Keys to investment success

There are a few key principles that all successful investors follow to ensure long-term growth in their investment portfolios.

Diversify your investments

The first rule of investing is not to put all your eggs in one basket. Not following this rule raises your risk profile and may have a negative impact on your investment returns.

Diversification is not limited to the four different asset classes, namely cash (the short-term money market), bonds (the long-term money market), property and equities (the share market), it also encompasses diversifying into different geographic locations.

The South African Savings Institute explains the characteristics of the different asset classes as follows:

Cash is the safest asset class and provides the lowest return over time. It covers such investments as on-call deposits in banks, cash management trusts and similar short-term, interest-bearing investments.

Because cash is the safest investment market, it is used as a benchmark against other investments. When cash rates are low, other investments become more attractive and tend to rise in price. Cash tends to have a low correlation with all other asset classes.

Bonds are also interest-bearing investments, but involve a longer period of maturity, usually some years. Government, local authorities, parastatals, and corporates borrow money from investors by issuing them with debt instruments called bonds. By holding a bond an investor is usually entitled to an annual cash interest payment that is fixed at the time of purchase. While this locked-in interest rate may seem safer, it exposes the investor to more risk: if inflation or short-term interest rates go up during the period to maturity, the investor loses out. Bonds are low to medium risk investments and provide low to medium returns over time.

Property covers the whole ambit of real estate investment, from rural estates to office blocks. It is a medium to high-risk asset class, with returns proportionate to this risk. Because the property market is generally adversely affected by rises in interest rates, it tends to have a low correlation with interest-bearing investments – especially cash.

Equities are the highest risk, highest return category of investment. Investors take a direct share in the profits or losses of companies, and hence in the economy itself.

Do not attempt to time the market

Long-term investors differ from speculators in that they do not try to time the market, meaning that they do not attempt to buy when prices are low and sell when prices are high. Investors do their homework and buy shares based on their long-term value and growth potential.

Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.

Avoid emotional investing

According to research conducted by Barclays Wealth and Investment Management, the innate need for emotional comfort is estimated to cost the average investor around 3–4% in returns on an annual basis. This loss of returns is partly due to what is known as ‘the behaviour gap.’ The behaviour gap explains the difference in what our returns would have been if we were to stick to sensible investment rules and actual returns that are determined by our short-term decision-making, mostly based on fulfilling our emotional needs. In times of market flux and uncertainty, irrespective of whether markets are rising or falling, we often make incorrect investment decisions, and end up buying high and selling low.

Markets often overreact on both the upside and the downside. Whatever the market reaction, it is important that investors stick to their individual investment strategy. It is understandable that investors are concerned when markets fall and start to question their investments. What an investor doesn’t want to do, however, is to make rash short-term investment decisions that have negative long-term wealth consequences.

The only way to lock-in your losses is to exit the market. History has shown that every economic down-turn is followed by a recovery, and investors who exit the market lose out on the recovery that follows.

Rebalancing your portfolio

Rebalancing is the process of adjusting the weightings of the different asset classes in your investment portfolio by buying or selling assets, which changes the weighting of a specific asset class.

Rebalancing your portfolio helps to maintain your original asset-allocation strategy. Rebalancing will help you stick to your investing plan regardless of what the market does, which helps you to stick to your risk tolerance levels.

By seeking investment advice from a qualified financial planner, keeping the various elements of your investment plan aligned and remaining informed about your investments, you will be able to successfully navigate the investment market storms on your journey to wealth creation.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs.