Common mistakes members make when investing

Although it may be attractive to construct your own portfolio, it is worth pointing out the following two common mistakes members make with own choice portfolios.

Choose an investment strategy that is too conservative

The South African and international experience is that when faced with investment choice, members often choose a portfolio that is too “conservative” relative to the risks you face. This error can have materially negative financial consequences on the value of retirement benefits.

For example, if a 25-year old member decides to invest their retirement savings in the Money Market portfolio over their entire working life (i.e. for 35 to 40 years), they could end-up with a pension some 20% less than had they invested more appropriately according to the life stage model.

So, if you are young and/or you are not concerned about your “Capital risk”, you should invest primarily to manage your inflation risk (as the life stage model aims to do automatically.

Trying to “time the market”

Experience shows that many members believe that you can “time” the share market. This means you try to get out at the top of the share market and buy back in at the bottom of the share market (i.e. you aim to get both decisions right).

The reality is that the vast majority of expert investment managers cannot time the market effectively. Expressed another way, it is very difficult to choose the right time to invest or disinvest. Usually this can only be done with hindsight.

The evidence to date shows that retirement fund members who try to time the market almost always get it wrong. In fact the evidence shows that members expose more money to the equity market when it has gone up sharply (possibly the worst time to do so) and avoid the share market after a sharp fall (typically the best time to get back into the share market).

If you can consistently time the market correctly, you are almost certainly in the wrong job!