It is easy to over-complicate your investment strategy. It is tempting to invest in each new Initial Public Offering (IPO) because it feels like you are getting in on the ground floor. On top of that you do not have to pay the transaction cost for buying the shares. So, because it is new and we can get it for cheaper, we buy new Exchange Traded Funds (ETFs). thinking that they will drastically improve our performance. This is especially true in our current economic circumstances. Before we know it, we end up with a portfolio comprising 15 ETFs. The next thing that happens, is we decide that we can make better share decisions than what is held in the ETFs. Then we start buying individual shares and have a ton of those as well.
Your investment options
The first thing that you should decide it what you are buying shares for. For most people the answer is simple: To save for retirement. In this case the answer to what you should buy is also simple. You need to buy the market. This implies that you should buy index funds that track the market performance. These give you the average performance of an index like the Johannesburg Stock Exchange (JSE) for example. Why would you buy the market?
Well, you can either give your money to fund managers or buy your own ETFs. On average though, after the exorbitant fees charged by fund manager, only one in six fund managers beat the index. Best case scenario, one in five will beat the market. This means that buying ETFs gives you at least an 80% chance to outperform fund managers. Those are odds I’d be willing to take.
You also have the option of buying cash products like the ones offered by ABSA or Fedgroup. These are quoted to offer returns of up to 13%. Note that it is simple interest and the compound interest is closer to 10%. After inflation, this will give you real growth of about 4% historically. ETFs however will over the long term give you about 12.3%. So, for the consistent growth offered by cash products, you will pay a 2.3% penalty. Which I’m not willing to do.
Start by investing in your tax-free savings account. After you have invested R33 000 in the present financial year, the rest of your investments can be done in a regular share trading account. I am a big supporter of Easy Equities, simply because they don’t bullshit you with hidden fees and is dirt cheap. If you are already trading shares, you can probably add a tax-free savings account to that account for free. So, look into that as well.
The next decision you need to make is which ETFs to buy. Again, if you are investing for the long term, this is not a hard decision to make. You want to buy the market. This will include the United states, Europe, Asia, Canada, Australia and some South America. Luckily you do not have to search for ETFs in each of these countries, you can simply buy the Ashburton Global 1200 fund. It gives you exposure to 70% of the global market capitalization. Now that is buying the market.
Then, there is a case to be made for investing in the country where you live. You know the companies, our market is extremely cheap right now, historically the JSE Top 40 performs better than the S&P 500 and you are not exposed to currency fluctuations. The simple option here is buying a Top 40 ETF like the Satrix or Coreshares options. The Coreshares Top 40 ETF is an equally weighted fund while the Satrix option is market cap weighted. Which one you buy is up to you and there are a lot of opinions out there. My strategy was to look at the fees, choose the cheapest one and stick to it.
My ETF investment strategy
I split my investments 40% local and 60% international. The exact percentages are completely up to you and will depend on your optimism about South Africa. This is a simple strategy that has been proven historically. Note that these are still shares that can be volatile and can’t guarantee return. However, if Warren Buffet recommends this investment strategy, who are we to argue. There are many other ETFs that buy bonds, do momentum trading, buys emerging markets and many more. New ETFs are almost launched monthly, with a burst during March when the new financial year starts. The point is to keep your investment strategy simple and wait for the double digit returns. It will come.
Be safe out there,