Eight Principles of Investing  

Eight Principles of Investing

"We have always said that while we cannot predict the future, we have learned a lot from the past. It is important to stay calm rather than act impulsively or reactively - only then can you build a sound investment strategy. Your investment goals will still be achievable, despite the ups and downs of the markets.
"Our principles of investing are tried and trusted. They will help you to work towards your investment goals and your future plans. You can be sure that Old Mutual will always be there to offer any support, guidance or advice you may need along the way."
 - Paul Hanratty, MD Old Mutual, South Africa

The Principles
• A sound financial plan: should include determining your goals, current financial position, planning horizon and risk profile.
• A diversified portfolio: a sound financial plan contains a balanced portfolio of investments, including shares, bonds, cash and property, in local and international markets.
• A holistic approach: don't focus on the performance of one element of your portfolio but consider its performance in its entirety.
• Time in the market: taking a longer-term view is bound to yield greater returns that trying to time the markets.
• Outpacing inflation: over the long term, cash is unlikely to deliver inflation-beating returns.
• Regular contributions: by investing on a regular basis over the longer-term, you generally enjoy the best returns.
• Financial partner: Old Mutual has the tools, experience and people to help structure your investments to match your needs and goals.
• An unique solution: the right solution for your neighbour might not be the right one for you.

 
The Financial Plan
It all begins with a plan.
Financial planning is about finding a solution that satisfies your financial needs. Your financial plan should be just as unique as you are, tailored to your individual needs and risk profile. Elements of your financial planning should include:
• Determining your goals.
• Your current financial position.
• Your time-horizon.
• Your risk profile.

 
Your goals
Be clear on what it is that you hope to achieve by investing or saving. Is your focus on establishing an emergency fund, buying a car or saving for a holiday? Or are your goals longer term, for example saving for tertiary studies or retirement?
Your goals may change as time goes by so it is important to review your plans regularly. However, it is just as important to focus on achieving these goals and not to become distracted along the way.
Determining your current financial position
It is important to take stock of your current financial position. This process will help you identify any shortfalls in your current planning process and financial needs you may have overlooked.
Questions you and your adviser should aim to address include:
• Are your family's needs catered for if you die?
• Do you have a valid Will?
• Would you have enough capital to generate an income if you were unable to work?
• Would you require capital in the event of severe illness or physical impairment?
• Do you have medical aid provision in case you are hospitalised?
• Are your assets sufficiently protected against fire, theft or damage?
• Will your investments be able to generate the income you require on retirement?
• Have you saved enough for education or any other need?
• Do you need a homeloan or vehicle finance?
What is your time horizon?
The length of time available to reach your goal determines how much money you will need and how much risk you are willing to accept.
As a rule of thumb, the more time you have available, the more risk you can afford to accept. The shorter your investment time horizon, the less risky your investment should be.

Your risk profile
You need to establish your risk profile before deciding on which investment vehicle is most suited to your needs.
Are you willing to accept the possibility of capital loss, and if so, how much of your capital would you be willing to put at risk?
These days, most companies are likely to offer you a large selection of funds to choose from. Be clear about your investment objective and the risk profile of a fund before investing.
It is difficult to take the time out to build your financial plan. It is easy to come up with excuses like "I don't have time" or "I don't have the money to do this now". But, by delaying, you could be putting your financial future at serious risk. The sooner you start investing, the more time your money has to grow, and the bigger your financial reward is likely to be.
Because your financial plan will play such a big role in determining your financial future, it is important to find a properly qualified, licensed financial adviser who will be able to guide you in the right direction.

A Diversified Portfolio
Diversification is the principle of not putting all your eggs in one basket. In investment terms, it is a strategy to reduce the overall risk of a portfolio by investing in different asset classes (e.g. cash, bonds, shares, or property) that do not all move in the same way relative to the market.
Different asset classes display different levels of volatility/risk and offer different potential returns. For example, in the long-term investors can typically expect higher returns from equities (shares) than from other investments such as cash.
But higher returns tend to be more risky. In the case of equity investments, investors may run the risk of capital losses in the short-term. The returns from one period to the next may also be highly variable (volatile), which also contributes to the riskiness of equity investments.
In market downturns losses are offset by gains
Diversification works for the investor by combining riskier assets, which offer the possibility of a higher return, with lower risk, lower return assets. The result is a lower level of overall portfolio risk, and the potential for higher returns. In a market downturn, losses should be partially offset by gains recorded by other asset classes.
However, while diversification limits the potential losses suffered, it also means that the investor forgoes some of the exceptional returns which can be earned in the stock market.
Diversification can be achieved by building up your portfolio with your adviser's help from components such as bond, money market funds, property and equity funds. Alternatively, you can choose a balanced type of portfolio in which the asset allocation is based on a predetermined mandate.
A well-diversified portfolio should enable you to meet your long-term investment objectives. But it is important to remember to view your investments as a whole and that every investor's solution will be unique.
Contact a professional financial adviser to help you structure and maintain a well-diversified portfolio tailored to meet your needs.

Time in the Market
It's time in the market that counts.
In the short-term, returns may vary considerably. This kind of volatility is typical of higher-risk investments such as equities. But, while higher-risk is the price to pay for the potential of good returns, investing for the long-term helps to manage risk and reduce the variability of returns.
Instead of adhering to this sound investment principle, many investors try to time the market. However, a market-timing strategy is difficult, if not impossible, to follow. You have to guess it right, twice!

The problem with switching between asset classes, is that it requires you to be right twice: once when exiting and once when entering any particular asset class. Now, imagine having to time this decision across asset managers, investment styles and currencies!
Given the short-term volatility inherent in equity investments, how can investors structure their portfolios to have the best-of-both worlds: growth and security?

 
For most investors, the wise approach to investing is an investment plan that builds a diversified portfolio with a mix of equities, bonds, cash and property based on the investor's needs and risk profile.
Essentially, diversification is about structuring your investment in such a way that it includes a spread of assets with different risk profiles.
This would combine a stable element (bonds and cash) with the opportunity to benefit from the historically higher returns of equities. The exact mix should depend on your needs, risk appetite and timelines.

Contact a professional financial adviser to help you structure and maintain a portfolio tailored to meet your needs.
Outpacing Inflation
Learn to outpace inflation.

Investing in cash may seem to be a safe bet as the risk of capital loss is very low. However, it comes at a price in terms of lower returns.
Cash may be an appropriate investment for some investors: those who have a very limited risk appetite and/or who need to draw an income. It is also a given that every investor needs t keep part of their funds liquid in case of an emergency.

For the bulk of investors cash-only investments are unlikely to deliver long-term investment solutions due to the low returns.
Over the long-term, cash needs to be supplemented with investments in other asset classes. As the graph below illustrates, a balanced portfolio not only helps to deliver a smoother return overall in the long term.
It is also likely to deliver higher returns than a typical cash-only portfolio.
 
The key is to consult with your financial adviser to to ensure that your portfolio is constructed in a way that manages your risk exposure while delivering suitable returns. 

Regular Investing
It has been said that markets are driven by fear and greed - at least in the short-term. Keeping a cool head when the market performs poorly is still one of the most difficult lessons to apply.
When you buy can have a distinct impact on the kind of returns investors can expect. Unfortunately, research has shown time and again that investors often get it wrong.
They often buy when markets are at a high and sell when markets are low (ask anyone who remembers the dot.com bubble).
Market downturn = big sale
Ironically, while many investors disinvest from equity markets during times of poor market performance, market downturns can represent excellent buying opportunities - if you have a long-term view.
It is one of the great contradictions that while people generally flock to sales, a stock market "sale" or downturn (i.e. when share prices are low) tends to send investors running for cover instead of running to snap up the bargains on offer.
The few who continue buying on a regular basis throughout market downturns, are actually following one of the oldest and wisest investment principles: buying low and selling high.
Trying to time the market is therefore a futile and potentially costly exercise. Added to this, is the problem that last year's winner is unlikely to be next year's winner. If you are in the market with the aim of building your long-term wealth, it is better to disregard short-term performance fluctuations and to focus on your long-term goals.
Provided that your fund selection is suited to your risk profile and investment needs, following a steady investment approach is likely to serve you better in the long run.
Contact a professional financial adviser to help you structure and maintain a portfolio tailored to meet your needs.

The Right Financial Partner
Before you decide to buy a new car, you do some homework. A car is a functional item that you may decide to sell again within 3-5 years. Isn’t it ironic that many investors spend more time researching their next car than they spend on checking the credentials of the company they will invest with?

Investment is a long-term commitment. You need to be sure of the partner you are entrusting your financial future to. Here are some questions you should ask:
• Does this company have a track record I can trust?
• Are they reputable?
• Are they licensed with the Financial Services Board?
• What documentation is involved?
• Do I understand the marketing material/application form?
• Do I believe this company will still be around by the time the benefits become due? How accessible is this company?
• Can I easily find their call centre number or website?
In addition to choosing to invest with a reputable company, you need to find a financial adviser who can help you to achieve your financial goals.

The questions you should be asking your financial adviser include:
• Does the adviser have my financial wellbeing at heart?
• Have my financial needs been taken into consideration?
• Has my financial situation been reviewed as a whole?
• Is he qualified to sell the product, and is he licensed with the Financial Services Board?
Remember, it is your financial wellbeing that is at stake. You have the right to ask questions and receive honest answers.
Contact a professional financial adviser to help you structure and maintain a portfolio tailored to meet your needs.

An Unique Solution
When you are standing around a braai on a Saturday evening, and your neighbour is telling you of the "killing" he has made in property/the stock market/gold, it is difficult not to be envious. But, before you rush out to invest, ask yourself whether this investment would be the right one for you.
Consider how risky it is, and how it fits into your existing financial plan. Ask yourself if the institution you will be investing with (or for that matter your neighbour) is reputable and trustworthy. Then, consult your financial adviser, and make an informed decision.

Investing is not a one-size-fits-all endeavour. Your financial plan should be just as unique as you and your financial circumstances are. Do not settle for second best.
Contact a professional financial adviser to help you structure and maintain a portfolio tailored to meet your needs.