Why good clients achieve great investment outcomes

Why do some clients achieve better investment returns than others? Here are some key behaviours that separate successful investors from those who are less successful.

Dec 3, 2021

7 minutes

Paul Hutchinson
Why do some clients achieve better investment returns than others? Here are some key behaviours that separate successful investors from those who are less successful.

The fast view

  • With insights from financial advisors, we discuss why some clients achieve better investment outcomes than others.
  • There is a list of fairly obvious ‘to dos’ but interestingly, in investing (as in life), what not to do is just as important as what to do.
  • Together with a financial advisor, develop and follow a documented financial plan, set up an emergency fund, match your growth asset exposure to your time horizon, maximise any tax benefits, preserve your retirement savings, and take total costs into account are some of the to dos.
  • Don’t panic is a key ‘what not to do’, i.e., stay invested. Don’t be too conservative or extreme in your portfolio positioning. And don’t be influenced by friends, colleagues, or social media.
  • Consistency and good investment behaviours compound meaningfully over the long term, resulting in great investment outcomes for good investors.

We often get the question: “Why do some clients achieve better investment returns than others?” While we don’t believe that there is a silver bullet – each of us is unique after all – we do think that the following dos and don’ts shared with us by financial advisors help to explain why some investors do better than others. Please note that this is not meant to be an exhaustive list of key behaviours that separate successful investors from those who are less successful, but rather food for thought. We have also provided some practical examples to evidence why maintaining this discipline is so important.

What to do

01 Understand and document your goals

Start by understanding and documenting your personal and financial goals, your investment time horizon, and your personal tolerance for risk. Often this is best done together with a professional financial advisor, who can then also provide you with a baseline – ‘you are here, you want to be there’ – and help you to monitor your progress and adjust where necessary. And it is important to measure your progress against this financial plan, not your peers.

02 Set up an emergency fund

We suggest targeting six months of income in a money market account. This is not an investment but rather a savings vehicle for you to use in case of an emergency, preventing you from having to access expensive credit or your long-term investments.

03 Match your asset exposure to your time horizon

Match your growth asset exposure to your time horizon and thereby also maximise the benefit of compound interest. Most of us have an investment time horizon that spans several decades. We should therefore have a high weighting to growth assets (local and offshore equity and listed property), at the expense of defensive assets (local cash and other fixed income assets).

The following table summarises the very long-term real returns1 offered by different asset classes:

Figure 1: Long-term real returns - 1900 to 2019

Asset class SA equities SA bonds SA cash Global equities Global bonds Global cash
Real return 7.1% 1.8% 1.0% 6.6% 2.5% 1.8%

Source: Cambridge Judge Business School, Global Investment Returns, Dimson, Marsh & Staunton dataset.


If you compound these real returns over different time horizons, you can clearly see why Albert Einstein describes compound interest as the “eighth wonder of the world” – R1 000 growing at 7.1% p.a. real over 20 years yields R9 646 but at 1% p.a. real, grows to only R3 147. A real life example is Warren Buffett, who at 90 was worth $81 billion, but a staggering $70 billion of this wealth came after he qualified for retirement benefits in his mid-60s!

In fact, there is a reason why the book which also references much of Figure 1’s source data is titled “Triumph of the Optimists”.2 This study of 101 years of global investment returns provides compelling evidence of the reward that investors (optimists) get for bearing the risk of investing in equities.

04 Maximise tax benefits

Maximise any tax benefits available to you via investment and retirement product wrappers, for example, tax-free savings accounts, retirement annuities and preservation funds. Once again, you will be compounding a higher starting amount.

05 Preserve your retirement savings when you change your job

Preserve your accumulated retirement savings when you change jobs. This is critical to your ability to retire comfortably. In a nutshell, to comfortably maintain your standard of living in retirement you need to have saved approximately 20 times your final annual salary (pre-tax). To do so, ideally you need to start early and stay invested, as evidenced by the following formulas:3

  • Starting at working age 20, retiring at 60: you need to invest 15% of your pre-tax salary for 40 years.
  • Starting 10 years later, still retiring at 60: you now need to invest 30% of your pre-tax salary for 30 years (or plan to work until 70).
  • Starting 20 years later, still retiring at 60: you now need to invest the improbable amount of 60% of your pre-tax salary for 20 years (or work until 80!).
    Clearly there are no quick fixes to a lack of, or interrupted retirement savings.
06 View your investments holistically

Take the overall cost of investing into account but importantly also be aware that long-term outperformance of a benchmark can be achieved with investment manager skill, resulting in meaningful additional returns for the patient investor.

What not to do: recognising that sometimes in investing what not to do is more important than what to do!

01 Don't interrupt your compounding period

Don’t panic and interrupt your compounding period. Yes, a market correction is a scary thing to live through, but often the recovery is swift. Anyone who sells out in panic may miss out on all/most of the gains when markets recover.

An analysis of bear markets over the past 50-odd years shows that the best action is to do nothing and remain invested.4 Figure 2 demonstrates the benefits of staying invested. In this chart, Mo’ Money invested R10 000 at the peak prior to each of the last nine bear markets (a total of R90 000). Figure 2 also tracks the investment outcome for Lo’ Money who made the same investments as Mo’ Money at the peak. However, at the trough, Lo’ Money panicked and switched his accumulated investment to cash for a year, before switching back into the market. The results are astounding. Over 50 years, Mo’ Money’s investment grew to approximately R48.6 million (an annualised return of 16.1%) compared to Lo’ Money’s R4.6 million(an annualised return of 10.4%).

Figure 2: Time in the market versus timing the market

Figure 2: Time in the market versus timing the market

Source: Ninety One benchmark database, 1 January 1970 to 31 December 2020.

It is also worth noting how a 20%+ fall in the market loses much of its immediate significance over time. Take for example the almost 40% market collapse during the Russian Debt Crisis in 1998, and how, over the long term, it barely registers, as can be seen in Figure 2.

02 Don’t be too conservatively positioned

Defensive investments don’t protect you from inflation over the long term. As we discussed earlier, you need to embrace the long-term outperformance offered by growth assets.

03 Don’t be too extreme in your portfolio positioning

An example would include being 100% exposed to South African equities or 100% exposed to global equities. Historically, there have been periods where South African equities have meaningfully outperformed offshore equities, and vice versa. For example, over the last decade, the FTSE/JSE All Share Index (ALSI) returned 7.8% p.a., while global equity markets delivered 15% p.a. However, the prior decade saw these numbers almost reversed, with the ALSI returning 15.7% p.a., versus global equity markets delivering 8.8% p.a.

04 Don't review your investment too often

Don’t look at your investment performance on a daily, weekly, or monthly basis. In fact, even though you receive statements on a quarterly basis, it is often best to simply take note and move on. Rather have an annual debriefing session with your advisor. Make sure that you are on track and adjust your plan if necessary.

05 Don't be distracted by market hype

Don’t be distracted by what your friends and colleagues are investing in or be influenced by social media frenzies and market hype.

In conclusion, as difficult as it is for all of us at times, trust the financial planning process and your investment partners, and be patient. Consistency and good investment behaviours compound meaningfully over the long term, resulting in great investment outcomes for good investors. The optimists will triumph.

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1 The returns that investors earn after adjusting for inflation. For the period 1900-2019, inflation averaged 4.9% per annum
2 Triumph of the Optimists, 101 Years of Global Investment Returns, Elroy Dimson, Paul Marsh and Mike Staunton.
3 Are you investing enough for your future?
4 Cash costs money over the longer term.

Authored by

Paul Hutchinson
Sales Manager

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