In my three decades of working in investments, I have rarely seen investor confidence as low and pessimism reign as we are seeing now. The past three years have been grueling for South Africans. Not only has our own economy hovered in no-growth terrain for years, but global developments seem disturbing. I suspect that many of our readers are questioning their financial planning strategies. It feels like time for action. We have identified three critical questions for making drastic changes to your strategy and even your advisor.

Do you have a strategy or a plan?

Any investment should be part of a holistic financial plan for your future. It should never be considered on its own but as a tool to a goal in the plan. We know that financial plans rarely turn out exactly as we set it out, but a plan is better than no plan at all. People with no plans are rarely better off than people with plans. Our experience at Foundation Family Wealth shows us how planning can bring both relief and positivity to our clients.

Your cash flow should inform your financial plan. We believe strongly in this principle at Foundation. Your current and future income and obligations should form the basis of your investment decisions because it is the basis of your risk profile. For example, if you plan to build a house next year, you should have money in the bank to cover that cost.  If you plan to send your kids to overseas universities in five years’ time, then you should have overseas investments that can grow in line with that need. If your financial plan is not based on your current and future cash flows, you should review it.

Any well thought out investment portfolio will often include a poorly performing investment. You should not expect to have well performing assets in your portfolio. You should be concerned about such a portfolio.

A plan and a well-designed investment strategy should not be based on one view of the future. We love to think that we can predict the future. We also prefer to see the future through our own filtered lens of our past. It is how our brains work.

We also feel more comfortable if our friends confirm our views. It is precisely why money moves in crowds, at exactly the wrong time to the wrong assets. When the most recent returns on the local share market are at their lowest, money moves out of shares into safer assets, which often and sadly leads to wealth destruction. To benefit from the long-term gains available in risky assets like shares and property, you should avoid this behaviour at all cost. When everyone around you starts moving money around, review your plan. Your plan should have foreseen these circumstances.

Financial plans should include the very high probability of low short-term returns! You cannot expect any financial advisor to have the impossible ability to foresee exactly when low returns will occur, – but worthy financial advisors should have forewarned you that a well-diversified portfolio is likely to deliver low returns at some point.

Any financial plan that promises you high and steady returns is a fraud: that combination of returns does not exist. Low and steady, yes. High over the long-term, but up-and-down in the short term, yes. If your financial plan is based on ‘guaranteed’ high returns or even steady returns, you should review it.
Am I making this decision due to the most recent experience?

Over the past three years, you were fortunate if you received over 6% per year growth on your long-term investments. The local equity market barely beat inflation over this time. It is also likely that one element in your investment portfolio performed poorly, even lost you money, such as property which declined over the past three years. On the positive side, global investments performed well in Rand and USD. Headlines in South Africa hardly foster confidence in further investments in the country. You may be thinking of making changes such as moving all your retirement money offshore or to the money market.

It is very difficult to see right now that there is the possibility that local equity markets may recover and that we may look back in three years’ time to a reverse situation. It is very difficult to imagine a different outcome to our most recent past. This is human.

We think that the recent past will repeat itself. It seldom does. Statistically, the winners over the most recent past are more likely to be the losers in the near future. You

We also mistake certain ways of thinking as logical or given. For example, most people believe that there is a strong correlation between economic growth and investment returns. In fact, a recession does not necessarily mean low future returns – the inverse is more likely – a recession is more likely to be linked to high future returns.

If you are considering changes due to your most recent experience, think again. It may be exactly the wrong decision.

Am I making this change because I want to DO something?

When your car breaks down, you take it to a mechanic to get it fixed. They diagnose the problem and find a remedy.

It may be obvious when your car is broken. How will you know when your financial plan is broken? Perhaps you are experiencing normal volatility of any good financial plan. Upheaval is part of any plan.

However, the media ‘experts’ make out as though volatility needs to be fixed and can somehow be avoided.

The power of compounding over long time periods is necessary for investment success, which means that your investments should be left untouched. Warren Buffet’s key to success is not his investment selection skill, but his long-term view, which allowed his investments to benefit from compounding.

In addition, investment growth does not come in a straight line. Poorly performing investments can catch up astonishingly quickly. Just this year we experienced that a fund with a poor three-year return, gave 15% in six months, catching up quickly to the long-term expected growth. Just because an investment gave you slow growth over the most recent past, does not preclude fast growth in the future.

We like to act, especially when we’re experiencing pain. The pain of poor investment results is no different to physical pain. We just want to fix it. It also leads to us looking for advisors who will take decisive action based on strong directional views. It not only sounds more intelligent and convincing – but also makes us feel safe.

At Foundation we believe that no one can predict the future. We must plan for uncertainty. We take different potential scenarios into account and think about the impact of those scenarios on our clients’ holistic financial plans, considering all known risks to their plans. To some this may seem like indecision but to us and our long-standing clients, who have reaped the benefits, it’s the only way to build robust financial plans and secure our clients wealth.

To find out the difference between a financial planner and a wealth manager, click here.