How to Invest Your Hard-Earned Savings Personal Finance For The Busy Rural Veterinarian

Dr Francois van Niekerk

Humansdorp Veterinary Clinic

RATIONALE FOR THIS ARTICLE

Many veterinarians, especially rural veterinarians, are so busy that they neglect to spend time educating themselves about how best to invest their hard-earned money. It is indeed hard-earned, with much sweat and many injuries, which often result in physical inability to continue production animal practise.  Sound investments are therefore of even more importance than to persons in other,  less robust occupations.

Alternatively, those who understand what they should be doing with their savings, often neglect their investments due to time pressure, thus losing potential returns on their hard-earned savings.

The good news is that there is an easy and almost painless solution to this predicament which will be highlighted below.  The only pain will be in actually saving!

SOME INVESTMENT OPTIONS 

  1. Property: Buy to let is fraught with challenges. Current legislation favours the tenant and changing demographics [Hillbrow in Johannesburg and Central in Port Elizabeth being examples] and inefficient municipalities add to the challenges.
  2. Active share selection  by the individual: This route to investment requires a tremendous amount of a very scarce resource, namely time, and you need to control the emotions of greed and fear to be successful. Notwithstanding the above, shares [equities] do  undoubtedly yield the best returns of all investments over time.1,2
  3. Mutual funds [unit trusts]: easy, but costs are usually high, see below.
  4. Exchange traded funds [ETFs]:  Easy to understand, easy to implement and costs are low.    Furthermore indexes in which ETFs invest usually beat the returns of actively managed funds.

SOME DISTURBING FACTS ABOUT FUND MANAGERS

Aspirant investors are exposed to massive marketing efforts by fund management companies eg Old Mutual, Coronation, Alan Gray and  Sanlam are examples but there are many others. However, very few fund management companies [about 20%] beat the market i.e. beat the growth in value of shares on the  JSE or on other stock exchanges such as the NYSE.   

In fact in South Africa for the ten years till the end of 2014 the figure was only  15%!6 For global funds it was only 13%.6  Even fewer beat the market consistently.1,3,4,5,6,7  It is extremely difficult to identify a fund manager who will consistently beat the market.

The evidence from more than fifty years of research is conclusive:  for a large majority of fund managers, the selection of stocks [shares] is more like rolling dice!5  The irony is that most fund managers charge very high fees for mediocre or even bad management of your money!

Then we come to financial advisors.  Some are excellent, some are mediocre and some are dangerous to your wealth.  The difficulty lies in identifying the excellent ones.

Many financial advisors simply choose different mutual funds to achieve “asset allocation”, “diversification” and  “risk management”.  This is largely an administrative task, but they generally charge high fees in the form of commission for doing so and of course the fund managers are also charging various fees such as an initial fees, annual service fees, intermediation costs and management fees.

High costs/fees can have a massive impact on the amount which your investment eventually delivers.  For example 1% extra costs will reduce your investment gains by 30% over 30 years, 2% will reduce them by 60% and 2.5% extra costs will reduce them by over 70%! 2, 4

WHAT CAN YOU DO WITH INDEX TRACKERS USING ETFs  

i.e. how can you use them to build your assets?

  1. Retirement Annuities : before and after your “official” retirement age.
  2. Living Annuities : at and after retirement.
  3. Tax free savings  [R30 000 p/a]
  4. Discretionary portfolio : any other savings you have other than the 3 above.

The cost of such an investment could be as low as 0.1% for the upfront fee to purchase the  ETF Securities on the  JSE  plus an annual fee of 0.55% per annum which would cover all other costs and fees.

You could do this through a platform such as the etfSA Investor Plan [www.etfsa.co.za]. Compare this with some fund managers’ fees of 3% plus  per annum [and then only 15% of them beat the market in the ten years ending in 2014, as mentioned earlier].

Is there risk in this portfolio?  Yes, there is risk in any investment, even in United States government inflation protected securities [bonds], because the  US bond yield [interest earned] is very low and US inflation is minimal.  However, the portfolio in the table above is well balanced and therefore reduces [but does not eliminate] risk.

A SENSIBLE COST-EFFECTIVE SOLUTION FOR THE TIME CONSTRAINED RURAL 

VETERINARIAN 

In one short sentence : invest in index trackers using  a balanced portfolio of exchange traded funds [ETFs]!

CONCLUSION

Life can only be understood backwards, but it must be lived forwards [Soren Kirgegaard]. It is impossible to predict the future with accuracy,  therefore choose the easiest and arguably the most effective way to invest – passive monthly [debit order] investing  into an ETF portfolio and/or put in a lump sum.

Such a strategy should weather  the storms of the world of investing, preserve your capital and ensure you receive a good return on your investment without you having to try and predict the future and without you losing a significant part of your capital growth to fees.

REFERENCES

  1. The Intelligent Investor: Benjamin Graham  ISBN   978-0-06-055566-5 with commentary by Jason Zweig Pages 243-250
  2. The Effective Investor: Franco Busetti ISBN  978-1920075-80-4 Page 447
  3. Value Investing: Glen Arnold ISBN  978-0-273-72452-0
  4. The 3 simple Rules of Investing: Edesess, Tsui, Fabbri, Peacock ISBN  978-1-62656-162-5
  5. Thinking Fast and Slow: Daniel Kahnemann ISBN  978-0-141-03357-0 Pages 212-216
  6. Stock Exchange Handbook: Mike Brown ISSN 168000-36, 201, Issue 3 Pages 71 – 72
  7. The Financial Times Guide to Investing: Glen Arnold 3rd Edition ISBN  978-1-292-00507-2 Pages 144-145

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