February newsletter Feb 2021 Welcome to the February issue of...Read More
Being a prudent investor does not necessarily mean being a conservative one and, although it seems counterintuitive, following an investment strategy that is too risk-averse could cost you dearly in the long run.
On the other hand, following popular trends instead of proven long-term investment strategies can result in substantial losses.
Most investors are looking to grow their wealth, and this can only be accomplished if the returns on their investments outperform inflation. A very conservative investment strategy usually consists of allocating a significant portion of the funds to cash investments, i.e. investing in money market accounts and savings and call accounts. Investors should be aware that after-tax returns from cash investments will be very unlikely to produce returns in excess of inflation for an extended period of time. This is especially true in the low interest rate cycle we have been experiencing. The result of your investment portfolio not achieving inflation-beating returns is that, while your capital may be reasonably safe, instead of increasing in value over time and growing your wealth, with each passing year your wealth is being eroded and the buying power of your capital is becoming less and less.
Traditionally, savings and retail bonds have been perceived to be safe investment vehicles; however, investors need to be aware that these types of investments are certainly not completely free of risk. Capital invested in cash and bonds is only as safe as the institution at the back of the investment. There are many examples of where investors who had invested in “conservative” funds ended up losing a portion of their capital.
One of the popular investment strategies is the so-called “momentum investing strategy” (MIS). Momentum investors continue to buy shares or invest in stock market indexes in rising markets, with the belief that the upward trend will continue, or they sell their shares when markets decline. This investment strategy has given rise to the expression “the trend is your friend,” and it does not include analysing the value offered by specific shares at their current prices. Momentum investors are not primarily concerned with fundamental security valuations. It is, however, critical to be aware that the pendulum can very rapidly start swinging the other way, and one of the characteristics of the strategy, i.e. investing in shares irrespective of the fact that share prices do not necessarily reflect true value, can then result in significant losses.
One of the most important rules to ensure that your investment portfolio does not contain unnecessary risks is to choose a well-known, reputable financial services provider in the first instance. If an investor chooses to make use of the services of a financial adviser, he/she must not be afraid to ask questions, and should always request that recommendations be put in writing. Investors should review the progress of their investment portfolios at least once a year, with the assistance of their advisers, to confirm that it is still on track to achieve the goals and objectives that have been set.
Financial advisors need to understand that their clients are individuals with distinctive attitudes towards managing their money and should consult with their clients to determine their financial risk tolerance and investment goals and objectives. The outcome of the consultation process will inform the advisor how to apportion the investment funds between equities, bonds, cash and other assets. The asset allocation must meet the client’s needs, provide diversification to minimise risk, be comprised of asset classes that are generally accessible to investors, and incorporate long-term macroeconomic and market views.
To ensure that you select an investment strategy that will help you achieve your investment goals, it is advisable that you partner with an expert who can guide you on this journey and has your best interests at heart. It is also important to remember the old adage of “If it seems too good to be true, it probably is.”
The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.