7 Ingredients for a Lifetime of Investing Success
As the world gets smaller from the perspective of communication, connectivity, instant visibility of events, entertainment, influencers and investments, it can be easy to get confused about how to invest successfully. A plethora of investment options often confuses those without an investment plan and philosophy. This month we look at the 7 simple ingredients for successful planning, a plan that will stand the test of time.
1. Regularly invest 7% of your after-tax income.
Regularly investing just 7% of your after-tax income will do more for your long-term wealth creation than almost anything else you might get lucky with. If you already contribute 3% to KiwiSaver and your employer matches that at 3%, you are already a long way there. Remember though that your employer’s 3% contribution is taxed.
2. Invest throughout your working lifetime.
The recipe will only work if you save the 7% throughout your working life. Seemingly normal decisions such as taking money from your investments or KiwiSaver for a first home purchase or stopping contributions during periods of maternity leave will have a dramatic effect on your long-term success. The loss of compound interest from such actions can take 10 or more years of increased savings to catch back up again.
3. Invest into equities.
You can’t ‘save yourself’ rich. Cash and bonds have never provided the return necessary to outpace the double effects of tax and inflation. This means much of the $170 billion sitting in cash or term deposits in New Zealanders bank accounts, will hinder rather than help these people grow their wealth. Only equities and property have proven track records of outpacing inflation and providing some tax-free returns that will maintain purchasing power and in addition, providing surplus for others.
4. Diversification.
Investors who literally lost a lot of money, in the recent large market corrections in 1987, 2000, 2008 etc were those who had concentrated their investments in just a few companies, typically less than 50, or one sector of the market such as technology stocks. Those who were well diversified, invested in 8000 or more companies, still suffered short term reductions in wealth but this was quickly returned once the markets corrected.
5. Index / Asset Class Funds.
While some still debate the relative merits or otherwise of Active funds management versus Index or Passive funds management, empirical evidence shows the latter is superior to the former over the long term. Most Active managers fail to beat the markets they measure themselves against. Plus, Index funds are the easiest, cost effective and most efficient way of diversifying your money across all markets .
6. Low Cost.
Fund manager fees are one of the greatest drags on investment performance. In addition to the usual fees some Active fund also charge additional fees if their funds achieve a certain percentage return. Isn’t that just their job? On the other hand, Index / Asset class funds which follow an index require less analysts and trade less, thereby reducing costs for investors.
7. Be Strategic not Tactical.
Those with patience and faith in their long-term strategy tend to be less emotional about their investment decisions and stay the course despite short-term setbacks. Constant, seemingly tactical changes, run the risk of moving you totally off course, add cost and make measuring success more difficult.
Unsure if your, or someone you know, plans measure up? Call us for an obligation free review. We can tell you how on track / off track you are and what simple adjustments might enhance your chance of success.
Are your investments at danger of catching the Coronavirus?
While investments can’t catch the virus, people's emotional reaction to events will likely cause short term volatility in returns. This virus is something new, but people’s reactions to such new viruses is nothing new, nor is our advice to those worried about their investment portfolios. If you are well diversified, have a good cash reserve and understand your long-term strategy then probably nothing needs to change. Typically like the virus, the effects of these events are short lived and those who stay the course are rewarded for keeping their nerve. Refer to the Morningstar Research data on investment returns covering 9 similar viral outbreaks since 2003 and investment returns in the months following.
Source Morningstar Direct. 06 Feb 2020.
As always, we look forward to updating you with the progress of markets and investments throughout the remainder of the year.
Kind regards,
Warwick Walker
The views and opinions expressed in this article are not intended to be a personalised service for an individual retail client. The views and opinions are general in nature, may not be relevant to an individual's circumstances, and constitute class service only. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser of FoxPlan Limited. You can find more important information about us here.