History has shown that share prices do not only go up. It is entirely normal for prices to decline in value, just as it is normal for them to go up. As we experience the seasons of spring, summer, autumn and winter, so do share prices on stock exchanges around the world rise, fall, rise and then correct again, almost always to higher levels than before. We are currently experiencing a period when investment performance is disappointing. History has shown that this will change – it always has!
When markets are in decline, it is tempting for investors to try to time the market by cashing in their investments with the intention of re-entering the market when the outlook for positive returns is more promising. Unfortunately, very few investors get their timing right consistently, and many lose money or miss out on important gains. This leads to below-average performance and often a permanent loss of capital.
When making long-term investment decisions, it is essential to separate your emotions from your objectives and instead follow a sensible strategy underpinned by the following fundamental principles:
Start investing as early as possible. The longer your money stays invested, the longer it has the potential to grow exponentially through the miracle of compounding, the so-called eighth wonder of the world. You should ideally add to your investments regularly. The earlier you can start investing a portion of your available money instead of spending it, the more your investments will be worth over time. It is never too late to start investing,
Next, it is advisable to stick to your investment plan and stay invested through the cycle. Although growth assets such as shares, in most cases, should form the cornerstone of your investment portfolio, it is prudent to adopt a diversified approach to investing and hold investments in different asset classes. It is important to rebalance your investments regularly to ensure that your portfolio remains aligned with your financial goals and attitude towards risk.
Take advantage of as many tax-saving opportunities as you possibly can. SARS has provided South Africans with the means to reduce their taxable income through certain investments, and it makes sense to take advantage of those opportunities. These incentives include investing in products such as retirement annuities and tax-free investment plans.
You should only invest in what you understand. By so doing, you will be able to separate meaningful information from the vast amount of noise associated with your investment decisions. Avoid pursuing any “hot tips,” chasing last year’s winners and especially steer clear of investment opportunities that seem too good to be true. They usually are!
While the stock market volatility can test your patience, it is best to adopt a long-term approach to your investments. An experienced Certified Financial Planner® will be able to assist you in understanding the various options available to you and assist you in avoiding making mistakes that could ultimately lead to a reduction in your wealth.
Rands and Sense is a monthly column written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891