16 Investment tips for 2016
Duggan Matthews, an investment professional from Marriott Asset Management, shares 16 investment tips to consider while you build the future you want:
- Invest for income and let the capital take care of itself. The value of a business is based on the income or earnings it can generate. Only through increasing its income can the value of a business increase, a maxim well known by those running their own businesses. Over the long term, this principle holds true for investments.
- Don’t speculate with your life savings. Speculating invariably involves buying and selling investments based on very little fundamental knowledge and typically produces enormous anxiety and poor results in practice.
- Start saving early. The earlier you start saving for retirement the more time your investments will have to benefit from the compounding effect of reinvesting income and accumulating more capital.
- Ensure you save enough. It is generally accepted 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.
- Avoid capital erosion in retirement. Capital erosion occurs when more income is drawn from an investment portfolio than is being produced by the underlying investments. By eroding capital, you reduce the ability of your investments to generate income in the future.
- Don’t pay too much for an income stream. Avoid any investment where the dividend yield is well below the historic average.
- Invest in consistent and reliable income streams. Certain companies will continue to produce reliable and growing income regardless of global slowdowns, exchange rate volatility and declining interest rates. Choosing to invest in these companies will significantly reduce the risk of an investment outcome not meeting expectations.
- 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.
- Diversification makes sense. Investment diversification is one of the fundamental building blocks of a solid portfolio. Diversification is just another way of saying “don’t put all of your eggs in one basket”.
- Maximise your offshore exposure. With dividend yields of some of the largest companies in the world well above bond yields, equity valuations in first world markets are presenting investors with a good opportunity to generate inflation beating returns over the next five years.
- 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.
- Find out how much your investments cost. Investment fees reduce the income earned from investments and will therefore have an impact on how much income you can draw in retirement or how much income you are reinvesting pre-retirement.
- Don’t worry about economic variables which are out of your control. It is difficult to predict interest rates, the future direction of the exchange rate, or the stock market. Rather concentrate on what is actually happening to the businesses in which you are invested.
- 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.
- Equity exposure is key. Equities have generally given investors a 6% real return over time compared to a 2% real return from bonds.
- 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.
August 1, 2016
Grant van Zyl
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