With the start of a new year and a new decade in full swing, Marriott Asset Management provides 20 investment tips for 2020.
Establish your financial goals. This will enable you to put together an effective investment plan with an appropriate long term allocation to stocks, bonds and other asset classes.
Start saving as early as you can. The earlier you start saving for your goals the more time your investments will have to benefit from the compounding effect of reinvested income and capital accumulation.
View investing as a marathon, not a sprint. Investing your money for 5 years or more is generally a good idea. Investing is best suited to long-term financial goals, like saving for your retirement.
Don’t speculate with your life savings. Investing should not be a gamble. Speculating invariably involves buying and selling investments based on very little fundamental knowledge and typically produces anxiety and poor results in practice.
Focus on the income of your investment. The value of a company grows, over time, at the rate at which its profits grow. In the same way, the value of an investment, over time, grows at the rate at which its dividends grow. Invest for the income while taking a longer term view on your capital, which can be volatile.
Know what you are investing in. When investing in a unit trust try to look through the unit trust and understand in which asset classes and in what businesses your money is actually being invested.
Never invest in anything that you don’t understand. Contrary to popular opinion, investing doesn’t have to be complicated – adopting an investment philosophy based on common sense will significantly reduce financial anxiety. If it sounds too good to be true, it probably is.
Invest in quality. Quality businesses are those that are large, established entities that are market leaders in the industries. With the best products and management teams, these businesses will serve you well in the long term.
Avoid capital erosion in retirement. Capital erosion occurs when more income is drawn from a portfolio than is being produced by the underlying investments (i.e. dividends or interest). By eroding capital, you reduce the ability of your investments to generate future income.
Maximise offshore exposure. With dividend yields of some of the highest quality companies in the world well above bond yields, equity valuations in first world markets present investors with a good opportunity to generate inflation beating returns over the next 5 years.
Be cognisant of tax when investing offshore. The tax implications of investing directly in securities can be quite different to those of investing via foreign unit trusts or sinking fund life policies. The compounding effect of tax savings can be significant over the longer term.
Equity exposure is key. Historically, equities outperform other asset classes such as cash and bonds. Equities have generally given investors a 6% real return (total return minus inflation) over time, compared to a 2% real return from bonds.
Don’t worry about economic variables that are out of your control. It is difficult to predict interest rates, exchange rate movements, or the stock market. Rather concentrate on what is actually happening to the businesses in which you are invested.
Diversification is important. Investment diversification is one of the fundamental building blocks of a solid portfolio. Diversification simply means “do not put all of your eggs into one basket” when you invest.
Invest in shares that produce reliable dividend streams. Certain companies will continue to produce reliable dividends regardless of global slowdowns, exchange rate volatility and declining interest rates. Nestlé is a good example of this. Consumers around the world drink on average 5500 cups of Nescafe every second of every day. Other examples of Nestlé brands include Maggi 2 Minute Noodles and Kit Kat. Over five billion packets of Maggi Noodles are sold every year and 650 Kit Kat fingers are consumed every second of the day. Choosing to invest in companies like this will significantly reduce the risk of an investment outcome not meeting expectations.
Do not overpay for an income stream. In determining a fair price to pay for a quality business, its current valuation (dividend yield) should be reasonable when compared to its historic average and also reflective of future growth prospects.
Find out how much your investments cost. Investment fees reduce not only the investment returns but also the income earned and will therefore have an impact on how much income you can draw post-retirement or reinvest pre-retirement.
Ensure that you save enough. This is especially true for retirement. It is a generally accepted concept that you need to save at least 15% of your annual income for 40 years in order to have saved enough to replace 70% of your salary at retirement.
Seek financial advice. Although many people practise DIY investing, it does take knowledge, understanding and thorough research to make the right decisions to suit your needs. Get professional advice from a FAIS-licenced financial advisor on the points raised above and together, formulate a plan that’s right for you.
Remember, above all, investing is ultimately all about income. Capital growth may receive a great deal of investor attention; however, investing should ultimately be focused on building an income stream to fund a lifestyle. Consequently, instead of agonising over the prices of your investments on a daily basis, rather spend that time monitoring the income produced by your investments.