your strategy to your changing needs.

Over time I will receive a myriad of investment reports informing me how my investments are performing. I must be able to monitor and understand these reports so as to measure the success of my investments in the context of my plan.

I must make sure that any deviations are within the expected limits and that if I have employed active fund managers that they are earning their fees by outperforming the benchmark after fees.

If the circumstances of my life change (Like I have a second child) I must know how to adjust my existing strategy to take account of my changing circumstances.

If I cannot make payments as a result of some unforeseen event I should know which products or savings to cut back on without compromising my long term strategy if possible.

 9.    You have the time and motivation to keep up to date with the options available in an ever changing industry.

The market is constantly changing. There are better products available to us retail investors today than there were just a few years ago.

I need to invest in my investment and product knowledge on a regular basis if I am to stay in touch with the changing trends and ensure I get the best out of my hard earned cash.

10.    You know how to combine individual investment goals into an overall financial plan that ensures your objectives are prioritised to maximise your chances of success.

Linking all my individual investment goals into one common sense approach is essential. I should view all of my investment decisions as part of an overall plan and be able to prioritise accordingly.

For example, it may be more prudent for me to plan and save for public school education rather than private school if it means I can also contribute sufficiently to my retirement savings. After all my child would probably rather not have the burden of looking after me in my twilight years whether he has a private school education or not. And of course I can always amend my strategy should my circumstances change along the way.

Does it make sense to invest R1000 a month into an education savings plan, trying to earn 11.16% average return, while I am carrying store and credit card debts of R25000 being charged 24% a year (which equates to about R2600 a month repayments if I want to pay it off in a year)? Perhaps I should focus on paying down that debt as quickly as possible and then commit the larger payment to the education fund for a longer period.

I must also be conscious of minimising the chance of any single event (market or otherwise) completely derailing my families well being. I should have appropriate insurance in place, whether that is health insurance via medical aid or life and disability cover for those unforeseen events that may occur.   

Conclusion:

Investment Advisory Service’s like the one we offer at White Investments do cost money. If you are able to confidently and competently carry out the tasks identified in the checklist above then you can save yourself from any additional advisory fees. But if you are not able or willing to spend the time getting to grips with your investment planning requirements you must ask yourself if a good advisor is not actually worth the additional investment.

* Source: Discovery Holdings/ Discovery invest from Moneyweb article January 2012

 Please contact White Investments if you would like to learn more about the ways in which we can partner with you to a more secure financial future. E-mail: info@whiteinvestments.co.za