Investing during Turbulent Times. Advice on setting a plan.
Many investors have experienced significant losses over the past year. Perhaps you are one? Perhaps the current market volatility is preventing you from starting an investment?
There is no correct time to invest.The best time to invest is when you have the money! History dictates that there is no perfect opportunity to invest. To reap the benefits, your money has to be in the market and stay there for an extended period.It is not market-timing that gives a return, but TIME IN THE MARKET!
Equities can make money in short periods that are impossible to predict. But, anything less than 5-years is saving or gambling, not investing.
THE BEAR MARKET.
Whilst it is true that most investments have not made money over the last few years, there are some that have returned handsome figures. If you had been in offshore and rand denominated funds, you would have realised a good return. But, how many of us were lucky enough to have picked this sector of the market? Not many! And you can bet your investment that this will happen again and again. So, how can you try to avoid this happening to your investment?
STAND BACK AND RE-EVALUATE YOUR BASIC RULES FOR INVESTING.
You need to build your strategy on a firm foundation. By creating sound investment decisions and sticking to the basics, you greatly increase your ability to generate high returns! If your investment is long-term, the best opportunity of generating a real return still lies in the equity (share) market. However, you need to have a realistic expectation of your return. The days of a 15% to 20% return are gone. Our inflation rate is now in single figures and looks likely to remain so for quite some time. This lower inflation rate directly corresponds to lower rates of investment return. Adjust your expectations considering the future buying power of your money. It will not depreciate as much as in the past, so a lower future return is not the disaster you may think it is!
IF YOU CAN BEAT THE INFLATION RATE BY 1 OR 2 PERCENT YOU ARE DOING WELL.
You are retaining the purchasing power of your money, one of the cornerstones of successful investing. This may seem a low target to aim for, but if you take too much risk chasing the potential of higher returns you are going to get burnt! To make money, you want to buy in a low market and sell in a high market. Yet, so many investors don't do this. They get greedy and keep going in rising markets, often till it's too late when the market suddenly falls. Or, they try time the market bottom, scared to buy too early. The JSE is constantly beating all time high returns. Now is the time to buy!
Market sectors behave differently all the time. When the Rand is weak, offshore rand denominated and resources funds do well. When interest rates are falling, bonds do well and so on. Just how do you hedge your bets? Certainly not by chasing last year's best performers!
YOU DO IT THROUGH DIVERSIFIED ASSET ALLOCATION.
You need a diversified portfolio of Equities, Bonds, Cash, Property and Hedge funds. Both in local and offshore markets. Then, if one asset class falls, your entire portfolio won't be as badly affected as if you were totally invested in one sector. Many investors achieve diversification by buying endowments and unit trusts from reputable financial institutions. Some of these products offer managed portfolios that already embody the principles of diversification. Always consider your total investment return. Don't concentrate your efforts on one sector. It will affect your judgment.The Importance of Diversification
DON'T KEEP YOUR MONEY IN CASH.
If you do, you will miss out on any up market recovery. Keep only the maximum interest-free allowance in your cash investment. Invest the rest.
Know what you want to achieve and when. A sound plan will give you the confidence you need to weather the storms. Set clear investment goals. Take tax and CGT into account and your risk profile. Create benchmarks levels of return (or loss) that you want to achieve (or not!) and a strategy that you will follow when your investment reaches these benchmarks. Don't become attached to your assets. You need to be mercenary and follow your initial plan closely, irrespective of whether you believe you can do better by waiting a little longer. You can't predict the future.
If you are not a hands on investor, use a management team that has a good long-term record. It does cost a little more, but the results will justify it.
INVEST AT REGULAR INTERVALS.
Invest at regular intervals. Rand cost averaging allows you to take advantage of the movement of prices and to buy more shares when prices go down. It is a important tool to use and it's the way to take the fear out of investing in markets. Simply put, over a period of time the unit price you are buying at will fluctuate with market movements. When it is high, you buy less units than when it is low. If you regularly buy units, over time you will end up with more units than if you bought all in one go. This means you land up buying units at a discount and this discount results in a higher return, even before considering the investment return. With Rand-cost averaging, you'll never worry about short-term price fluctuations. You'll never land up investing a lump sum when the market is low. You build your investment in a systematic, cost-effective way.
CONSIDER GUARANTEES WITH YOUR INVESTMENT.
Although this will force you to look at a term of at least 5-years, it may be worth it. But remember guarantees cost money, so your return will be less than in a non-guaranteed product. However, I have yet to meet a client who regretted not taking a guarantee - especially in these volatile times! If you rely on your investment for income, or are risk averse or retired, you must consider a guarantee. Not all guarantees are the same. You need advice as to the security of the company you are invested with and the cost of the guarantee. In times of high inflation, returns are good so the cost of guarantees are reasonable. With our lower inflation, costs of guarantees are a major concern.
To worry is natural. Have realistic expectations of what to expect and put your trust in someone you can get real advice from, in a timely manner. Don't get immobilized by fear. Know what you need to do and do it consistently over time and you will reach your goals. If you keep a cool head and build a sound investment strategy, you can achieve the financial goals you have set for yourself.
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