There are certain elements of investing that are worth spending your time and energy on. Markets do what they do; they always have and always will. Investing isn’t always a comfortable journey, and the less you understand, the more disconcerting it becomes.
When markets disappoint, investors wonder whether they should switch, fire their adviser, disinvest or listen to their neighbour’s hot stock tip. When markets are running, everyone wants to pile in – usually at the top.
What to do? None of the above… Focus only on the things you can control when you’re a long-term investor.
Here are nine of them.
Commit to a time frame upfront, and don’t change it. Stock market investing (as opposed to trading or speculating) is, at minimum, a five-year commitment. The stock market can deliver, but only over time. Why is this? In the short term, share prices are subject to volatility as a result of news flow, trading activity and short-term economic data. This is what causes the daily gyrations you see if you watch share prices in real time. Over the long term, the real value of the company will emerge as everyone involved in running or working for that company is incentivised to make that share price go up. This takes time.
2. Asset allocation
This goes hand in glove with time. How your portfolio is constructed, and particularly the risk you can bear, very much depends on the time you have. Short time frames (6 – 18 months) mean you are better off staying in cash or money market assets. Anything longer requires careful thought about the asset classes you’d like to invest in for a given outcome.
To illustrate, if you are 32 and saving for retirement, you have plenty of time and should construct an aggressive portfolio. If you are 63 and drawing an income from your portfolio, you need to have a smoother performance journey, and therefore, you’d look for a more cautious portfolio. There is an asset allocation to suit every goal and need. Understand what you need.
This goes without saying: keep them low. Fees you pay on an investment directly affect your net return, and the effect compounds over time. The lower the fees you pay, the more performance you get to keep.
4. The amount you invest
Yes, you do have control over this. If wealth is what you’re after, commit to the marathon and invest as much as you can. That doesn’t mean it has to be a large amount, and it needn’t be in a share portfolio. Paying off your mortgage earlier is also an investment. The amount you allocate to your investment is unique to your circumstances. The point is to have a goal, have a plan and stick to it.
“If wealth is what you’re after, commit to the marathon and invest as much as you can. That doesn’t mean it has to be a large amount, and it needn’t be in a share portfolio. Paying off your mortgage earlier is also an investment. The amount you allocate to your investment is unique to your circumstances.
Don’t shy away from getting advice, especially if you are not comfortable with your level of investing expertise. Life is too complex to be an expert in everything, so outsource the gaps. A good adviser should, in fact, keep you accountable to every point in this article, which really is half the battle won in wealth creation. The market needs to do the rest.
Minimise it. Use your tax-free savings account. It may seem a trifling annual amount to some and an inordinately long time (15.15 years) to reach your lifetime contribution limit, but every tax cent saved enhances your investment return.
Maximise your retirement annuity contributions and save on the tax. Look at endowments for their tax benefits. These products have improved tremendously and are enormously helpful in tax planning. Consider high-yield equity products if the risk profile matches yours. There are many ways to skin the cat. They all require thought and a time commitment, but are worth it if you work them properly.
7. Have a plan
Yes, it sounds trite, but it’s true. Plan your money. You ideally plan most other things, so why not your finances? This goes beyond a simple budget. Have short-, long- and medium-term goals. Understand what retirement may look like. Even if you’re slavishly contributing to your employer’s pension fund, understand how far this is going to get you when you’re 73. Saving and investing isn’t just randomly allocating some money to a unit trust or ETF you heard about at a braai and are hoping for the best. It involves applying your mind to what you want and how you are going to get there. Spend the time planning. This, too, is an investment.
8. Avoid the noise
Do listen to it if you are trying to educate yourself and understand the intricacies of finance. Avoid doing a single Google search or listening to the radio after 18:00 if you are looking for a hot tip or guidance on what to do next. Popular media is full of opinions. Opinions are interesting and varied, they’re often partisan and inflammatory, and they certainly are not meant to be taken as advice.
Doing what everyone else is doing is also not advice or a plan. So, listen and read (widely) if you are genuinely interested, but know that emotions are a strong force for good and for evil, and don’t let them (and the noise) sway you from the seven points above – which are absolutely within your control.
In extreme cases, you may want to consult an adviser who can point out when you are knee-jerking instead of being thoughtful in your decision-making process.
9. Just start
If you had started something two weeks ago, you would be two weeks into it, better at it and along your path to achieving that goal. Need we say more?