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Considerations when building your investment portfolio

Considerations when building your investment portfolio
22-08-22 / Duty Editor

Considerations when building your investment portfolio

Johannesburg - The importance of saving and investing from a young age cannot be emphasised enough, yet people are scared to start saving or investing – if not leave it to later in life, which is not always the best option. 

Your investment decisions must centre around your investment goals. Samukelo Zwane, Head of Product, FNB Wealth and Investments says that “When we invest, we must consider what we are trying to achieve before making that investment decision. A listed company’s strategy is built around where that company wants to go and how they are going to achieve this. Investment strategy is no different. Understanding where we want to go first, makes selecting the investment vehicle much simpler”. 

Investing from a young age not only allows wealth to grow but allows investment and savings knowledge to develop. Financial and investment education is key in unlocking sustainable returns into adulthood and being able to identify new opportunities in the market. Time is an exceptionally important asset in the investment world, and one the youth need to capitalise on. The more time we have, the higher the probability of short-term bouts of volatility being overcome in the market and consistent returns achieved. 

The younger generation need to be reading and listening to market news and actively investing and searching for opportunities. Active investors need to invest in a basket of assets and investment vehicles looking to outperform the increased cost of living over the long term. “In our youth we can afford to make certain mistakes, as long as knowledge is gained in the process and lessons learned. Investing early in the market into a balance of high growth assets can accelerate wealth creation, and I believe is a successful strategy in becoming a successful long-term investor with a large capital base when retiring”, says Zwane.

Creating sustainable returns does not happen overnight. Successful investors are consistent, patient, and develop a key understanding of what they want to achieve with the investments they make. Zwane notes the following steps will help assist you in your investment journey:

  1. Define your investment goals: Deciding on the right investment strategy means understanding what you are trying to achieve in your journey. You don’t plan the mode of transportation before selecting the journey. Ensure you know what your goal is before selecting investment and savings vehicles.
  2. Buy assets for the long term, ignoring market noise: Trying to predict the market’s direction so that you’re only buying when the prices are low or only selling when the prices are high has neverworked over a long period of time. Stocks for example can be high in price and continue to go higher, meaning you are missing out on potential returns sticking to that single strategy. Despite the stock markets ups and downs, market indexes over the long term have continued to increase. Investors both passive and active are better off taking the long view and investing set amounts regularly. This will result in an increase in dividends received from more shares and a chance for your capital to grow consistently over a longer period.
  3. Reinvest all earnings: Reinvesting the earnings for as long as possible allows the power of compounding to take effect. Reinvesting those insignificant dividends or small capital gains, will mean increasing the number of assets in your portfolio thus increasing the potential for dividends, interest received and capital gains. Reinvesting money back into the market means growing your capital base year on year until you need to live of those returns. Invest in assets you understand from a business point of view as well as see potential for growth. Invest in quality, not in cheap.
  4. Invest in assets and investment vehicles you understand or have dealt with before, and that are set to thrive in this new economic climate the globe finds itself in. If you only shop at Woolworths because they are the best in your opinion and you enjoy all their products, customer service and have done some research on some of the other revenue streams and strategies the company has adopted, invest in Woolworths if it matches your long-term goal and risk profile. For the active investor look for growth. Look at how the revenue of a company is growing from year-to-year. You can get a company’s financial statements from their website. Get an idea of how that company’s sales are growing. Compare it to other companies within that sector. With quality growth companies, sales growth leads to earnings growth. And earnings growth leads to growth in share prices and higher dividends and as a young investor this increases knowledge on investments as well as puts you on track to select successful growth assets.
  5. Diversify your investments in the stock market to reduce risk. Every investor has made mistakes. Be it missing an opportunity or investing in a non-performing stock. By diversifying your portfolio, you will limit the damage of these mistakes, meaning a mistake may not be as costly when diversified. Two stocks may be down for the year but your investment in gold is up, meaning your portfolio is up for the year. Diversifying your portfolio will improve returns substantially over the long-term period whether you are looking for passive income or high growth. To diversify a portfolio, include a basket of different asset classes, different size companies and industries as well as geographic locations. For the active investor FNB have introduced their offshore ETN offering giving investors the ability to obtain offshore exposure to some of the biggest international companies by market capitalisation. Just investing in SA, means all your eggs are in one basket. International markets are growing and behaving differently to the Global pandemic news.
  6. Limit the number of assets in your portfolio. In order to be consistent in understanding the assets you are investing in as well as their growth potential, limit the number of assets in your portfolio. Rather reinvest returns back into the same performing asset classes as opposed to buying something you may not fully understand. Remember that age old saying, don’t change what’s working. 

“When approaching retirement, our investment and savings needs start to change. The nest egg built over our working career, now needs to sustain us. Money must be accessible monthly to support living costs, which will mean having a balance of long- and short-term investments. Income assets such as shares with high dividend yields, Preference shares and bonds should be considered as an addition to your basket of assets, as reliable and consistent income streams are generated  from these investments, while protecting capital.

“Having a balance of growth and income assets when approaching retirement further diversifies portfolio risk, giving you a greater chance of growing and protecting your wealth into your golden years,” says Zwane.

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