PENNY WISE AND POUND FOOLISH INVESTING

How would your attitude to loss change if you had some serious money to invest?

Over the years I’ve noticed an interesting thing – the more money people have, the less risk they’re willing to assume.

Ask someone investing R500 a month to go into a high equity (Stockmarket) fund with no guarantees, and they will most likely trust me to make the decision.
Ask someone investing R1 million to invest and it’s a different kettle of fish. Fear often paralyses.

Take for instance a guy who inherits R1 million and invests it for a year at a 5% nominal rate.

  • On the 1st of January 2013 he deposits R1 million.
  • On the 31st of December 2013 he withdraws R1, 050, 000.

Did he make money by investing?

Let’s take a look. The average inflation in 2013 was 5, 7% according to Stats SA.

In order for his R1 million to still be worth R1 million at the end of the year, he needed the following:

  • R1, 000, 000 deposited on the 1st of January 2013.
  • On the 31st of December 2013 he withdraws R1, 057, 000.

That might only be R7, 000 difference but the picture gets really scary after a year or two of that.

So why is this important to you?

Ever watched those game shows on TV?
As the jackpot gets bigger and bigger, the more stressed they become. Most go home with:

  • Nothing or
  • With way less than they could have.

The same emotions apply to investing which is why you need someone to hold your hand.
Turns out, our ladder is against the wrong wall.

  • Risk is not the possibility of losing money on the stockmarket
  • Or of getting into or out of the stockmarket at the wrong time
  • Your risk is inflation – spend some time visiting old age homes and ask them if I’m telling you the truth.
  • Instead of asking whether now is the right time to be invested in shares and unit trusts,
  • Start asking whether you can afford not to be.

I’ve had a few investors choose to stay in cash over the past ten years. During this time the stockmarket has hit record highs. For instance, The Allan Gray equity fund returned 21% (after costs nogal!) per annum over the past 10 years (according to their May 2014 fund factsheets).
During that same time their Moneymarket fund returned 7, 6%.

Now I’m not saying you should jump into the stockmarket with everything you have. What I am saying is that you need to have a long term plan to PROTECT AND GROW your money.

Another opportunity to earn 21% per annum will come up, but no way are you going to get the past 10 years back. Playing safe is often the most dangerous game in town.

So how would your attitude change if you had R1 million of your own money to invest?

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Until next time.

The InsuranceFundi Team

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