From diversification to compounding, Absa Multi Managements Kwaku Koranteng describes investment principles that South Africans should observe.
If we look back and look back at the course of events over the past year, we have seen a decent economic recovery after a terrible 2020, despite the fact that the Covid-19 pandemic continues to devastate our personal lives. This recovery in the global economy was reflected overall in a recovery in the financial markets.
Still, the financial markets rebound was not without some volatility due to uncertainty about the virus, vaccination campaigns, inflation, the global interest rate outlook, and the financial and regulatory dynamics in China.
With this in mind, and towards the end of 2021, investors are encouraged to keep an eye on their financial well-being.
This includes their investments, educational planning, retirement planning, and other financial matters.
With that in mind, I’d like to remind investors of eight simple principles that every investor needs to remember.
1. Diversify – security is in numbers
As the proverbial saying goes, “Don’t put all your eggs in one basket,” don’t bet on one or a few successful results.
Academic theories and various studies have shown that exposure to different securities that behave differently and inconsistently can reduce the fluctuations in the value of your investments without detracting from the potential for generating reasonable long-term returns.
Professionally trained investors such as asset managers and, on a further level of diversification, multi-managers such as Absa Multi Management, who analyze and combine different but complementary investment managers, can help investors achieve the goals of this principle.
2. You may live a lot longer than you think
The pandemic has been devastating and it’s easy to forget that as time goes on, people are living longer than ever. As a qualified actuary, I have always been interested in mortality tables. Due to medical advances in society, we have seen improved death rates over time.
Scientists suggest that the first person to live 200 years old since recorded history may have already been born.
In developed and some middle-income countries, longevity and falling birth rates are some of the most worrying long-term social challenges facing these countries.
Therefore, your investments to secure income in the last phase of life must take this increase in life expectancy into account. Your potential retirement years are getting closer and closer to the average professional career.
Important considerations include investment strategies through exposure to risky assets that outperform inflation and investment products that can potentially help manage longevity risk, such as guaranteed annuities or prudent drawing of income.
3. Bad times in markets can be good for regular savers
Disciplined investors know that timing investment markets and stocks is difficult and often impossible for ordinary investors to be successful in the short term.
Additionally, the outcome of your investment ultimately depends on the initial financial security price and the price at which you exit. With these two dynamics in mind, regular and frequent investments can help an investor avoid the pitfalls of market timing.
If an investor misses the best 30 days of stock market returns over a 10 year period, their investment performance will be poor.
Marginal cost averaging, the regular monthly investment in an investment fund, helps, for example, to reduce these risks, to c -ture timing opportunities and to avoid guesswork. As an investor, this helps not to buy securities at the top and cash out at the bottom.
4th Inflation is the biggest threat to your wealth
“Inflation is the source of unemployment and the invisible predator of savers.”
– Former UK Prime Minister Margaret Thatcher quoted from the period when the UK was experiencing debilitating inflation
At Absa Investments, risk management is an integral part of managing all of our investments. In order to preserve and increase wealth in real terms, we take some calculated risks so that your wealth can keep pace with and outperform the rising cost of goods and services over time.
This means that during these volatile periods you will have significant exposure to growth investments and balance this with exposure to safer investments. For example, if you are planning for retirement, you can save up to 30 years before your retirement, so it is important to focus on inflation.
5. Investment returns come from the power of compounding
“Compound interest is the eighth wonder of the world. Whoever understands it deserves it, whoever doesn’t, pays it.”
– Albert Einstein
Compounding is at the heart of investing. This means that as the invested c -ital grows, the initial c -ital combined with the growth already achieved will attract further growth. The longer the investment horizon, the better, because time is an investor’s best friend so that the compound interest effect can work its magic.
6th The journey counts, choose a smooth ride
Although every investor’s risk tolerance is unique, investing in financial markets or certain financial products in general can be an emotional experience.
This is especially true when money is lost, even if it’s temporary. This can sometimes lead to sub-optimal investment decisions, such as: B. Payouts at the low end before a subsequent recovery and investments at the high end of the cycle due to excitement followed by subsequent depreciation.
Hence, there are financial institutions like multi-managers who aim to manage risk for investors who tend to choose the top performing investment manager of the previous year who later underperforms. Remember that if at any point your investment loses 50% of its value, it will take 100% recovery to get back to where you started.
7th Avoid chasing the next best idea
History is littered with bubbles and financial market crashes because some investors are exuberant about certain investments.
Often and in retrospect, they contradict the logic and investment principles. The tulip bubble in Holland in the 17th century is famous, and more recently the bubbles are the dotcom and mortgage crisis.
Some would argue that cryptocurrency could have similar characteristics, although it is too early to say, given the technological advances surrounding the blockchain.
In these cases, investors often heard about the next big investment ideas through the media, friends, colleagues, etc., without paying attention to the fundamentals of the investment. It is vitally important to balance your investment goals with the optimal mix of assets in order for you to achieve your goal by using professional valuations and techniques.
8th. A small, incremental increase in risk can increase returns
Finally, taking incremental risk in eliminating the risk that is specific to a particular security because of its sector or unique characteristics provides the opportunity to increase returns.
This is amplified over time as small but frequent and regular growth compounds.
Academic theory supports this idea through the idea of optimizing investment portfolios. Investment managers and multi-managers such as Absa Multi Management achieve this through the diversification of securities and asset managers.
Kwaku Koranteng is Head of Institutional Business at Absa Multi Management. Views expressed are his own.