Having to rebuild your wealth after a setback is tough, but it’s also an opportunity to build back better, without being constrained by sunk costs and beliefs.
Your previous investment decisions may have been based on your emotions – such as fear of market volatility, or the hope that the top-ranked fund manager would continue to deliver – a fresh start is the chance to consider the factors that really drive your investment outcome. Taking a more informed approach should make the process more productive and rewarding.
Choose the best product for each investment
Different products and funds have different benefits – such as tax incentives, easy access and lumpsum options – that are suited to different goals and timelines. For example, retirement funds are designed to pay you an income in retirement, therefore claiming your money early comes at a cost and is possible only in certain circumstances. When it comes to your rainy-day fund, on the other hand, there is a chance you will need to access your savings immediately, and as a lump sum, which is why you would be better served with a money market fund or unit trust investment for this.
Keep costs down
Investors take all the risk on an investment and provide all the funds yet they often lose the lion’s share of the growth to one or more service providers. Ask questions and try to understand what an investment is costing you, not just in terms of a percentage, which can seem surprisingly low, but in actual rand figures, or as a reduction of your final savings outcome.
Fit your asset mix to your time-horizon – don’t be too cautious
Investments that are deemed riskiest (because they present more volatile returns in the short-term) tend to perform better over the longer term. This makes them more suitable for long-term savings goals, such a retirement. An emergency fund, on the other hand, should be invested more defensively, to secure the capital and be easily accessible in time of crisis.
If you have suffered a major financial setback, you may be tempted to minimise your risk. Keeping your money in the bank gives you the comfort of preserving your nominal capital, but don’t be fooled into thinking that this will preserve or grow its purchasing power.
Money that is not returning interest above the inflation rate (as is the case presently with money held in savings accounts) is being devalued by the difference between the two. To grow your money above the inflation rate you need to take on some market risk. Generally speaking, the more market risk you are prepared to take on, the higher the return you can expect over the long term.
Forget about timing the market
Prices in global markets represent the aggregated wisdom of all buyers and sellers (millions of people). New information – everything from long-expected earnings reports to sudden scandals – is priced in almost instantaneously. It is nearly impossible to beat the combined wisdom of the market delivered at lightning speed by modern technology; it is impossible to do it consistently.
The timing that matters is time in the market. The timeline on a goal should direct the investment product you choose and the assets you invest in. As Ishani Khoosal-Kala said in Part I of this series, Rebuilding your wealth after a setback, start with a plan.
Know your own weaknesses
High risk (more volatile) assets have their place in investment portfolios, but some people do not have the temperament to look away, or to ride out the ups and downs. If you know you won’t be able to stomach severe market volatility rather invest more conservatively so that you don’t do the wrong thing at the wrong time (or drive yourself into an early grave through worry).
Stay the course and keep your emotions out of it
In times of market turmoil, those with a well-considered financial plan can take comfort knowing their plan makes allowance for such periods. This will be more difficult if you are going through a personal crisis, and you have to abandon the plan, say, through losing your income when Covid hit and must draw your savings. This is when you’ll need to plan afresh.
Try not to get overwhelmed by your emotions. One way to avoid panic is to stay informed and engaged, and to reset your expectations, and adjust them where necessary.
Ignoring the noise and staying the course is often the hardest part of being a good investor. Remind yourself that your investment objective is to maximise your return over the entire investment period, covering all reasonably expected market environments, to give yourself the best chance of achieving your goal. Your focus must stay on that long-term return, not on the return over the next month or the next year.
Many long-term investors make the mistake of attaching great importance to short-term results (anything less than five years). Short-term results are largely random, which is why no-one can reliably predict short-term investment returns.
Unfortunately, you are informed frequently of short-term returns, by way of everything from daily stock market reports and quarterly economist and fund manager predictions to annual fund manager rankings. While these have zero predictive value, they have a huge psychological impact on how many people invest their savings.
You risk making poor long-term investment decisions if you base those decisions on short-term investment returns. Rather focus on the end goal and detach from what is happening in the market right now – if you are following an appropriate plan, it should have no bearing on your outcome.
10X is running a special offer in conjunction with its Rebuild SA campaign: Open a new unit trust or tax-free savings account with 10X before February 28 and pay no fees before July.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002.
