The ABCD of investing

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BUSINESS NEWS - Avoiding risk doesn’t create wealth

You can’t avoid investment risk because then you won’t create any wealth over time.

In fact, if you do nothing your money will lose value because inflation will erode the purchasing power of your hard-earned savings.

Be prepared for things not to go as planned and learn from your mistakes
The most common investment mistakes include selling your winning stocks too early, sticking with losers for too long and not doing a proper assessment before investing. We wish we could say that every investment we made in the past has been a success, but that isn’t the case. You need to accept when you are wrong and, importantly, learn from your investment mistakes.

Compound interest is the eighth wonder of the world for a reason
Compound interest is the secret to getting wealthy slowly. The way to maximise the power of compounding is to start today and save consistently. If you want to retire comfortably, the ‘rule of thumb’ is to save 15% of your salary before tax when you are 25 (the exact percentage will depend on your retirement income needs and idea of financial independence). If you start when you are 35, you must save 24%. If you start when you are 45, you must save 43% and if you start when you are 50, you must save 60% of your salary*. Starting early and saving consistently is really one of the most powerful things you can do.

Diversification
Diversification is absolutely critical and the best way of protecting yourself against an uncertain future. However, it needs to be appropriate for the investment outcome you want to achieve. For instance, if you’re saving for a retirement that’s many years away, your portfolio should have a larger exposure towards growth assets such as equities, listed property, alternative investments etc. You can, however, also diversify within asset classes, for example by combining equity managers who approach their task in different ways. Correct diversification is also the best way to give investors the comfort to remain invested in uncertain times and during different market cycles.

A qualified financial adviser can help to ensure you apply these ABCD’s in a way that is suited to your needs and objectives.

*Assumed retirement at 65, member saves 15% per year of annual salary, Investment returns of 10% per year, salary increases of 6.5% per year.