This article includes four general financial resolutions followed by six-investment related resolutions.
Pay off your debt. Tackle one bill a month
According to the National Credit Regulator, there are 25 million active credit consumers in South Africa and 10.23 million creditors (40%) are behind on their payments. If you are trapped by debt, paying your debt should be your top priority. Many of those who are in debt do not realise how much interest they are paying on their debt. Use a search engine like Google to learn about the differences between ‘simple interest’ and the ‘annual percentage rate’.
Build an emergency fund
Too few South African adults have cash savings to help pay for unexpected or emergency expenses. This can lead to borrowing money at exorbitant rates from illegal credit providers and falling further into debt. Have the discipline to create an emergency fund to help with those unexpected accounts.
If you do have spare cash at the end of each month, save it! Investing small amounts of capital each month really does add up. Compound interest is known as the eighth wonder of the world. The proceeds of an investment into a unit trust can be used to pay for university fees, buying a first car for a child or any other big-ticket future expense.
Don’t ignore your retirement needs. Start planning now before it is too late
At the very least you should know whether you have a retirement annuity, a company pension plan or both. Secondly, irrespective of how your retirement funds are invested, you should review the asset allocation of your pension investment and take independent advice on whether you are investing enough to fund your retirement. Thirdly, aim to be up to speed with the underlying fund managers of your investments, the performance of these managers and their investment philosophies.
Check the asset allocation of your portfolio and rebalance if necessary
It is easy to keep an investment that has delivered exceptional returns. However, you need to sit down with your independent financial advisor and make sure that the allocation of your assets still meets your requirements. You might be running the risk of a large proportion of your portfolio relying on one fund manager, one company or being too concentrated in one asset class.
Review those investments that are unlikely to recover
One of the hardest things to do is to sell underperforming investments. That old adage of converting a “paper loss” into a “real loss” has been used time and time again to justify poor performance. While you don’t want to change your portfolio too often, you should be aware of the reasons an asset has underperformed and if the underperformance was due to general market conditions, the timing of the investment, whether or not the original price was too high, the costs of the investment or simply bad management.
Have you outgrown your portfolio?
An investment portfolio that was right for you when you were 30 and growing your portfolio might not be right for you now if you are retired and need an income. Look at your circumstances and the absolute value of your portfolio and amend accordingly. Your independent financial advisor will be able to help you decide whether your investments still meet your objectives. Your priority may have changed from capital growth to income. Alternatively, your capacity or appetite for investment risk might have changed.
Stop holding cash over the long term
Some of our clients admit to holding cash investments for too long because they are afraid of making a bad investment decision. Long term cash investments are unlikely to beat inflation especially when tax is taken into account. Cash investments only make sense if you know you need the money in the short term or you need an emergency fund. Other spare savings should be invested in growth assets.
Take an interest in your investments and learn as much as you can
Learn as much as you can about investing from all sources available to you. Ask your independent financial advisor for advice on which investment books are useful, which websites to follow and which columnists can be relied on for neutral, balanced, insightful comments. Maintain regular contact with your financial advisor.
But don’t obsess
While we strongly recommend that you should take an interest in your investments, we do not recommend checking your investments every day. Ideally, investment decisions should be made with a five or ten-year time horizon. Investors can sometimes become too obsessed with the bad news that sells newspapers and as a result chop and change their investment choices too frequently, which can lead to underperformance.