A new financial year means resolutions to save money and invest for the future abound. But, with a surfeit of unit trusts to choose from and a wide range of vehicles, it’s easy to get caught up in the detail while losing sight of basic investment principles. If you’re invested for the long term or intend to start your investment journey, remind yourself regularly of these investment principles that have stood the test of time.
Know your investment objectives
Your reasons for investing are central to the construction of your investment portfolio so being clear on your investment goals is critical. If you lose sight of your goals, you’ll likely find it difficult to stick to your strategy when markets fluctuate or when herding pressure becomes unbearable. That said, keep in mind that investment goals are not cast in stone and are likely to change as and when your circumstances do, so don’t shy away from revisiting them and recalibrating your investment portfolio to keep the two aligned. Personal circumstances can change quickly, and our advice is to document your investment objectives so that they can easily be reassessed and reviewed.
Wise words: ‘Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.’ (Pablo Picasso)
Seek independent advice
Be intentional about seeking advice from an experienced financial advisor who is not affiliated with any particular product house or insurer and who is not financially incentivised to sell you a product. Independent, fee-based advisors are generally better placed to provide unfettered investment advice with no built-in incentives or commissions. Fee-based advisors generally charge a pre-quoted professional fee for the investment advice dispensed, leaving the investor free to implement the proposed solution with any service provider. Take time to do your research, ask for personal recommendations, and undertake careful due diligence when selecting an advisor to partner with.
Wise words: ‘Thought financial planning can easily take a backseat to daily life.’ (Suze Orman)
Be aware of your biases
Us humans are not as rational or logical as we like to think we are – especially when it comes to investing. While being clear on your investment goals is as important as sticking to your investment strategy, it’s just as important to be alert to the havoc that one’s emotional and/or cognitive biases can play when it comes to making investment decisions. Whether it’s over-confidence in one’s own ability, succumbing to endowment bias, choosing to follow the crowd rather than empirical evidence, or ignoring information because it doesn’t seek to confirm our views – be fully aware of one’s natural predisposition towards acting in response to emotions or subjective standpoints.
Wise words: ‘Human beings are poor examiners, subject to superstition, bias, prejudice, and a profound tendency to see what they want to see rather than what is really there.’ (M. Scott Peck)
Understand the nature of investment markets
Financial markets fluctuate over time in response to social, political and economic events and as a long-term investor, you need to be able to tolerate these fluctuations. Equity investments are, by their very nature, more volatile than other asset classes such as cash and bonds, and long-term investors should be able to withstand short-term fluctuations in the value of their portfolios without panicking. Remember, past share performance is no guarantee of future performance, and stock markets have proven their resilience even in times of dramatic political and economic turbulence.
Wise words: ‘You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.’ (Peter Lynch)
Have a broad overview of the investment environment
Appointing an independent financial advisor does not absolve one from keeping abreast of the investment and retirement funding industries. The retirement funding industry is a highly regulated one that includes complex sets of rules pertaining to the various retirement funding vehicles that fall within the ambit of its legislation. Selecting the most appropriate vehicle, or combination of vehicles, in which to invest is dependent on numerous factors so while it’s prudent to seek advice, it’s just as advisable to stay informed and abreast of industry developments.
Wise words: ‘Investing favours the dispassionate. Markets efficiently separate emotional investors from their money.’ (Naval Ravikant)
Don’t track your investments
The more earnestly you track your investments, the more likely you are to succumb to greed, fear or any number of the investment biases that so regularly trip investors up. If you’re investing for the long term, our advice is to review your investments less frequently to avoid panic and anxiety. Human behaviour is such that our response to bad news is more emotionally profound than our reaction to good news making daily tracking of one’s investments counterproductive. Depending on the nature of your strategy, investment horizon and objectives set regular intervals for reviewing your investment portfolio and adhere to the programme.
Wise words: ‘The individual investor should act consistently as an investor and not as a speculator.’ (Ben Graham)
Consider investing through a multi-manager
Portfolio management and the selection of underlying investments is a uniquely specialist field that requires an enormous amount of investment capability, research and skill. Rather than adopting a single manager approach, investigate the possibility of appointing a multi-manager to manage your portfolio in line with a specific mandate. A multi-manager, also known as a designated fund manager, is tasked with formulating the asset allocation and selecting the unit trusts used to express that allocation. The blending of specialist managers within asset classes as well as having experts managing your overall asset allocation means having huge professional resources constantly working on your portfolio, while investment fees remain highly competitive as a result of bulk discounts.
Wise words: ‘The beauty of diversification is it’s about as close as you can get to a free lunch in investing.’ (Barry Ritholtz)
Don’t try to time the markets
Your documented investment goals should serve as a constant reminder that you are a long-term investor and not a speculator. While speculators aim to generate the highest possible investment returns over the shortest period of time, as a long-term investor your objective is to grow your net wealth consistently over time by adhering to a carefully devised strategy. Avoid making investment decisions in response to short-term market movements and stick to your game plan.
Wise words: ‘Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.’ (Peter Lynch)
Know your propensity for risk
The risk that your investments need to be exposed to is a fine balance between the returns your money needs to achieve in order to reach your goals, your liquidity requirements in retirement, and your personal propensity for taking risk. Ideally, your advisor should spend time understanding your tolerance for risk, your expected response to market volatility, and the level of risk in your portfolio at which you are most likely to adhere to your strategy.
Wise words: ‘The biggest risk of all is not taking one.’ (Mellody Hobson)
Have a wonderful day.
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