PUTTING your hard-earned money into an investment is a scary proposition, and every investor is only too aware of the fact that financial markets are neither predictable nor stable.
In this constantly changing environment, many would-be investors do not fully understand why they should invest their money, and how their portfolio can work for them.
So how can you be sure of making the the wisest and most sensible investment decisions? Discovery Invest FUNDamental Series has identified six principles that have stood the test of time, and that can help you secure the best possible returns.
Just do it
When is the best time to start investing? Well, it's never too early and it's never too late. Regardless of the current economic climate or how well financial markets are performing, the most important thing is just to get going.
After all, if you don't invest, you cannot start to earn the returns you need to reach your financial goals.
This is where financial advisers come into the picture: they are able to explain how financial markets work, and can tailor an investment portfolio for you by combining their knowledge of market cycles with analysing the factors which impact on your portfolio.
A competent adviser will steer you towards the investment plans that best suit your needs. Be patient and committed
Instead of chopping and changing from one investment fund to another based on past performance, most of the time it really is best to make a long-term commitment to your chosen fund.
After all, there is no guarantee that a fund which has performed well in the past will do so in the future. Patience and commitment are key to building up a successful investment portfolio over time.
To illustrate this principle, Discovery Invest looked at three men of different ages (25, 35 and 45 years old) investing the same amount of money (R5 000) every year until the age of 65.
By that time, their total investment respectively would be R200 000, R150 000 and R100 000.
Assuming that their investment grows by 10% each year, by the time they reach 65 its overall value would respectively be R2 312 645, R859 518 and R299 275.
This shows that over time, your investment yields more value if you invest for longer. Save fixed amounts regularly
South Africans are notoriouly bad at saving. This in itself is a big risk, as it is a given that the cost of living will rise considerably.
Investors should budget to invest fixed amounts of money at regular intervals, because over time these savings add up. Investing via a debit order is an excellent example of this type of saving.
This allows you to invest a set amount of money regularly without the additional worry of timing transactions with the financial markets.
As a result, you are able to buy more units or shares when prices are low, and fewer when prices are high. This means you pay a lower average cost per share, a principle called "rand cost-averaging".
Your financial adviser will be able to explain the different types of funds to you, and advise you on which type of funds would suit your investment portfolio.
Making the decision to save small amounts regularly over a period of time helps you to maintain a regular investment plan, and to be disciplined about saving.
It is important to note that this type of savings doesn't necessarily result in a profit, and does not protect you against financial loss when markets are not doing well,. However, it does help you in reaching your financial goals.Don't put all your eggs in one basket
This old saying is especially true when it comes to investing your money.
Instead of investing in one basket or asset class, you should invest in a variety such as equity (eg ownership of shares in a company), fixed income (eg bonds) and money markets, both in South Africa and abroad.
Even though diversifying your investment portfolio does not guarantee a profit, doing this reduces the overall risk of your investment since negative performance in one asset class can be offset against positive performance in another.Plan your asset allocation with care
Planning how to allocate your assets is a very important step when talking to your financial adviser about how to develop a personalised, diversified investment portfolio.
Asset allocation strategically mixes different asset classes in varying proportions to achieve this investment portfolio, which is tailored to your needs.
When discussing your investment portfolio with your financial adviser, be sure to raise the following points:
• Your investment goals, which take into account the reasons you are making an investment eg saving for retirement, funding your child's education, and buying property;
• Your ideal timeframe horizon, which indicates how long you want your investments to work for you in achieving your goals; and
• Your risk tolerance levels, which show how comfortable you are with potential fluctuations in the value of your investment portfolio.
These three aspects will help your financial adviser to see which investment plans will work best for you in achieving your goals. Rebalance your portfolio regularly
The last investment principle is to be consistent in rebalancing your investment portfolio.
This means that once you and your financial adviser have come to an agreement on which investment funds are best for your portfolio, it is important to consistently review your decisions with him or her when markets shift and change.
This will help you to align your asset allocations with your original goals. It's important because not monitoring your portfolio could lead to your investment having too much exposure to certain asset classes over time.
These six principles, under the guidance of a competent financial adviser, will help you make the most of your earnings and steer you towards your best investment options.
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