The importance of saving and investing from an early age cannot be stressed enough, but people are still hesitant to start saving or investing. More often than not, they tend to put it off until later in life, which isn’t always the best option.
Samukelo Zwane, product manager, ETFs Wealth and Investments, said that might not always be the best way to manage your finances.
“Your investment decisions should be centered on your investment objectives. When we invest, we must consider what we are trying to achieve before making that investment decision.
“The strategy of a publicly traded company revolves around the direction that company wants to go and how it will get there. The investment strategy is no different. Understanding where we want to go first makes selecting the investment vehicle much easier,” Zwane advised.
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Investing from an early age not only helps to grow wealth but also to develop investment and savings knowledge. Financial and investment education is key to unlocking sustainable returns in adulthood and being able to identify new market opportunities. Time is an exceptionally important asset in the world of investing, and one that young people need to capitalize on.
“The more time we have, the higher the likelihood that bouts of short-term volatility will be overcome in the market and consistent returns achieved,” Zwane said.
He further indicated that the younger generation should read and listen to market news and actively invest and look for opportunities.
Active investors should invest in a basket of assets and investment vehicles seeking to outperform the rising cost of living over the long term.
“In our youth, we can afford to make some mistakes, as long as knowledge is gained in the process and lessons learned. Investing early in the market in a balance of high-growth assets can accelerate wealth creation, and I believe this is a successful strategy for becoming a successful long-term investor with a large capital base in retirement,” explained Zwane.
Creating sustainable returns doesn’t happen overnight. Successful investors are consistent, patient, and develop a key understanding of what they want to achieve with the investments they make.
Zwane notes that the following steps will help you on your investment journey:
Define your investment goals
Deciding on the right investment strategy means understanding what you are trying to accomplish in your journey. You do not plan the mode of transportation before selecting the trip. Make sure you know your goal before choosing investment and savings vehicles.
Buy long-term assets, ignoring market noise.
Trying to predict the direction of the market so that you only buy when prices are low or only sell when prices are high has never worked for a long time. Stocks, for example, can be priced high and continue to rise, meaning you’re missing out on potential returns by sticking to this strategy alone.
Despite the stock market ups and downs, long-term stock indexes continued to rise. Both passive and active investors are better off taking a long-term view and investing fixed amounts on a regular basis. This will result in increased dividends received from a greater number of shares and a chance for your capital to grow steadily over a longer period.
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Reinvest all earnings
Reinvesting earnings for as long as possible allows the power of compounding to kick in.
Reinvesting those insignificant dividends or small capital gains will mean increasing the number of assets in your portfolio, thereby increasing the potential for dividends, interest received and capital gains. Reinvesting money in the market means growing your capital year after year until you need to live off those returns.
Invest in quality, not cheapness
Invest in assets you understand from a business perspective and see potential for growth. Invest in assets and investment vehicles that you understand or have dealt with before, and that are poised to thrive in this new economic climate the world finds itself in.
If you only buy from Woolworths because they are the best in your opinion and you appreciate all of their products, their customer service and you have researched some of the other revenue streams and strategies the company has adopted, invest in Woolworths if it fits your long-term objective and risk profile.
For the active investor, seek growth
Watch how a company’s turnover increases from year to year. You can get a company’s financial statements from its website. Get an idea of the sales growth of this business. Compare it to other companies in this industry. With quality growth companies, sales growth leads to profit growth. And the growth in earnings leads to growth in stock prices and higher dividends and, as a young investor, it increases investment knowledge and puts you on the right path to selecting high-performing growth assets.
Diversify your stock market investments to reduce risk
Every investor has made mistakes. Whether it’s missing an opportunity or investing in an underperforming stock. By diversifying your portfolio, you will limit the damage from these mistakes, which means that a mistake can be less costly when diversified. Two stocks may be down for the year, but your investment in gold is up, which means your portfolio is up for the year. Diversifying your portfolio will dramatically improve long-term returns, whether you’re looking for passive income or strong growth.
To diversify a portfolio, include a basket of different asset classes, companies and industries of different sizes, and geographic locations. For the active investor, FNB introduced its offshore ETN offering, giving investors the opportunity to gain offshore exposure to some of the largest international companies by market capitalization. Just investing in SA means all your eggs are in one basket. International markets are developing and behaving differently from global pandemic news.
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Limit the number of assets in your portfolio.
In order to be consistent in understanding the assets you invest in and their growth potential, limit the number of assets in your portfolio. Instead, reinvest the returns in the same performing asset classes instead of buying something you may not fully understand. Remember that old adage, don’t change what works.
“As we approach retirement, our investment and savings needs begin to change. The nest egg built during our professional career must now sustain us. Money needs to be accessible on a monthly basis to cover living expenses, which means having a balance between long-term and short-term investments.
“Income assets such as high yield stocks, preferred stocks and bonds should be considered as an addition to your asset basket, as reliable and consistent streams of income are generated from these investments, while protecting capital.
“Having a balance of growth and income assets as you approach retirement further diversifies portfolio risk, giving you a greater chance of growing and protecting your wealth during your golden years,” Zwane said.
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