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Advice for young investors

Aug 30 2012 07:57
Cape Town - Younger investors have a longer savings timeframe, so should considerations such as risk mitigation and timing the markets feature in their long-term investment plan?

With a generally accepted retirement age of 65, pensioners can look forward to a possible third of their lives being spent outside formal working years. 

The worldwide economic slowdown and ongoing crisis in the eurozone has resulted in even the most prudent of investors sometimes attempting to time the markets in an effort to generate returns enjoyed in pre-recessionary times. 

There is also often an inclination to move into cash to avoid losses.

Although this tendency can be understood in the context of an older investor needing to generate optimal returns in as short a time as possible or preserve capital, it is not advisable, especially for the younger, encumbered saver, who does have the time and freedom to weather negative market cycles. 

"Current market conditions have resulted in a lot of uncertainty, with younger investors opting to open standard savings accounts until such time as the situation stabilises," says Robert Walton, CEO of Momentum Collective Investments. 

"The low interest rate environment currently being experienced translates into negative real returns and younger investors need to be educated about the benefits that are still associated with long-term investing. 

"Taking a longer view on investments is the only way the power of compounding can be fully enjoyed, and that includes weathering periods of poor market returns."

Short investment horizons of one to three years generally involve low tolerance for investor risk/losses and portfolios consequently hold no or little equity allocation.

Medium-term horizons of three to five years allow for greater risk tolerance and benefit from some equity holdings in the form of value investing (buying shares at lower than their intrinsic value) in balanced funds. 

Longer investment terms of five or more years, which are typically enjoyed by younger investors, allow for more aggressive portfolio allocations. These savings products usually include larger equity holdings which, although considered a riskier asset class, can generate significant returns over time. 

"The All-Share Index is higher now than it was before the onset of the global economic crisis in 2008 and investors who haven't tried to time the markets have not lost money," adds Walton.

Younger investors' interest in boutique fund managers is another developing trend. These investment houses perform exceptionally well in their particular asset class and, as a result, often generate better returns than companies with more assets under management due to their nimbleness and ability to take advantage of opportunities more quickly. 

Larger managers, on the other hand, offer mandate flexibility and choice as they are able to identify the most appropriate skills across asset classes (ie "best-in-class" boutique managers) and therefore provide an invaluable service for investors struggling to make the right choice. 

Their skills should therefore not be overlooked by younger savers concerned about making prudent investment choices in the current economic climate.

DIY investing involves investors utilising automated portfolio construction and management tools within an online brokerage account. 

These platforms are often of interest to younger savers wanting to better understand markets and curb the costs associated with smaller initial investments. 

The most important considerations, however, for younger investors following the traditional savings route are the careful selection of their investment manager and adherence to the advised savings plan. 

"Discipline is key in today's investment market as, although insurance against losses is available, it costs money and can significantly erode returns," concludes Walton.

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