THAT ONE... I think: How to confidently choose an investment product
Updated: Feb 18
I often get asked what Exchange-Traded Funds (ETF’s) I recommend for investing, and sadly I think the answer bores most people.
You see, we tend to think that investing is something that only rich people do. We think they are putting their money in fancy investments we have never heard of. We think complexity means dollar signs and simple means average.
I want to suggest the opposite to you. Long-term investing is not something that you should be thinking about every night, it’s a process that happens incrementally over decades. And because of this, whatever you decide to invest in (this applies to anything) needs to be able to stand the test of time.
Have you bought shares in a company whose product you like and now all it has done since day one is lose you money. What about those long-named structured products or those fancy-sounding, academically back-tested smart-beta ETF’s? Perhaps you only invested in these things because you felt that they were going to experience a period of heightened growth compared to other investments. But if they gave you a negative return on your investment over the next year, would you say with complete confidence that they should remain a part of your investment portfolio?
Overthinking your investments is a sure-fire way to ending up with an investment that you don’t want. I’ve been there. Too many shares that people told you were a good buy. ETF’s that overlap, track similar indices or just don’t live up to their hype. Dabbling in something that’s price was just going up until you bought it.
One of the most common reasons for ending up with investments you don’t want is because you are constantly changing your mind. And constantly changing your mind is a symptom of the lack a guiding plan. Your plan is the partner you need to ensure your investments are well matched for you in the long-run. Conviction in your plan will give the investments you choose a longer life span in your portfolio. Some of them, even life-long.
The following three points which are a part of my financial plan, guide my decision-making about what I invest in:
1. My priority for long-term investing is in shares through ETF's, this provides me with the best inflation beating return over this time horizon with the most appropriate risk level. This allows me to be a passive investor, giving me market related returns without having to work hard to analyse businesses.
2. My goal is to have 80% of my equity/shares exposure offshore and denominated in dollars, my investment contributions will reflect this goal.
3. Where possible, I will only buy products that will stand the test of time by buying products which track broad, well-diversified global indices which are cost-effective.
These three points have enough detail to allow me to analyse any investment product and determine whether they fit into my strategy. Take the example of choosing an ETF:
1. My priority for long-term investing is in shares through ETF's, this provides me with the best inflation beating return over this time horizon with the most appropriate risk level. This allows me to be a passive investor
As mentioned in the point above, my strategy is mainly focused around investing in ETF’s. Of which there are currently 77 options in the South African market:
But in this point I am also specifically referring to share-based ETF’s. That means ETF’s which are investing into companies not bond or commodities). This cuts down my selection from 77 ETF’s to the following 60 ETF’s:
2. My goal is to have 80% of my equity/shares exposure offshore and denominated in dollars
Based on my preference for offshore investments my options are narrowed even further. Removing the local ETF options reduces my selection from 60 ETF’s to the following 21 offshore options:
3. Where possible, I will only buy products that will stand the test of time this means buying products which track broad, well-diversified global indices which are cost-effective
This point describes my intention to have a global investment. It therefore rules out sector or country-specific ETF’s. “Standing the test of time” to me means that the ETF must be simple, market-cap based, diverse and global, this rules out funds that are over-complicated, rule-based or niche. It also means no smart-beta products with unique share weighting or selection methodologies.
This narrows down my selection from 21 ETF’s to 5 options:
The last word mentioned in this point is cost-effective. This is the final factor in deciding what ETF I am going to be investing in. Based on a comparison of the TER’s (Total Expense Ratio’s) of these 5 ETF’s there is one clear winner:
The Satrix MCSI World ETF (STXWDM), meets all the criteria that my financial plan stipulates. This ETF is the one and only investment I need to make to achieve my long-term investment goals. It is an investment which is denominated in US dollars, which consists of 1600 companies across 23 countries, and is the perfect medium to invest in the world.
Going back to what I said about over-complicating things. The best way to make long-term investment decisions that stick is by ensuring they align with a plan. Your plan is essentially your thoroughly reasoned best thinking at a point in time, and if something goes against it, it’s quite likely it won’t be around for very long – especially in tough times.
This means that your financial plan is where you need to do the most work. Spend your time continuously developing your financial education. This is crucial so that as you learn you tweak and amend your plan over time. As you develop your education and build your plan you will find that concepts once complex to you are now rather simple, and it is the simple concepts that will stand the test of time.