Wealth Creation
Whatever your goals, the right investments can help you reach them. Choose from a range of investment solutions designed to help you grow your wealth and achieve financial security.
5 key investment principles
Before you start investing, it pays to learn the basic principles. The more you know, the better off you'll be in the long run.
There are five key principles to think about when investing, which can help reduce your risk and build your wealth. You should also remember that your investment strategy depends on your attitude to risk, your financial situation and life goals
So what are the five key investment principles?
- Start early, invest regularly and reinvest distributions
- Set your investment goals and pay yourself first
- Diversification- Not putting all your eggs in one basket
- It's time in the market not market timing
- Invest for the long term - the trade off between risk and return
1. Start early, invest regularly and reinvest distributions
The earlier you start investing, the more opportunity your investment has to grow through compounding - which means you generate earnings on earlier earnings.
Investing the same amount at consistent intervals, known as dollar cost averaging, can help take the stress out of investing as you to don't have to worry about trying to time the market. If the market happens to be falling on the day that you buy, you get more units for your money on that day. It is the opposite when the market is rising. This tends to "average" the cost of your investment and can help "smooth out" market fluctuations.
A key benefit of dollar cost averaging is that you don't risk getting in at the wrong time with a large purchase or waiting too long and missing a rebound.
Let's see how this works in practice:
Jane puts away $100 a month, every month from the day she turns 20 to the day until the day she turns 30, making no withdrawals. By the time she reaches 60, her investment will be worth $962,952. For simplicity's sake, we'll assume that both Jane and Belinda earn 6% each year on their investments.
Belinda puts away $100 every month, but she doesn't start until she's 30. Instead of investing for 10 years, Belinda invests until she's 50 (twice as long as Jane). By the time she reaches 60, her investment is worth $837,960. So despite the fact that's she's put away twice as much, her investment is worth slightly less.
Why? Compound interest has given Jane a massive head start. By age 60, Jane's investment has been compounding for 40 years, while Belinda's has only been compounding for 30 years. As you can see, that extra 10 years makes a huge difference.
What can we do to get us where we want to be financially?
We can put away more each month.
We can save for longer.
We can reinvest our earnings
We can try to make our money work harder for us.
2. Set your investment goals
To invest successfully, you need to establish investment goals. Having a clear understanding of your goals will help you select the most appropriate investments to achieve them.
To help you assess your current financial situation, and therefore how much you can afford to invest, you should prepare a current budget. This will help you determine how much you can afford to invest.
Once you have decided on the right type of investment for you, a tried and tested way to stick to your regular investment plan and achieve your goals sooner is to have this investment amount automatically deducted from your pay.
Our financial planners can help you through the process of preparing a financial plan, including goals, budget, risk profile and timeframe, as well as recommending a range of investment strategies tailored to your situation.
3. Diversification
Diversification can be one of the keys to successful investing. Do you want to have all of your eggs in one basket, or do you want a few baskets?
Simply put, diversification is about lowering the level of risk across your investment portfolio by spreading your investment across a number of assets and/or markets. Diversification generally reduces the impact of any single investment or asset type negatively affecting the value of your overall portfolio. In a way, it has a smoothing effect - you won't get the huge gains, but nor should you experience the big losses.
4. Timing the market versus time in the market
'Timing the market' is where you try to buy when the market is low and sell when it is high. However, anticipating the top and bottom of the market can be extremely difficult. In practice, many who try to time the market end up worse off.
'Time in the market' refers to the length of time your investment stays in the market. History shows that while assets like shares may experience periods of negative return over the short term, over the longer term returns tend to be higher than less risky investments such as cash. Adopting a longer-term investment strategy helps keep you focused on your financial goals.
5. Invest for the long term - the trade off between risk and return
All investments involve some degree of risk. The potential for higher returns generally means an increased chance of negative returns.
Regardless of the type of investment option you choose, it may not perform according to your expectations. You need to strike a comfortable balance between the level of risk you are prepared to accept and your desired level of return. As a general rule, the longer the timeframe you can invest for, the more risk you can afford to take.
What sort of investor are you?
Before you invest, you need to understand your time horizon and how you feel about risk.
In a nutshell:
You're a conservative investor if you don't like taking risks and are happy to invest your money for 3+ years whilst it grows steadily.
You're an aggressive investor if you don't mind taking risks and you are happy to invest your money for 7+ years with a tolerance for higher volatility .
You're an aggressive investor if you have a tolerance for higher volatility and you are happy to invest your money for 7+ years, with a view to higher returns.
Most investors are somewhere between these two. Before you categorise yourself, answer the following questions.
What is my time horizon?
Ask yourself, 'How long do I intend to invest my money before I need to access it?'
This is essentially your time horizon, and it is a key factor when making your investment decisions. Investment markets move up and down over time, and the value of your investment will move with them. The short term volatility experienced by growth assets such as shares may be less of a concern where you are an investor wanting long term growth. Alternatively, if you want to access your money in the short term, you may prefer a greater weighting in defensive assets that offer less long term growth opportunity but greater short term stability.
What is my attitude towards risk?
Risk is associated with the up and down movement (volatility) of the market and the potential for negative returns. It's very important to understand how you feel about risk.
If you don't like taking risks and are happy to invest your money for 3+ years whilst it grows steadily, then you are more likely to be a conservative investor.
If you don't mind taking risks and you are happy to invest your money for 7+ years with a view of higher returns, then you are more likely to be an aggressive investor.
You can also ask yourself, 'Am I comfortable with receiving low or negative returns in the short-term in order to obtain higher returns in the long-term?' Could you still sleep at night if this happened and would you stick to your long term strategy?
Or, would you be more comfortable receiving moderate but consistent returns? This is commonly referred to as the trade off between risk and return.
What sort of investor are you?
Are your goals and investor profile compatible?
For instance, you may have a short term goal to double your money so you can pay for a holiday, but you have identified that you are a conservative investor. To double your money in a short period will require an investment with high returns, which generally involves high risk. This means your goal is not compatible with your conservative investor profile and you may then wish to look for alternate ways to fund your holiday.