There’s nothing simple about investing — and knowing where to focus one’s energy can be difficult. Investment markets react quickly to political events, economic policies and presidential tweets, and it’s easy to get caught up in the noise and narrative of the day. But, concentrating energy on factors beyond one’s control can be pointless and counterproductive. In fact, investors are likely to achieve better results if they focus on factors within their control, such as:
While speculators aim to make as much money as possible in the shortest period of time by conjecturing on stocks, investors take a much more insightful, strategic approach to generating returns — and it all starts with goal setting.
Neither speculators nor investors have any control over market returns, but long-term investors have the upper hand in the form of a set of investment goals which forms the touchstone of their decision-making. Goals allow investors to block out market noise and focus on achieving the returns they need to achieve those objectives.
- Asset allocation
One of the primary goals of investing is to ensure that your returns outstrip inflation over time so that your wealth grows in real terms. As an investor, you do not have control over inflation, although you do have control over the asset allocation in your investment portfolio.
By deciding where to put your funds to work in the market, asset allocation allows you to balance risk and reward by allocating your funds across the four main asset classes, equities, fixed-income, property, and cash and cash equivalents.
Because each asset class has different levels of risk and return, allocating your funds strategically across these asset classes helps to balance your portfolio and align your returns with your investment goals thereby tempering the effects of inflation and, in turn, the purchasing power of our money.
When it comes to investing, political events, wars, global pandemics and socio-economic factors can result in certain sectors surging while others tank. Diversification is a management tool that allows investors to spread investments to avoid hedging their bets on a single asset class, currency or sector.
Diversification allows investors to spread their risk between local and offshore equities, local and overseas currencies, developed and emerging markets, as well as between various sectors such as mining, retail, technology and construction.
Focusing too much on what you think will happen with the war in Ukraine or North Korea’s sabre rattling allows you to spend less time appropriately diversifying and rebalancing your portfolio as and when needed.
- Your investment horizon
Your investment horizon is another factor within your control – and this timeline is a critical component when it comes to determining how much risk you should take in your portfolio. Generally speaking, a short-term time frame of between six and 18 months is more suited to cash and money market assets, while a longer-term horizon — such as saving for retirement — will allow you to expose your investments to more growth assets such as equities and property.
Keep in mind that your investment horizon is closely linked to your goals, and it is important to review your investment timelines as and when your goals change.
- How much you invest
The level at which you invest towards your goals is within your control and is closely tied to your income and expenditure which to a certain extent are also within your control.
Again, how much you invest depends on a number of factors such as your goals (and your commitment to achieving them), affordability, debt levels, and future earning potential, amongst other things. In determining how much to invest on a monthly basis, it’s important to find a realistic balance between saving for the future and living comfortably in the here and now.
Reviewing your investment portfolio on a regular basis is important to ensure that the level of contributions remains aligned with your goals, timeline and affordability.
While paying tax is not something you can avoid, it is possible to structure your investment portfolio in a tax-efficient manner so as to reduce your tax liability.
Tax planning is an integral part of investment management as not using the available tax deductions can erode your investment returns and scupper your goals.
Besides using the available tax deductions, understanding how the various taxes such as income tax, dividends withholding tax and capital gains tax apply to your various investments is important for maximising returns.
As a proportion of your overall investment portfolio, your fees may appear negligible — but don’t lose sight of the fact that the fees you pay have a direct effect on your returns which, in turn, compounds over time.
Despite what many investors believe, there is no correlation between investment fees and returns, so don’t fall into the trap of thinking that by paying more, you’re guaranteed higher rates of return.
Be intentional about interrogating the fees you are being charged, insisting on transparency, and ensuring that your fees are fair and that you receive value in return.
Of all the factors investors can control, emotions have proven to be the most difficult. And yet, as Warren Buffett is famous for saying, “Only when you combine sound intellect with emotional discipline do you get rational behaviour”.
Remaining composed when markets fluctuate is easier said than done as most investors will attest to, and emotional control is an investment fundamental. Emotions such as fear, greed and jealousy can cause investors to make irrational decisions and succumb to a range of emotional biases such as herding, market timing and the fear of missing out.
We can’t control the volatile nature of stock markets, but we can choose how we respond to the short-term noise by staying invested and waiting for markets to recover rather than exiting the markets and locking in our losses.
When it comes to investing, choosing a trusted financial planner is one of the most important decisions you can make. Unless you’re a qualified investment manager, managing your own portfolio, allocating your assets, re-balancing your portfolio, and planning your taxes may be difficult.
Partnering with an independent advisor will provide you with ongoing access to investment expertise and a sounding board for all financial decisions.
While many life events — such as death, disease, divorce or disability — are beyond our control, we can choose to seek the guidance of financial experts who have our best financial interests at heart. — Moneyweb