In many ways, rebuilding your wealth after a setback is not dissimilar to building your wealth in the first place. The basic ground rules apply although now you will have your own experience to refer to, which will hopefully make the process a bit smoother.
From formulating a plan with defined goals (and sticking to it unless there is a compelling reason not to) to understanding the products available and working to your own strengths and weaknesses, there are a number of areas an investor can influence and improve the outcome.
Make a plan
Some people may hit the jackpot – whether that be by birth, or at the horses – but for the great majority, financial planning is the key to financial independence.
Like having a destination in mind when you set off on a journey, a plan will help you set a route and an appropriate speed that will get you there at the required time. It can serve as a guide, and a reminder to stay the course when happenings to the left or the right (or even behind you) look more exciting. Most importantly, when things look scary up ahead a carefully thought-through plan will act as your North Star.
Set out your goal for specific investment products and design a plan to achieve them.
This is especially relevant for long-term investments, such as retirement planning, and there are many tools online to simplify the process. Build your retirement savings plan using 10X’s free online retirement savings calculator. If you are not confident about making investment decisions on your own, there are many qualified financial advisers who will assist with a personal portfolio and helping you to reach your retirement goal.
It is important that your investment strategy explicitly allows for unexpected events, and that it delivers the optimal outcome in bad times and good.
A plan is a good starting point but a ‘set and forget’ policy is not usually ideal. Your guidelines should cover occasional checks on your plan to see if it needs some tweaking. (Are things progressing as you had hoped? Do you need to save more to stay on track to achieve your goal?). Also, you may need to adjust aspects of your plan to reflect changes in your life.
Investors should not take it for granted that their adviser is frequently checking in on their portfolios and the performance of their investments. They could be checking in just once a year. Whether you have an adviser or not, it is important to keep a tab on your investments. If you are in doubt about something talk to your adviser or a representative at your fund.
Focus on the things within your control
There are factors an investor has little-to-no influence over, such as market performance, political events and, dare we say, pandemics. Focus your efforts, instead, on the areas you can control, especially the key elements of the plan: how much you save and for how long, what fees you pay, and choosing the optimal investment strategy for your circumstances and goals.
You can also control how you react when other strategies appear more profitable over the short term. Or how much time you spend reading market news and following market movements. Share markets rise and fall all the time in response to a myriad of internal and external factors. The worst thing you can do is watch constantly and react to short-term moves.
Selling your shares after the market has fallen locks in your losses. Besides, by the time you hear about some new development, the market has already priced in the expected response and there will be no advantage to be gained.
Investing in a well-diversified index fund is one way to control your anxiety over stock market volatility, because you have the comfort of knowing that it is the market, and not your asset manager’s stock picking, that is to blame. Your strategy should expect the former but cannot account for the long-term underperformance of a fund manager. Also, broad exposure in an index fund reduces your stock-specific risk and ensures you don’t miss out on owning the top performing stocks in the market that you are tracking.
Wide diversification gives you a buffer against a sudden shock at a company, in an industry, or even a region, while regular rebalancing within a multi-asset fund keeps your asset mix aligned to your plan. Automatic rebalancing means you buy more of the investments that are out favour and lighten up on those that have done well.
This is buying low and selling high in action. It is doing the exact opposite of what your emotions tell you to do (buy high and sell low). Few people would have felt comfortable to keep buying shares at the height of the global financial crises in 2008/9 or during the pandemic meltdown in 2020, yet those contributions would have earned the highest returns since.
As Winston Churchill observed, “plans are of little importance, but planning is essential”. It is going through the planning process that turns you into a more informed investor, able to make competent financial decisions, and able to control the process and the outcome. The alternative, to go with the flow and hope for the best, is not really an alternative, but surrender.
In the second part of this series, Building back better, 10X’s CEO Tobie van Heerden outlines some key principles to help investors correct past mistakes.
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 Investments before February 28 and pay no fees until July 1.
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.
