Risks of financial markets and others

 Many people don't invest because they think the financial markets are risky. That's true, but what are the options? You can't save money without giving it to someone to invest, or inflation will destroy it. 

Today we are analyzing the investment fund management companies that normally deal with retirement money. Take a look at Figure 1 which shows the progression of one medium sized fund from Alexander Forbes. The currency is the South African Rand.

Figure 1. The value of 100 Rand since the fund's inception. Source: https://transact.alexanderforbesinvestments.co.za/Download-Centre/Fund-Fact-Sheets

A simple calculation shows us that the performance over three years was only 8% (less than the performance of the FTSE/JSE All Share!). Compare this with the market performance shown in Figure 2.

Figure 2. Market performance since 2018. Source: https://transact.alexanderforbesinvestments.co.za/Download-Centre/Fund-Fact-Sheets

Not the most performant option, isn't it? Meanwhile, users of the fund should expect to pay a management fee of 1.3% to 2.08% per year or 3.9% to 6.24%.

At the same time, one could buy the S&P at $2718 on June 29, 2018 and sell it today at $4166, pay a fee of only 0.03%, and enjoy a gain of over 40% over inflation.

If you think these are just South African funds, here are 2 "average" US corporate funds from John Hancock Asset Management:

Figure 3. 2 "medium" US corporate funds from John Hancock Asset Management. Source: https://www.jhinvestments.com/investments/fundComparison?compare=GMDYX%2CPVEYX#key-facts

So it's not very cost effective to give money to fund management companies. Maybe it's easier?  Not really.

Buying an index is easier than buying a house or a car. Almost everyone buys a car in their lifetime - it's not too complicated. What if I told you that buying the S&P500 is easier? Here are the steps to follow:

1) Open an account with a broker. I admit it's a bit complicated, you have to prepare the documents, etc. But it is not more complicated than opening a bank account. Be careful, choose a respectable broker, especially if you have a tendency to anxiety. Even the most reputable ones sometimes have bugs in their software, but like banks, they work out the kinks. 

2) Buy an ETF, there are many, choose one available in your country or on your favorite exchange, e.g. Vanguard, SPDR, etc. Check that the cost of this ETF is not very high (costs start from 0.03%).

That's it! Now you own a fund. You can call it "Moderate Growth Fund" and enjoy a fund researched by financial professionals, for a minimum cost of 0.03%!

Now wait for the profits.

For the more advanced investor, there is also the option to buy individual stocks of the companies that make up the S&P500. This will allow you to earn even more profits through dividends. Dividends are not fixed, but for a portfolio of the same stocks as the S&P500, you should expect at least more than 1% (https://www.multpl.com/s-p-500-dividend-yield).

Finally, let's talk about risk. You've heard many times that investing is risky. However, everything is risky. The S&P500 index represents the 500 largest U.S. companies. If all of these companies are losing money, it's a good sign that all companies are losing money and that we have a crisis. Let's think about it: which is riskier: depending on one company, sometimes one manager, who gives you money based on your performance, which depends on your health or your mood, or depending on 500 companies who give you money without any requirements.

Unfortunately, for most of us, we have to work to save money, which we can then invest. When it comes to investing, you need to understand that the money is either placed in a bank account or with a fund management organization or pension fund. The difference lies in the costs you have to pay and the profits you can expect. And the risk of paying much more than necessary to banks and other financial institutions is real and not negligible.