Are you getting in your own way? Why the 'patience premium' is the key to financial stability

National Savings Month traditionally focuses on encouraging South Africans to save more and spend less. However, for those who already have an investment portfolio, the real challenge is whether they have the discipline to stay fully invested when anxiety pushes them to act.

Investor behaviour, not market performance, is one of the greatest destroyers of long-term portfolio value. You can either panic and make unwise short-term spending decisions, or you can stay the course.

Staying calm, disciplined and focused are essential for investment success – and that’s why we call it the ‘patience premium’.

Tuning out the noise

In an era of constant external shocks, it is easy for investors to get spooked. The reality is that stories of volatility are part of the world we live in. Bad news that comes to us can make us anxious, but we also have to realise that in terms of investing, reality can be different.

For example, we've had the Middle East crisis, which affected consumers’ pockets through the inflationary effects of rising fuel prices. But when you look at the markets, global equities have actually had a good year to date. Many emerging markets excluding South Africa have also had a strong rally. So, I think tuning out that noise and looking at diverse investment options for the long-term is always best.

 The eighth wonder of the world

A critical pillar of wealth creation is the power of compounding – when money grows exponentially over time. Sometimes even referred to as the eighth wonder of the world, because compounding is such a phenomenal force. 

However, benefitting from compounding requires the emotional maturity to stick to a plan even during periods of high volatility. It’s about starting early, staying disciplined and leveraging the tools at our disposal. 

Tools that can help investors achieve discipline include  strategies like fixed monthly debit orders for their retirement annuities, tax-free savings and investment accounts. These are tools that need to be leveraged by all South Africans. It removes the pain of handing over your money every month and automates discipline. Another important consideration  is understanding the distinction between a conventional bank account or bank deposits for short-term savings versus a long-term financial plan for retirement. You need both, so that you have liquidity for payments you need to make in the short term but also have funds being more appropriately invested for long term wealth creation.

Appropriate buckets for every goal

To manage the psychological stress of investing, Noor suggests categorising funds into specific “buckets” rather than making blanket decisions. Here are examples of how to consider your investment approach: 

• Short-term (The Bailout Fund): For goals within a 12-month period or emergency liquidity for example, Money Market accounts offer a conservative vehicle with a large degree of capital protection. If you don’t have any appetite for volatility for that particular portion of funds, you can keep your money protected but also easily accessible. But remember, in this low-interest rate environment, it’s not the best solution for capital growth over the long term. To beat inflation, you need other solutions.
• Medium-term (The five-year plan): For goals like an education fund for a child who wants to study in five or six years for example, Noor suggests multi-asset solutions may be useful tools to ensure capital growth.
• Long-term (The retirement plan): Equity funds have proven to be very successful vehicles for real long-term growth. For example, equities fluctuate and are deemed more high risk, but there is a plethora of research on the long-term benefits of diverse investment portfolios that include a mix of equities.
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Capital protection through diversification

I advocate for diversification – when investors spread their eggs across different baskets. 

Diversification makes the investment journey more palatable through all the market cycles. A multi-asset solution and a diversified portfolio may not achieve as much as a single asset class over a 10-year period, but it makes the journey a lot smoother.

A diversified portfolio might include a mix of active and passive investments, conservative and aggressive investments, different asset classes, local and offshore investments, different currencies, emerging and developed market investments, and traditional and non-traditional investments.

Seek an empathetic human guide

Ultimately, the role of an Independent Financial Advisor (IFA) is to act as a guide and objective sounding board. Just like building a puzzle, IFAs can take complex information, look at your circumstances and all investment options, and assemble a wise financial plan.  

If you are unable to put your plan on paper, it’s going to be very difficult to follow through without help. That’s why it’s good to talk to a trusted advisor. 

This Savings Month, seek out advice to ensure you don’t get in your own way. Just start. Use all the tools at your disposal and start right away. As the ancient Chinese proverb goes, the best time to plant a tree was 20 years ago, and the second-best time is now. Get help to plant and take care of that tree.

* Noor is the head of retail distribution at Ashburton Investments.

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