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The stifling effect of COVID-19 on investment newbies

COVID-19 has left the economic world in a state of shock. Stock markets are fluctuating and the global economy is contracting, leaving people concerned about their investments. Some lost money as markets reacted to COVID-19, others adopted a holding pattern, and others still pulled back on their investments, expecting things to get worse before they get better.

It is an unfortunate truth that COVID-19’s substantial economic consequences have meant that people from all walks of life are even more wary of how they spend and save their money. While South Africa’s economy was struggling even before the global pandemic, COVID-19 has had a stifling effect on almost every economy in the world. Even the most seasoned of investors have not managed to completely avoid the crisis.

Although the impact of the pandemic on the global economy has been no stranger to newsfeeds, there is one topic that has been: the effect that the pandemic has had on investment newbies – those looking to ‘dip their toes’ into the world of investing and begin their investment journey. For anyone who doesn’t already have investments in their name, starting to invest amidst a global pandemic can seem daunting.

According to Sheldon Friedericksen, Chief Financial Officer of South African financial services group Fedgroup, “Investing is a very personal thing and is largely dependent on the personal circumstances of the investor. When investing for the first time, especially now, it is worth speaking to a financial advisor to have a customised investment plan drawn up for you. Advisors consider your financial circumstances, risk appetite, time horizon, and investment goals in order to help you make the best investment decisions.”

To help investment newbies, Friedericksen shares six tips

1. Decide if investment is a priority for you – for now

According to Friedericksen, “Before making the decision of how to invest your money, make sure that there is not another financial goal that should take priority, such as paying off an expensive debt.”. Other aspects which could take precedence over investing include taking out an income protection plan and life policy. “These are the building blocks of a strong financial foundation.” So, while investing is always encouraged, in pressing times such as these, there may be other more financially sensible decisions to make.

2. Establish your investment time horizon

Once you have established whether investing is a priority, you can start looking at investment as an option to grow your wealth and decide what you need the money to do for you. Do you want to build a nest egg for retirement, save for future school fees, or have extra money for that dream holiday you are planning? This will help you set your investment horizon. Are you looking at a short-term, mid-term or long-term investment?

Short-term investors usually look at low-risk options like cash management, high-yielding savings accounts or short-term fixed income. Mid-term goals fall in a five to ten-year time frame while long-term goals fall over ten years. Investors who are in it for the long haul (ten or more years) are usually more comfortable with shorter term fluctuating markets as experienced in equity investments.

3. All risk is not equal

“The first step when investing your hard-earned money is to understand your risk profile,” says Friedericksen. ‘Risk tolerance’ is a term used to describe the general level of risk you are willing to take. Riskier investments are expected to provide higher returns to investors, to compensate for the risks they are willing to take. But, of course, the riskier the investment, the higher the chance of losing money too. Your risk profile can be determined by looking at factors like age, income, liquidity needs, time horizon, personality and your investment objectives.

4. Stay true to your investment goals

As with anything in life, COVID-19 and everything associated with the pandemic will eventually pass. Although the effects of the pandemic is seen as a one-in-100-year event, the financial sector has survived similar circumstances before – consider the Great Depression (1929 to 1939) and the stock market crashes in 2007, 2008 and 2009. Many people lost a lot of money in these times, but some (such as Warren Buffett) reached their financial milestones by staying invested and true to their objectives.

When new to the world of investment, it is imperative to revisit your objectives. Do you need liquidity (i.e. easily accessible money), or are you saving for the future? If you can afford it, don’t stop your monthly debit order for your Retirement Annuity or Pension Fund,” says Friedericksen. “In 10 years’ time you will look back at 2020 and be thankful that you stuck to your investment goal, bought more investment units at a lower value, and let your money grow uninterrupted.”

“When using your emergency fund or savings, make sure that you use it for what it was intended for, time of unemployment, medical emergencies, or life’s other unexpected events,” says Friedericksen.

5. Diversify your portfolio

“The best way to minimise your risk is by understanding your investments, diversifying your portfolio, which allows you to offset the risk of one investment against another differently exposed investment. In short, don’t put all your eggs in one basket, so to speak,” says Friedericksen.

Having a properly structured and diversified portfolio can help you mitigate the fallout caused by COVID-19 on the global economy. According to Friedericksen, the best way to bolster your investment against the COVID-19 market crash is to establish how long you are willing to invest your money for and how much risk you are willing to take.

6. Make investing a habit

Once you decide to invest your money – make it a habit. This will help your investment grow and will allow you reach your financial goals. This can be done by setting up a monthly debit order that goes off on your salary payment date. Soon you will not even miss the money in your account, but at the same time interest-bearing investments will grow by earning returns on your previous returns, better known as compounding returns

When you enter the investment market, make sure that you understand what you are buying and how to best profit from it. COVID-19 has had a huge impact on how people spend their money. For some people this is the rainy day they saved for, for others, it is the reason for starting their ‘rainy day’ fund. If you have any disposable income left at the end of the month, make sure you put it to work and enable it to grow towards a better and more stable financial future.