By Steven Nathan, founder and chief executive officer of 10X Investments
In investing, as in life, we regularly face the choice of whether to do the right thing, or the popular thing. We must trade off between wants and needs, and balance our desire for short-term gratification against long-term benefits.
In investing, long-term success rests on a few simple principles: invest according to your time horizon, choose index funds – which outperform most managed funds – and minimise costs. This is what we should do, yet what we want to do is follow prevailing market trends. And if you think the industry is set up to help keep clients on the right path, think again.
When I joined the investment industry, I quickly learnt that the business of investing was not very well aligned with the principles of investing. There is an obvious conflict between making money for your client and making money off your client. It is one that the industry prefers to resolve to its own advantage. So, while it purports to take care of investors, it is actually taking care of itself.
Rather than apply proven investment principles, the industry serves up hundreds of different investment strategies that deliver vastly different long-term results. These are mostly expensive, underperforming funds that at some stage offered a short-term marketing opportunity.
The industry’s huge network of managers, brokers, administrators and intermediaries adds absolutely nothing to the market return but captures a large slice of it in its charges, which add up to many billions of rand every year. If you wonder where the money comes from for your fund manager’s fancy new offices, their luxury sedans, or their marketing on TV and at the airport: it comes out of your retirement savings.
We started 10X to do the right thing for investors. Back then, the industry did not like index funds, and disparaged them as being no match for smart fund managers. 10 years later, index funds have consistently delivered better returns than the vast majority of fund managers in every market. So, today, almost every investment manager has launched an index fund, not because it is the right thing to do, but because it is the popular thing to do.
If the industry really wanted to serve its clients, it would transfer them all into low-cost index funds. Then asset managers could no longer selectively market top-performing funds as every investor would be subject to the same “best investment view”. Talk about aligning the interests of investors and fund managers: they would be in the same boat, the company’s future would depend on the performance of this single product as much as the investor’s.
As individuals, we must accept some blame. We like entrusting our savings to last year’s best-performing fund or ‘star’ fund manager. However, if we keep doing that, the consequences will be dire. We can afford only so many investment mistakes.
By retirement at the latest we will appreciate the importance of doing what is right for us, not what gets a thumbs-up from our friends or broker.
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Steven Nathan is the founder and chief executive officer of 10X Investments, a disruptive asset manager with more than R9 billion in funds under management.