What are the investment basics I should know?
Time in the market versus timing the market
Seasoned investors will tell you that investments need time to do their thing. The longer your time in the market, the harder your money works for you, which is mainly due to the wonders of compound interest. Stripped down, compound interest is interest earned on interest, meaning that the more money you save over time, the more interest you stand to earn on these investments, but time is the crucial ingredient.
Apple Inc. is the ultimate case in point. If you bought a few shares when the tech behemoth listed in 1980, your initial investment would today be up around 56,000%. But how do you identify the Apples among the many companies that go bust? Patience and time is the name of the game.
Play the long game
Even after doing your research and identifying good companies worthy of your investment, it’s important to know that even the greats have to endure periods of stagnation and sudden price crashes. During these times, it’s worth playing the long game. Adhere to the tried and tested maxim, “Time in the market, not timing the market.” Volatility in equity markets are a part of the game and these types of investments require a timeframe of at least five years.
Apple survived numerous price crashes of more than 60%, it even survived the dot-com bubble, the mother of all technology market crashes. Investors who kept skin in the game throughout these dips and peaks have reaped the rewards.
Long-term investing, whether it’s for retirement or a medium-term goal like investing in property, is in continuous competition with the wants of today. You may want to splash out on new shoes or a flashy new piece of tech but the more money you can park in long-tail investments, the better off your future self will be.
Risk changes over time
Risk is often perceived as a fixed concept but it changes according to where you are in your life. A college graduate can take on more investment risk than someone on the verge of retirement, as the younger person’s investments have time to absorb market volatility. The lower down on the time scale you start to invest, the more time your higher-risk investments have to absorb volatility and deliver higher returns.
Considering this, it’s crucial to save as much as possible and as early as possible, even if the amounts are minimal at the beginning.
A diversified investment portfolio is generally split between stocks, bonds, property and cash, the four main asset classes. Each class has its own distinctive properties that almost act as counterbalances to the other, ultimately creating a stable, balanced investment portfolio.
South Africa’s investment landscape, and financial system in general, is up there with the best in the world, but the local listed market only accounts for 0.5% of the global economy. To counter this, geographic diversification ensures that your investments are exposed to all the upside the global markets have to offer.
Compound interest can go both ways in that debts can also compound over time. Prioritise squashing negative contributors and focus on increasing your capacity to earn by developing crucial skills.
An investment approach driven by investment fundamentals has been proven to deliver the best returns. Financial professionals at Investec have the global reach to help you gain exposure to offshore markets, and help you build a balanced, sleepeasy portfolio.