The biggest mistakes young South African investors are making
As many as 94% of South Africans are currently unable to retire comfortably according to a recent survey by 10x Investments, and despite exhibiting different financial behaviour in certain areas, millennials may still be in danger of making some of the same mistakes as their parents when it comes to investing and planning for their retirement.
The survey, which featured over 2,200 respondents aged 25 and over, was aimed at gaining insight into financial behaviour, views and attitudes exhibited across different demographics, specifically targeting the economically active population of South Africa.
“Our findings reveal that the financial behaviour and attitude of the typical millennial investor, who is defined in the survey as anyone aged 25-35, differs in various ways to those of previous generations,” said Steven Nathan, CEO of 10X Investments.
“While in some instances we are seeing mistakes being repeated across generations, the evident shifts in perception that are happening offer valuable insight into the economic future of South Africa.”
Fees
Alongside not saving enough and beginning to save for retirement too late, the most alarming finding that was evident across the board, was a general sense of uncertainty and lack of regard around the impact of fees.
“While the majority of correspondents are aware that they are paying fees to financial service providers, most people are unaware of the exact level of fees or the impact that these fees are having on their investment value,” said Nathan.
In total, 42% of millennials don’t know what fees they are paying their service providers, and a further 51% think that they are paying less than 1% in fees – which is far below the current industry average of 3%.
This is alarming when one considers that paying 2% more in annual fees can leave investors with 40% less over a 40 year investing period.
He added that, when asked to select what the impact is, an overwhelming 83% of millennial respondents grossly underestimated the damage fees can have on their outcomes, with 28% believing the impact to be a 2% lower investment value.
“At the end of the day, it comes down to awareness and understanding that total fees of more than 1% of investment balance will make a considerably negative impact on long-term savings,” said Nathan.
Technology
According to Nathan, another major trend among millennials is the growing dependency on the internet and a general inclination towards doing daily tasks and activities online where possible.
“When asked which sources of information about financial investments are used, millennials – particularly males, and even more particularly black males – rely more heavily on the internet than they do on their financial advisor. The tendency to conduct personal research in this regard is likely driven by the growing accessibility and immediacy of information which has characterised the ‘information age’.”
“This ties in to the finding that millennials consider the ability to manage their investments online to be one of the most important characteristics of an investment company – as important as the company’s ability to offer low investment fees. This contrasts significantly to the views expressed by older investors, who place greater significance on having a well-diversified portfolio and lower fees than online capabilities when it comes to choosing an investment company.”
Why people are investing
In terms of reasons for retirement investing, Nathan says that millennials and their parents are in agreement on some objectives, but not all.
“For the older generation, by far the most important objective is to maintain their lifestyle when they retire. While this is also ranked number one for millennials, they appear to place greater importance on educating their children and leaving an inheritance to their children than their parents do.”
While there is undoubtedly a shift occurring in the mind set of South African investors, the fact remains that high fees and under-performing fund managers can easily erode investors’ long-term investment returns, said Nathan.
“Even as financial behavioural traits and trends change, the formula for a successful retirement remains simple: put away 15% of your salary over a 40-year period in a high-equity fund with total fees of less than 1%, and let time do the work.”
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