“Men are from Mars, women are from Venus.” This notion rarely becomes more apparent when you’re in an argument about following a map or step-by-step assembly instructions.
“Why should I follow instructions on how to assemble this simple cabinet?” And how many times have ended up unscrewing everything, only to follow the assembly instructions eventually…
This made me realise that even though I work with investments on a daily basis and it may seem complicated to some, there are certain guidelines one can follow to simplify the assembly process of your personal portfolio.
Step 1: Speculators are not investors
Based on historical data, equity investments still deliver the best returns over the long term. Consider the investor who decided to invest on the JSE at the end of May 2008.
At that time, the market was also at an all-time high and on the brink of one of its biggest corrections ever. The investor who hung in there would have enjoyed a whopping 130% capital growth (up to end of July 2017), even with one of the largest corrections of all time. As they say: It’s capital loss that hurts, not protection.
Step 2: Diversify
This really is such a simple concept, and yet this is where I see so many investors struggling, mainly due to personal preference or emotions.
One investor, for example, may have lost capital investing in shares over a short period of time and may have decided to shift his focus only towards the money market for the rest of his life, while another investor had so much luck with his property investments, that he will never consider any other type of investment again.
Historical figures show that diversification, or the spread of capital across different types of investments not only reduces investors’ risks, but it also provides better returns.
Step 3: Use time, not timing
Due to the fact that share prices fluctuate constantly, many speculators would have become filthy rich if they could buy when share prices are low, and sell when they were high.
If that was as easy as it sounds, however, I probably would have written this article from my hammock next to a powdery white beach in Mauritius.
The fact is that not even the most sought-after investment professionals can get it right 100% of the time and historical data backs this fact. Only 11% of all general equity unit trusts, for example, managed to beat the JSE’s total returns over the last 12 months (up to 31 July 2017).
Step 4: The power of compound returns
This concept requires about the same amount of control as not using that brand-new credit card you just got in the mail. Let’s use an investor who demonstrated such self-control over the last 20 years as an example.
If he invested R1 000 in shares in 1997, his investment would be worth R14 590 today.
If the same investor didn’t exercise any self-control and looked for excuses to withdraw from his investment regularly, that picture would look very different. If he withdrew 10% of his capital each year, his investment would be worth a measly R1 971 today. Now we can understand why Albert Einstein said that compound growth/interest (growth on growth) is one of the most powerful forces in the universe.
Step 5: Invest in what you know
Don’t just see your investments as a number on a page. If you invest in shares, make sure that you are investing in good companies, and make sure that you know these companies well.
You have to know where your money is going and you have to know your investments. I have said this many times before: no one cares more about your money than you do.
Schalk Louw is a portfolio manager at PSG Wealth.