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Things to consider before investing

Knowing where to start is the hardest part; an advisor will assist with mapping out a financial plan that matches your goals.

Where to start is the hardest part

Where to invest and how you are going to invest is mainly dependent on what your financial goals are. The goals you set out for yourself must be rational, measurable and must be in line with your lifestyle objectives. As an example, if you are looking to save monthly to buy a certain asset within a certain timeline, your investment strategy will be completely different from a plan put in place to save for retirement. You must understand and make sure you aware of the risk you are willing to take, the goals you are investing towards and your investment time frame. And therefore, a financial advisor plays a vital part in your life and will assist at mapping out a financial plan that matches your goals, objectives, and financial requirements.

The tax implication or tax benefit involved with investing

When investing, one will always want to take a route that will be tax-efficient by minimising the tax payable and maximising on your tax benefits. It is important that one understands how exactly the investment is taxed before implementing as different investment structures follow different tax rules.

Here are brief examples and breakdowns on some investments and how they are taxed:

  • Tax-free savings: No tax implication on this investment but there are certain annual investment limits.
  • Retirement annuity: Contributions made to a retirement annuity are tax-deductible up to certain annual limits.
  • Unit trusts: Tax is triggered at the withdrawal stage. The investment gains earned on a unit trust are taxable.

Diversification is vital

This is a topic that is bought up often among financial advisors, as the old saying goes it’s never advisable to have all your eggs in one basket. Diversification is a strategy where you spread your risk as concentrating your investment in one stock or one sector is a risky investment approach. If you are 100% invested in one fund or asset class and the fund underperforms, this will heavily impact the overall growth of your portfolio. In our opinion, the best way to diversify is to expose yourself to a variety of assets that are either negative or neutrally correlated to each other. This means that the funds will react differently during the same economic event so while the one fund may underperform the other performs positively so assisting with the balancing out of the returns of the investment.

Key points to diversification:

  • Can receive a positive outcome from your investment by lowering the risk by ensuring efficient diversification.
  • Ensure you diversify by introducing several different stocks, asset classes and sectors with ensuring some offshore exposure to take advantage of growing your portfolio in a different currency.
  • Diversification works well to assist with the rebalancing of a portfolio return as the funds are not correlated.

What is the investors’ appetite for risk?

As an investor, it is important to understand the risk you are willing to take when investing. Depending on your risk appetite, this will give the advisor an indication of what would be the best asset class to invest in. As an example, cash would be considered a low-risk asset class while being invested in equities will require the investor to have higher risk tolerance. With taking the above into account one needs to understand the relationship between risk and reward. The greater the risk you are willing to take the greater the possible returns.

The advisor must establish a good understanding of the investor’s personality to determine their reaction to potential losses, and what their goals and priorities are. Other measures to consider are things like time horizon, age, the need for income, and family situation.

Clients must be entered into an investment that is suitable and corresponds with their willingness and ability to take on risk. A good advisor should always establish your risk tolerance to ensure they provide the correct solution for your needs.

Keeping your emotions under control 

The nature and the movement of the markets are subject to fluctuation which can be driven by several different factors. Many investors tend to act on emotion when the markets are underperforming, the immediate reaction is to make an irrational decision and disinvest.

Generally, a client will exit out of markets when it is low but then will re-enter once there is market recovery. This in our opinion is not advisable as you are now reinvesting and buying into the market at a much higher price and you have now missed out on the growth. If anything, when the markets are down, we see this as a great investment opportunity as you are buying in at a cheaper price and you will benefit from the upward trending market.

A long-term investment strategy and staying patient during unsettling times is always advisable. You must ensure to trust your advisor to actively manage your portfolio as I am sure they have taken the relevant steps to position your portfolio to provide some protection during volatile market conditions.

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Michael Haldane

Global & Local The Investment Experts


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