Investment reward comes through sacrifice today
19-AUG-08
It's true that market has displayed increased volatility for a while, but investors should listen less to short-term market noise, and rather focus on longer-term investment principles, argues Donny Bruce, Business Development Manager at Old Mutual Investment Group in Cape Town
Bruce cautions that by focusing too much on the short-term noise, investors will allow themselves to become consumed by short-term market moves and lose track of what’s important- sticking to their longer term investment plans.
Speaking at a recent Soul Sessions event in Cape Town on 02 August 2008, Bruce explains that when markets are volatile, investors tend to be biased towards lower risk investments, like cash.
“Given the volatile, tough market and economic conditions, the thought of investing scares people,” says Bruce, adding that dreams don't come cheap. “Reward down the line comes as a result of sacrifice today.”
Bruce does acknowledge that it has become tough to invest. Despite huge incentives from government in the form of tax cuts, investors have not seized the opportunity to invest; rather, household savings remains non existent.
“To complicate matters, the recent spate of higher food prices, fuel prices and increased cost of debt has put further pressure on the consumer. We also know that people are living longer. This means that we need to accumulate more money because it needs to last a long time,” advises Bruce.
To invest successfully and grow your wealth, says Bruce, below are investment principles that should guide investors in their journey to grow wealth:
Diversify: Basically, don’t put all your eggs in one basket.
By diversifying your portfolio, you gain exposure to various asset classes, thereby reducing risk and volatility.
Cash is unlikely to outpace inflation in the long-term: Short-term, cash returns look attractive, but there's always an opportunity cost staying invested in cash over time. Over the last five, ten, 15 and 20 years, growth assets (property and equities) have been the top performers.
Cash does not offer a growing income stream and therefore longer-term investors should be wary of an over-exposure to cash.
The value of advice: Investing starts with a plan. One must have a retirement goal to strive towards; otherwise you may find yourself reaching retirement with insufficient retirement capital.
If you don't know what you're aiming for, how will you know when you get there?
Start early: In an ideal world we would all start saving at an early age, invest enough, and not be concerned about volatility. Compounding is very powerful, but it doesn't work over five or ten years.
You need to give it even more time. There's no substitute for starting early. “What's important is time in the market.”
Donny Bruce will be speaking at the remaining Old Mutual Soul Sessions taking place in Johannesburg – 16 August 2008, Durban – 23 August 2008 and Port Elizabeth – 30 August 2008 amongst other speakers.
