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20 investment tips for 2020

The early bird gets the worm – even when investing.
Grow your savings and increase your income streams with savvy investment tips. Image: Shutterstock

With the start of a new year and a new decade in full swing, here are 20 investment tips for 2020.

1. Establish your financial goals. This will enable you to put together an effective investment plan with an appropriate long term allocation to stocks, bonds and other asset classes. 

2. Start saving as early as you can. The earlier you start saving for your goals the more time your investments will have to benefit from the compounding effect of reinvested income and capital accumulation.

3. View investing as a marathon, not a sprint. Investing your money for 5 years or more is generally a good idea. Investing is best suited to long-term financial goals, like saving for your retirement.

4. Don’t speculate with your life savings. Investing should not be a gamble. Speculating invariably involves buying and selling investments based on very little fundamental knowledge and typically produces anxiety and poor results in practice.

5. Focus on the income of your investment. The value of a company grows, over time, at the rate at which its profits grow. In the same way, the value of an investment, over time, grows at the rate at which its dividends grow. Invest for the income while taking a longer term view on your capital, which can be volatile.

6. Know what you are investing in. When investing in a unit trust try to look through the unit trust and understand in which asset classes and in what businesses your money is actually being invested.

7. Never invest in anything that you don’t understand. Contrary to popular opinion, investing doesn’t have to be complicated – adopting an investment philosophy based on common sense will significantly reduce financial anxiety. If it sounds too good to be true, it probably is.

8. Invest in quality. Quality businesses are those that are large, established entities that are market leaders in the industries. With the best products and management teams, these businesses will serve you well in the long term.

9. Avoid capital erosion in retirement. Capital erosion occurs when more income is drawn from a portfolio than is being produced by the underlying investments (i.e. dividends or interest). By eroding capital, you reduce the ability of your investments to generate future income.

10. Maximise offshore exposure. With dividend yields of some of the highest quality companies in the world well above bond yields, equity valuations in first world markets present investors with a good opportunity to generate inflation beating returns over the next 5 years.

11. Be cognisant of tax when investing offshore. The tax implications of investing directly in securities can be quite different to those of investing via foreign unit trusts or sinking fund life policies. The compounding effect of tax savings can be significant over the longer term.

12. Equity exposure is key. Historically, equities outperform other asset classes such as cash and bonds. Equities have generally given investors a 6% real return (total return minus inflation) over time, compared to a 2% real return from bonds.

13. Don’t worry about economic variables that are out of your control. It is difficult to predict interest rates, exchange rate movements, or the stock market. Rather concentrate on what is actually happening to the businesses in which you are invested.

14. Diversification is important. Investment diversification is one of the fundamental building blocks of a solid portfolio. Diversification simply means “do not put all of your eggs into one basket” when you invest.

15. Invest in shares that produce reliable dividend streams. Certain companies will continue to produce reliable dividends regardless of global slowdowns, exchange rate volatility and declining interest rates. Nestlé is a good example of this. Consumers around the world drink on average 5500 cups of Nescafe every second of every day. Other examples of Nestlé brands include Maggi 2 Minute Noodles and Kit Kat. Over five billion packets of Maggi Noodles are sold every year and 650 Kit Kat fingers are consumed every second of the day. Choosing to invest in companies like this will significantly reduce the risk of an investment outcome not meeting expectations.

16. Do not overpay for an income stream. In determining a fair price to pay for a quality business, its current valuation (dividend yield) should be reasonable when compared to its historic average and also reflective of future growth prospects.

17. Find out how much your investments cost. Investment fees reduce not only the investment returns but also the income earned and will, therefore, have an impact on how much income you can draw post-retirement or reinvest pre-retirement.

18. Ensure that you save enough. This is especially true for retirement. It is a generally accepted concept that you need to save at least 15% of your annual income for 40 years in order to have saved enough to replace 70% of your salary at retirement.

19. Seek financial advice. Although many people practise DIY investing, it does take knowledge, understanding and thorough research to make the right decisions to suit your needs. Get professional advice from a Fais-licenced financial advisor on the points raised above and together, formulate a plan that’s right for you.

20. Remember, above all, investing is ultimately all about income. Capital growth may receive a great deal of investor attention; however, investing should ultimately be focused on building an income stream to fund a lifestyle. Consequently, instead of agonising over the prices of your investments on a daily basis, rather spend that time monitoring the income produced by your investments.

Preston Narainsamy is an investment professional at Marriott.

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COMMENTS   14

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Great article thank you! Is it possible to invest in the NASDAQ from South Africa keeping brokerage etc fees low and what is the simplest way to do so?

Search for local S.A. ETF’s (electronically/online traded investment funds) such as Satrix, Sygnia, Coreshares, 1nvest, ETFSA, Newfunds, etc. You will find S.A. Rand denominated funds (you invest in Rands, investment exposure in example in US $ exposed to a certain fund theme and withdrawal are again paid in Rand value) and which offer a specific international investment theme such as the Nasdaq Top 100 or S&P Top 500, etc.

Mind the Rand / Dollar exchange rate though – ideally you should enter such offshore investment options when the Rand is strong against the Dollar, Euro or British Pound (lower exchange rate or less Rands to buy one Dollar) whilst the specific equities/assets are also not overly expensive with over-extended high PE ratios and consider to exit only when both these components are again working in your favour (that is a weak Rand and a strong US/Euro/UK market like it is currently the case).

The USA market is currently rather highly priced with ridiculous high PE ratios (in the region of 40 x) and whilst the R/$ exchange rate furthermore is rather weak (over R15 for one dollar) and thus both entry factors are against foolishly jumping into crocodile invested waters and more suited to rather consider exiting such offshore investments.

This of course a personal opinion, not to be construed as financial advice, given as a warning but even so, still well based.

You can invest through any of your broker, standard bank have webtrader

No.8, Quality businesses are not found among the “large” only. Generally on a long term basis it is the companies outside the “Large” which outperform the market.

Although you are correct in saying that. My experience is that it should be a company that has lots of trading within the share. (If its share price graph has a block effect – stay away) No use getting into a share an not being able to get out when you want to. Liquidity of the shares requirement that I have developed for myself tends to exclude a lot of the very small companies.

Wonderful article. We need to increase the financial education of all South Africans. How can we roll this out to every school learner countrywide?!

No… Keep them dumb. How else are they gonna continue to take out wollworths and egdars accounts??
Remember the smarter they all get the worse yr investments will do in those company’s.

hereshoping
I have invested in pref shares that pay me over 10%,after paying the 20% tax. I did this so that with the large dividend I can buy more pref shares and build up a good portfolio. I do not know if this is a good idea but it is working for me. I can just live on my pension so cannot afford to loose. I do have CML and property shares but getting Over 10% after tax on pref shares seems good to me. Any advice ?

Informative article. Hoe do I stop my capital from eroding, not so much now, but in the past five years with Steinhoff and Reslient basically stealing my money?

A risk analyst once told the book The Intelligent Investor by Benjamin Graham updated by Jason Zweig is a good book to read if you want to learn about investing.

A former insurance broker told me to remember everyone works for their own pocket.

Great article if one invests via advisors and the JSE. We continuously hear the future for RSA is small business and entrepreneurs. Yet none of these articles ever suggest putting funds in venture capital or buying shares in a small family business or providing trade finance to a business you know well.

So any advice on any of the above?

This is the territory where most people lose most of their money. This should only be done when you are a professional entrepreneur, you planning to buy more than 50% of the company, you know the industry the target is in and your target has something which you would not otherwise get and you know exactly what to fix in your target. For normal joe s – stay away!!

End of comments.

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