My advice to my clients as well as prospective clients is – please do yourselves a good act and read these simple truths presented here by Money Marketing about investing. The contents bear out what I often emphasise in my practice to clients and which, unfortunately, are not always acted upon – to their own long term detriment. Here you have it in writing – be wise and read on….
“Every form of saving is a form of paying yourself first. Savings should not make you feel deprived. On the contrary, savings should make you feel empowered. Soon they will offer you options and eventually complete financial freedom and independence.” Sunel Veldtman
Unsung investment heroes
Investing is a serious business that demands a lot of attention, information and time. Does it receive this?
Some common sound investment practices we hear often are time and diversification. So it pays to have a financial plan, invest for the long term and to reduce risk and avoid total wipeout diversification matters. But what about some other unsung investment principles that can make a real difference to the end result? Below we feature six of these.
1. Discipline
Discipline is an under rated investment activity. A disciplined investor is one who takes control of their finances and investments and on a regular basis uses a consistent investment process to meet their future financial needs. To achieve financial success you cannot invest in everything all the time, nor can you change your mind all the time.
And critically you have to keep at it even when the going is tough. You cannot give up because the first steps are hard nor because the last steps feel like the longest. Compounding – where your money grows more each year really starts to kick in near the end of an investment – think of the lily pond example from Franco Busetti’s book The Effective Investor. On the second last day a lily pond can be only half covered with lilies – a day later and the compounding effect sees the lily pond totally covered.
Extreme swimmer and environmental campaigner Lewis Gordon Pugh says that many people give up at the ninth hour – when they are so close to reaching their goals.
The first steps, the middle steps and the last steps – each amount you invest – can all seem difficult but an investor has to have the discipline to take them to achieve the goal.
2. Ignoring irrelevant information
We may have a lot of information that we can use and that is interesting – but a successful investor will identify the useful information from the irrelevant.
So do the intraday movements of a share price matter to your plan, does the weekly movement of the JSE All Share Index matter to your plan? Should you be reacting to these events? What is factual information and what is rumour – and what will make a difference to your investment?
These are issues every investor has to deal with. You will hear updates and newsflow on a regular basis. How do you decide what really matters?
Speaking at the Conversations with Coronation presentation yesterday portfolio manager Neville Chester pointed out that while the share price of a company can move significantly in any one day the underlying value of the business does not change with such speed.
In his book Don’t believe everything you think, Thomas Kida says one of the six basic mistakes we make is preferring stories to statistics. So a fireside chat reveals a friend who has a good investment experience in company or fund x and that leads to a decision to invest our own money in the same way. This happens frequently. Yesterday acsis revealed the results of their Financial Security Barometer – these showed that 26% of all respondents consulted friends, family and work colleagues for financial information and advice.
You may have a colleague or friend who is good with finances – but financial planning needs to be thorough affair based on individual situations and needs.
It is also sadly true that the finance world is filled with statistics and facts and not all of these will matter – and statistics and figures can be manipulated.
Investors have to question everything and avoid making decisions without verifying from trusted sources what information is worthy of action.
3. Too much attention to speed
Earlier in the year when Santam launched their new advertising campaign, CEO Ian Kirk spoke about the time difference – when choosing a house we spend days and months searching for the right property at the right price in the right place before entering into a lengthy transaction process and going through several checks and balances before acquiring the asset. And yet when choosing a short-term insurance cover we want to make that decision in a couple of minutes.
If your future is long it does deserve a lot of attention – and that means that funding the future needs time to make sure any decision made is the correct one.
The house provides two further interesting analogies.
The first argument people will raise when taking time to buy a house is that it is a big purchase – this is true. It is also a financial and a social investment – you live there and want to be comfortable and happy. But if a house is an upfront large purchase amount to be used in future then an investment is just the reverse of this – buying in small amounts upfront a very large amount for future use. You have to take the time to find the right investment product for you.
The second is maintenance. Acsis CEO Andrew Bradley said yesterday that while the financial plan is a good place to start it is not everything – it needs to be maintained. Bradley likened this to a having a garden landscaped – you can have a beautiful manicured landscaped garden but don’t maintain it and it will grow wild and possibly attract a few undesirable plant and animal inhabitants. Your house is similar. Over time we beautify and improve our properties – we extend, replace, redecorate, update and we add security.
The big things need big attention – investments are one of these. It is not the speed of the decision that will add to your wealth – it is making the right decision for you that will make a difference, and undertaking regular maintenance to keep that investment up to date and relevant.
4. The starting point
While it is undeniable that the longer most investments are given the more they will grow – when you start that investment matters.
The first important point here is that it makes a difference if you start young. The younger the better. Starting in your 20s is a very good place to start. The later you start the more you will have to save.
But also critical is the initial price paid. While not advocating the very risky business of market timing – it does deserve a bit more attention and analysis than it currently receives. Invest in the market at a high price and you may spend a lot of time playing catch-up. Invest at a low price and you just have a better base for growth. This really matters when you are investing a lump sum – because as Sanlam Private Investments director of investments, Alwyn van der Merwe, says – with a lump sum you have one chance to get it right. This is also why many advocate phasing in investments.
5. Compromise
Yes – if you are putting money into an investment you are forgoing another expense. When you decide to invest and provide for a future financial need there will be compromise.
In the words of Sunel Veldtman, author of Manage your Money Live your Dream: “Everything beyond covering our basic needs is a matter of choice.”
6. Size
The size of your investment matters. The more you can save the better chance you will have of success.
“Investment returns make a difference but the biggest factor is making sure you put enough money away – as simple as that.” Andrew Bradley made this comment yesterday. Yes, economic and political events will impact – but if you want enough – you have to save enough.