Yesterday I had the great pleasure to finally meet Andrew Hallam in the flesh at his book launch for “The Global Expatriate’s Guide To Investing”. There is another session coming up this Wednesday and I would highly recommend you to attend if it all possible: – http://andrewhallam.com/2015/01/the-global-expatriates-guide-to-investing-singapore-book-launches/
Andrew led the discussion about how easy it is manage your own investments with as little as 1 hour per year, but also about how naturally we are bad investors who typically buy when prices are high, and sell when low! Most of us under-perform the benchmark because of our emotions and belief that somehow the experts know when is a good time to buy and sell (and we follow their advice), when in fact their predictions are only accurate 46% of the time!
The simple fact is that investing for your retirement is a long term plan and you need to just stay with it. Ignore the news, just stay with your allocation plan and rebalance your portfolio once a year. And of course, keep your fees as low as possible.
Andrew gave a few examples to show us how very few of us understand “basic” compound interest when thinking on our feet.
He gave the below example:
If you had, $10,000 invested in the market for 30 years and it returns 5%, your final value would be $44,677.
The question is, if your return was 10%, what would your value be then?
I took the lazy route and just made the simple double it assumption: 10% is double 5%, therefore $89,354 is double $44,677. Sounds good right?
Whoops, I forgot to bring my compound interest formula with me!
The correct answer is in fact $198,374!
The point of this example was two-fold:
- We are terrible at doing these type of calculations on the fly, therefore easily manipulated into buying heavily marketed financial products.
- Percentage points matter! You may not think a few percentage points matter but with compounding they really add up. If you buy an Actively managed Investment Linked Plan, you’re going to be paying a lot of fees on this which is going to have a significant effect on your final return.
The alternative approach (and much more sensible approach) is to manage it yourself, by buying extremely low management fee index tracking ETF’s which will allow you to soundly beat the experts at their own game.
I’m looking forward to giving away my signed copy of Millionaire Teacher to a close friend, the book that really woke me up!