What makes a quality investment?

Here are five elements that I consider when it comes to understanding and measuring the quality of an investment.

Safeguarding against fraud, financial instability and poor consumer outcomes in the financial services sector is the primary purpose of Regulators like the Financial Sector Conduct Authority (FSCA). Regulators exist to ensure that investors can invest with both confidence and peace of mind knowing that someone has their backs in the event of serious trouble in the sector. 

A quality investment is one that is registered, overseen and regulated by the FSCA. A number of crypto currency schemes and suspect property investments come to mind, where investors suffered significant financial losses due to the absence of solid regulation. 

If you are thinking about making an investment, find out whether the investment is regulated and most importantly, how you are protected. You would not build a house with poor quality cement and risk it collapsing, similarly good regulation is the strength that ensures an investment does not implode.

Ask your service provider to show you how your investment is regulated and protected. Check the FSCA’s website to learn more about the financial service providers managing your investments. If you can’t find them on the FSCA’s website then that would be a good reason for concern.

Fees and costs have a direct impact on the outcome of an investment. Simply put the more you pay in fees the less your money is working for you! A good measure to help investors determine their total investment fees is something known as the Effective Annual Cost or EAC. 

The EAC allows investors to compare the various investment charges across different investment providers, thereby helping investors to make an informed investment decision. A quality investment can be measured by the total fees you are paying in relation to the value you receive. 

Value is subjective but most people have a tolerance and will sure enough know when they are over paying and not getting quality.

Ask for your EAC and then compare investment returns and other services offered by the various service providers to determine whether the fees you pay give you value for money.

A good measure of the quality of an investment can be found in the investment’s track record. A track record provides a good gauge as to what investors can expect from an investment over time, although past performance is not necessarily indicative of future performance.

When considering an investment’s track record, don’t just look at how the investment performed in the good times, look at what it did in the bad times too. The quality and strength of an investment is often measured by the ability to bounce back after a bad time. Ironically it is often in bad times where opportunities to create real long term wealth can be found. 

All investments have an objective and a benchmark they target. It is their reason for being. 

COVID19 has taught us that nothing is predictable and there will be unforeseen circumstances that impact the ability of an investment to achieve its set objectives and benchmark. However if an investment achieves its objectives and benchmarks 90% or more of the time, then in my opinion that is a quality investment and a good track record. 

When making an investment, transparency or the WYSIWYG (what you see is what you get) factor, as I like to term it, is a key measure of the quality of an investment. In other words is what you see upfront actually what you get at the end when it comes to an investment! 

One thing investors hate is that empty feeling of being misled when crucial information about the investment was not properly disclosed and discussed right up front. All the pros, cons, Ts and Cs must be clear and transparent from the outset to avoid poor quality investment outcomes for clients. 

Do you know whether there are any penalties if you transfer your investment to another provider? Can you even transfer your invest? Are you locked in? Do you have flexibility when it comes to investment management? 

Seek Transparency! 

A quality investment should deliver real returns. In other words beat inflation over time. Inflation is the mortal enemy of any investment and despite achieving a positive investment growth number, you could actually end up poorer if your investment growth is not beating inflation over time. 

So make investing real!

Ultimately we are all journeying towards retirement and need to be smart when investing money. A quality investment can set up a quality retirement. Test the quality of your investment regularly to ensure that what you see is what you get and what you get is what you want!

Gareth van Deventer, CFP®