Many investors must have been kicking themselves this week for leaving money sitting in money market accounts while the JSE Securities Exchange All Share index climbed by more than 30 percent over the past nine months and interests rates plummeted. And looking at unit trust assets under management figures, there must be plenty of those who did sit in money market accounts.
One of the lessons of investment is that it can be as dangerous to be out of equity markets as it can be to be in equity markets. Granted, equity investment is volatile and can give even the strongest investment stomach a bad turn - but in the end, if you have long-term investment objectives, it is far better to be in equity markets than it is to be out.
To prove my point, let me quote from research by Professor Colin Firer and Professor Heather McLeod at the University of Cape Town.
If you had been able to invest R1 in the JSE All Share index in January 1925, your R1 would be have been worth R26 959 by December 2001.
Over that period you would have seen 19 years of negative returns and 58 years of positive returns. Remember that these years of negative returns include that great market crash of 1929 and subsequent crashes.
Now, using the same research, let's have a look at cash investments. Your same R1 over the same period would be valued at R122 in 2001.
And to make things a little more complicated, let's add inflation to the equation. The buying value of your R1 in 1925 would have been equivalent to R75 in December 2001. And then no account has been taken of tax. So, while cash may offer an investor security, it is not much of a long-term investment vehicle.
As a matter of interest, bonds did a little better than cash, with your R1 growing to R223, even though there were positive returns recorded for 62 of the 77 years.
And for those people who believed (until recently) that the dollar was king, R1 invested in United States equities would be worth R2 931.
I am not saying that the massive growth of local equities over the past three quarters of a century will be repeated in the next 75 years, but it can be expected that equities will, in the long term, out-perform other asset classes.
It all comes back to the simple truths that you need to hold diversified investments and invest for the long term. Solid investment performance will come from time in the market, and not from attempting to time the market by jumping from one asset class or investment to another.
****
From the evidence I see, individuals and retirement fund trustees often make bad decisions based on a lack of knowledge of investment fundamentals; or on bad advice that may be malicious to garner maximum commissions/fees. However, more often bad decisions are a result of the adviser's and the trustees' ignorance.
Fortunately for all of us, a slow but steady start is being made in improving the knowledge of the people who advise individuals, as well as those people who are the guardians (trustees) of the our major source of savings, retirement funds.
The crooks and the commission-driven salespeople in the financial services industry must simply be driven out. But those who are not crooked and are responsible for other people's money or for giving advice on other people's money, have an obligation to do their utmost to ensure they have the knowledge required.
Events to diarise
With this in mind, there are two significant events in the next two months which will help towards improving the knowledge of those people who can add so much to the financial well-being of all of us.
Seminar for trustees
The first event is a seminar on retirement fund governance, in which, I am pleased to say, Personal Finance is playing a direct role.
This seminar, which is co-sponsored by Old Mutual Actuaries and Consultants (OMAC), is aimed at improving the knowledge levels of retirement fund trustees.
Over the past year evidence of some appalling decisions being taken by retirement fund trustees has come to light. It seems that trustees were often talked into significant loss-making investments by corporate advisers with an eye on the profits that they would make.
A lot of the trauma and losses for retirement fund members could have been avoided if the trustees had had a better idea of corporate governance issues (such as the dangers of buying a product from a company that is giving you advice and then advising you on how the product is doing).
There are major players in the retirement fund industry who simply do not give a damn about proper corporate governance. It is up to trustees to force those players to improve their ethics or face exclusion.
Trustees have enormous power to improve the ethics in the industry by applying simple corporate governance rules, but they need to know these rules.
The seminar we are holding with OMAC in Johannesburg on February 9 should be attended by every trustee who does not have a full understanding of corporate governance.
The big stick is that if you, as a trustee of a retirement fund, allow decisions to be made out of ignorance of good corporate governance, not only may you find yourself foul of the law, but you can also be sued by members of your fund.
Incidentally, we have not forgotten about you, the ordinary reader of Personal Finance. In May Personal Finance, along with the First Rand Group, will be hosting a series of retirement seminars around the country aimed at individuals.
Testing financial advisers
The second event that will take place in the next two months is the examination of financial advisers who have experience but little or no academic qualification.
As part of the government's effort to ensure that people who give financial advice are adequately qualified, the Financial Services Board, the insurance sector educational body (Inseta) and Unisa have combined forces to keep as many financial advisers in the field as possible.
By mid-year the Financial Advisory and Intermediary Services (FAIS) Act will be fully operational. Among other things, this will mean that only people who are considered "fit and proper" will be able to sell financial products.
To meet the fit-and-proper requirements, advisers must have certain minimum educational qualifications which will be ratcheted up over time.
Inseta and Unisa have set a number of examinations aimed at bringing financial advisers up to the required minimum educational levels. The examinations will be written from February 28 to March 6.
This is a once-off offer to financial advisers to get these minimum qualifications. If they do not have them by the time FAIS is fully promulgated, they will be out of a job.
Inseta has given financial advisers an additional week in which to register. In their own interests and the interests of us, their clients, financial advisers should take advantage of this opportunity.