Wishes do not always come true

By Cassie Carstens

There are, however, ways to get the gift of investment peace of mind

Even though Christmas season is not about gifts, most children sit in front of the tree on Christmas Eve, shaking, smelling, and looking at their wrapped gifts to guess what’s inside. We all know the feeling of excited anticipation. My three-year-old wants a real tractor this year; he will probably be very disappointed when he finds a plastic one, which is the size of a shoebox, under the tree.

We usually re-evaluate our investment decisions and returns at the end of the year. As with Christmas gifts, your investment wish list looked very different from what was wrapped inside of your gift.

Wish list: An expert who could accurately predict the future.

Gift: The reality that no one can predict the future.

The unfortunate truth around predictions is that every other person relies on the opinions of so-called experts. Think of something like our predictions about the rand, interest rates, stock prices and so on. If you shoot a snooker ball, it is fairly easy to determine where it will hit after the first shot, but almost impossible to determine where it will end up after the 10th impact with the side of the table or with another ball.

Considering the number of variables there are between the 1st and 10th impact, you would also be much less reliant on expert predictions that mostly only deal with the first impact. Listen to opinions, but first you must give up your own preconceived beliefs and put on your “critical thinking glasses”. A good investment portfolio is one that does not rely on the fact that a prophecy has to come true.

Wish list: A quick return.

Gift: A bloody nose at the end.

Multiple books have been written about the investment guru Warren Buffett and yet Buffett himself has never written a book, only his annual letters to Berkshire Hathaway shareholders. Buffett is an incredible investor, but he built up about 96% of his wealth after his 65th birthday. How many times do you have to read in the media about greedy, high-promised return schemes that simply came crashing down.

The reason for someone like Buffett’s success is simple, he started investing at age 11 and mostly allowed time (and a good dose of ingenuity) to do its job. The long-term consistency of good (not astronomical) returns over a period of time is far more important than a quick return.

It will be good to remember, for those who have been waiting too long, that 9 pregnant women cannot produce a baby within a month. Some things simply take time, and you will have to look at other ways to solve your problem rather than chasing unrealistic returns.

Wish list: Positive returns in a straight line.

Gift: A return line that looks like a 90-year-old’s ECG.

Clients often ask us: “How much interest am I going to earn on my money?” This is obviously an impossible question to answer over the short-term (due to volatility) but can be fairly accurately determined over the long term (due to the relative return of asset classes against inflation over time).

In his book The Psychology of Money, Morgan Housel uses a wonderful analogy about returns. If you invest in equities, you will generate good returns that will beat inflation in the long run (20,30 years plus). Unfortunately, the price that you must pay for these returns is volatility. Housel suggests that you should think about volatility as a fee that you pay. The price for good returns is to accept volatility (especially declines). The price for investing in money market is cheap, but the “cost” is a loss of purchasing power of your funds (especially when tax is payable). We are of the opinion that the price of the latter is too expensive.

Wish list: No responsibility.

Gift: Unforeseen outcomes.

Last weekend, I was in a harvesting machine where a farmer did the harvesting himself. He could hand over the job to a foreman or farm manager, but he harvests along with his team of workers. His answer was simple – you do not study all year for a subject and let someone else write the final exam for you. Every day, employees and employers take responsibility of the time, effort and sweat they put into their work and every investor’s invested capital has a story behind it.

If you develop respect for the origin or nature of the capital that you want to invest, you are building an extra layer of prudence in your decision making, rather than investing on a hunch. We also believe that you have a responsibility to understand what your nominal, but also relative return looks like compared to what is going on around you. I previously mentioned how important time is when accumulating wealth, but return is the other part of the equation and is equally as important. Long-term investments at rates of return that are too low are just as dangerous as starting too late.

Wish list: Just a little more than what you need.

Gift: Sometimes much less.

We sometimes see how people take unnecessary risks, just to have more than what they eventually will utilize post retirement. Be very careful with these types of decisions as the risk/return equation does not make sense. If you get it right, your offspring will probably get the benefit because you will simply be adding it to a pot that is already enough. If you get it wrong, the risk and inconvenience will be yours!

Finally: Money does not buy happiness. We know it, but a lack of it brings quite a lot of inconvenience and sometimes misfortune. Whether we want to know it or not, we cannot avoid prosperity challenges, daily financial temptations, emotion, as well as the significant role money will unfortunately play throughout your life. However, if you continue to polish your decision-making framework and surround yourself with knowledgeable people, your gift of happiness, namely your peace of mind, might just grow every year.

Cassie Carstens is a certified financial planner at Woodland Wealth (previously known as ProVérte Wealth & Risk Management). Contact him at info@woodlandwealth.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.

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