Investors often tell us they are very concerned about the current economic, market, political and socio-economic environment in South Africa and the rest of the world. At times like these, being fearful of what the economy and markets will do is natural and should be addressed, so that you do not make poor investment choices, driven by the need to act. This can only be achieved when you have a properly documented plan, stipulating what your investment strategy is. Your reaction may be to only invest in cash in uncertain times, but cash is not cautious. Rather, it is very conservative.
By only investing in cash – be it in a fixed deposit, money market fund or cash under your mattress – you are effectively saving yourself poor, as the value of your money is sure to be eroded by inflation over the long term. Rather, having a carefully documented investment strategy can provide a far better guide to achieving long-term success.
Here are five investment guidelines to follow for successful long-term investing.
1. Inflation is the enemy
Don’t be fooled: inflation is extremely destructive to your wealth in the long term. The inflation rate in South Africa was 4.6% as at the end of July 2017, and the long-term average was 5.6% over the past 105 years.
2. Correct cash is crucial
Cash has delivered a real return of 0.8% p.a. over the past 92 years (according to the Credit Suisse Global Returns Yearbook 2017 – Summer Edition), indicating this investment will only double in 90 years. Having some cash in your portfolio is wise as it enables you to buy bargains in the equity market, but by investing in fixed deposits, investors effectively tie up their money losing the opportunity to pounce when the market presents a good buying opportunity. Having the correct cash levels brings some stability to your portfolio and serves as a buffer for short-term downturns in the market.
3. Equities are excellent
Equities (growth assets) are a much-needed component in a long-term investment portfolio, as they outperform inflation over time – despite short-term ups and down. Equities delivered a real return of 6.2% p.a. over the past 11.5 years. At this rate, an investment will double in 11.5 years.
4. Take your time
Good, sound investments usually take their time to work in your favour. Predicting exactly when the market will run or is due for a correction is difficult and getting the timing perfect is unlikely. Remaining invested in the markets over time despite short-term turbulence can be beneficial and a simple strategy that delivers results. Doing nothing and waiting can be the best advice you can get – provided your portfolio is designed in line with your needs and investment strategy.
5. Diversify or die
A well-diversified portfolio is one that spreads your capital across different asset classes. This reduces the investment risk of the portfolio and effectively allows poor performance in one asset class to be offset by better performance in other ones. Not all asset classes perform in the same manner or at the same time in any given market cycle and diversification allows you to ‘spread your bets’. It has proven time and again to be a simple and effective strategy over the long-term success.
Follow a well-constructed investment strategy and plan, diversify, be cognisant of the effects of inflation, trust the professionals and base investment decisions on investment principles you know will remain constant over time to ensure you achieve long-term investment success.