Making Better Investment Decisions

Back to Money advice
26 March 2019
Making investment decisions, or any financial decision, can keep most people awake at night. How can you feel more comfortable when making an important financial decision and be confident in knowing that it is the right decision?

Perhaps the answer lies in this quote from the famous American politician, Benjamin Franklin, “An investment in knowledge pays the best interest”.

If you have the knowledge, investing would not be as daunting and scary as most make it out to be. Knowledge allows one to make an informed decision and when it comes to investing, making an informed decision gives you the upper hand.

There is no exact recipe when it comes to making better investment decisions, however the following six questions can help:

Question 1 - What are the main risks of the investment?

Bungee-jumping, sky diving, water-skiing, flying in a plane or even going to the local gym all have some degree of risk. Understanding the risks involved plays an important role in whether a person participates in these activities or not. Investing is much the same.

There are many investment products available, and each is designed to achieve a specific goal with a certain level of risk.

All investments have a certain degree of risk. Even keeping your money in a bank account or money market fund has some degree of risk: the risk that the money will not grow enough to beat inflation and leave you worse off over time.

Some investments, like shares on the JSE (Johannesburg Stock Exchange), are more “risky” because the value of your investment will change daily, but there is potential for significant growth in value.

Risk goes hand in hand with investing, it is just a matter of ensuring that you accept the right kind of risk.

Some might be happy to only be invested in cash and risk not beating inflation, while others accept the risk of their share investments losing value in exchange for the chance of increasing their wealth.

Knowing the risks you are taking when investing and knowing if you are comfortable to live with that risk will make you feel more confident in your decisions.

Question 2 - How much do I pay in fees?

Just as visiting a doctor, consulting an accountant or seeing your lawyer has fees involved, so too does investing. Fees are an important part of investing and understanding what fees are applicable to your investment can help you make informed decisions.

It is important to note that a cheaper fee does not necessarily mean better or worse service or performance from your investment.

The key is to ensure that you are comfortable with what you are paying in return for a certain level of service, as well as understanding this level of service.

Some things to consider include how often will your advisor review your investment, is your advisor available to answer your questions immediately or do you need to make an appointment, how does your advisor manage your investment and who assists them, such as administrators and investment managers?

Also find out who else is involved in the process and how much these other parties get paid and what it is that they do to give you value for the fees you pay.

Some typical fees in the industry include upfront and ongoing advice fees, upfront and ongoing administration fees, investment manager fees, performance fees, switching fees, rebalancing fees, withdrawal fees and transfer fees.

A good question to ask your advisor could be the following: “How much do I pay in total for my investment – including advice, administration and investment management fees?” In some instances it could be close to 3% for all these services added together.

When you know how much you are paying your advisor, what it is that you are paying for and understand the level of service you can expect in return, you can be more confident in your decisions.

Question 3 – How quickly can I sell my investment?

When making an investment it is important to not only know how to invest, but also how and when you can sell or redeem your investment. Is it easy or difficult to do?

For example, if you buy an endowment policy with a five-year term then you usually cannot redeem or cash it out until five years have passed, subject to certain exemptions.

Question 4 – What are the main Terms and Conditions (T’s & C’s)?

T’s & C’s are important as it sets out your rights and responsibilities yet some neglect to read these. 

If you are one of those who never read your T’s & C’s then these might catch you off guard at the worst possible time and leave you feeling a little unhappy. For example, what if you wanted to cancel your investment, are you allowed to or is there a waiting period involved? Are there any costs involved?

Is it possible to add more money to your investment or make some withdrawals? What if you are leaving the country or moving to a new province and wanted to transfer your investment overseas or to a new advisor, can it be done and are there any fees or penalties?

Always ensure that you know what your rights and responsibilities are in terms of your investment.  

Ask your advisor to explain all the important T’s & C’s to you in plain language so that you are more comfortable in knowing the fine details.

Question 5 – What are the tax and estate duty implications?

Find out what the tax and estate duty implications of your investments are. In some instances you will become liable to pay tax on your investments. Rather be informed and not surprised when this happens.

Question 6 – What do you know about your advisor?

Find out more about your financial advisor and their employer, if not self-employed. Is your advisor a CERTIFIED FINANCIAL PLANNER® registered with the Financial Planning Institute of Southern Africa? What experience do they have? Also find out if they are legally authorised to give advice and ask for their FSP (Financial Services Provider) number, which you can verify on the website of the Financial Sector Conduct Authority (FSCA) at www.fsca.co.za.

Make sure your advisor provides you with all information as to what products they can or cannot sell, their fees, their service, their experience, advice limitations and conditions.

Most importantly, take a minute or two to read all relevant documentation and familiarise yourself with this information so that you know exactly who you are about to entrust with your money and financial future.

There is no perfect recipe for making better investment decisions but asking the right kind of questions upfront will ensure that you are properly informed and aware of what you are investing in.

 An investment in knowledge really does pay the best interest.

 

 

Gareth van Deventer CFP®                                                                      OUTvest: Head of Advice
Advice Centre 0860 688 837
 This article does not constitute holistic financial advice as it does not take into account one’s personal financial circumstances. Please contact OUTvest before implementing any financial plan or advice to ensure that you make an informed decision.
Latest Money advice articles
Become an Investor in 4 Easy Steps
OUTvest Market Commentary - June 2022
OUTvest Market Commentary - May 2022