Let’s start with a simple question: What does it mean to build wealth? The fantasy scenario may vary from person to person, but we all share the same minimum expectation: we want our savings to grow over time and outpace inflation.
In recent years, many of us have only just managed to achieve this basic requirement, as most asset classes have not performed much better than inflation.
This has led to a prevailing sense of panic among savers across all wealth levels – and once panic sets in, we start making mistakes. These mistakes have the potential to be far more devastating to your long-term wealth prospects than recent low returns.
Here are six ways to stay on track and avoid wealth-destroying behaviour.
Keep a realistic time horizon
Investing is a long-term game, and evaluating returns over a one- to three-year period will give a skewed perspective. Assessing your investment returns over periods of five years or longer will give a more balanced view.
Mind over market
When times are tough, we tend to think things will continue that way indefinitely. This can cause investors to make rash moves based on fear. Being aware of this tendency and recognising it in yourself if it arises, may help to keep you focused on your long-term plan. One thing history tells us about the markets is that the good times don’t last forever – but neither do the bad. In addition, volatility is a given. The trick is to regulate the emotions it triggers in you. The goal is to not get overly excited about your prospects when things are going well, and not to get overly pessimistic when they don’t.
There is no silver bullet
Wouldn’t it be wonderful if there was a single solution to end your financial woes? Unfortunately, things are never that simple, and any solution that promises to solve all your worries is probably one you should steer well clear of. It’s in this kind of market where unscrupulous individuals find vulnerable targets, because who wouldn’t love a 15% guaranteed return right now? It’s more important than ever to do your due diligence before changing tack or making any new investments.
More bank for your buck
One of the most common complaints we hear these days is, “I could have done better in the bank.” Yes, this might be true from time to time. But remember that you’d need to be incredibly sharp with your timing when it comes to reinvesting in the market (and making up for what you lost in capital gains tax when you sold out of the market). Research shows that the average investor’s experience tends to be a lot worse than the market over all periods precisely because it’s impossible to time the market.
Emotions drive financial behaviour, and our emotions are often based on the extent to which our expectations are met or exceeded. Over the last year, few investors will have felt their expectations were met. But perhaps this is a good time to re-evaluate our expectations. Since inflation targeting was introduced in SA in the early 2000s, inflation has come down significantly, averaging at 5.7%. As a result, we can expect that investment returns should be lower too, which means that the classic 15% return that used to be considered ‘normal’ in previous decades might now be too high.
Back to basics
The best way to wealth is to control the ‘controlables’. Unfortunately, market performance is not one of them. But your behaviour is. Sticking to a few fundamental rules of investing is the best way to safeguard your savings and maximise your wealth creation efforts over the long term. These include:
- Start with a plan and put it down in writing.
- Take a long-term view.
- Diversify. This way there should always be something in your plan that is working out.
- Stick to your plan but remember that planning is a process. It involves a lot of thinking upfront, but also regular reviews and tweaks along the way.
- Enlist the services of a financial adviser. Like a good coach, this person will help you set realistic goals and create a plan to get you there. Over time, they’ll evaluate your progress and adapt the plan if needed. And perhaps most importantly, they will help you overcome the emotional obstacles that threaten to derail your efforts.
Anet Ahern is the CEO of PSG Asset Management.