If you’re new to investing, you might be wondering how to start. Good financial planning is a crucial part of building your wealth. But it can sometimes be confusing, especially if you’re just getting started. The financial world is full of jargon, technical terms, and concepts that can be difficult to understand. But it’s important to have an understanding of some of the basic investment concepts if you’re going to be making decisions about your money.
Here is my guide on the four basic principles for successful investing:
Goals
The first step in investing is to decide what your goals and priorities are. If you’re not sure, take some time to think about what you want out of life, what you value, and what you want to accomplish. Your goals may be simple or complex, but they should be specific and measurable.
Do you want capital growth or income? Are you trying to save for retirement? Or do you simply want a safe place for your money? Whatever your goals are, make sure you have them clearly defined so that you know what you’re saving for and what your investment horizon is.
Once you have established your goals, the next step is to get a financial adviser to develop a financial plan that will help you achieve them. As time goes by, your priorities may change or new opportunities may present themselves — both of which could affect how much money you need in order to achieve your goals. Having a close relationship with a trusted adviser and reviewing your plan at least annually will help ensure that it continues to work well with your changing circumstances.
Balance
Balancing risk and return is one of the most important things an investor can do when it comes to managing their portfolio. You should always try to find a balance between the two. In order to create a well-balanced portfolio, you need to know your risk tolerance and understand how different assets perform under different economic conditions.
For example, stocks are more volatile than bonds, but they generally offer higher returns over the long run because they’re not as safe an investment as bonds or cash. Cash investments or money market accounts are safe but pay very low interest over time compared with stocks or bonds. Stocks are riskier than bonds because their value can change significantly from day to day. Bonds represent loans made by companies or governments that pay interest over time based on the original amount borrowed plus any accrued interest payments.
As a general rule, it’s best to diversify your investments and have some exposure to stocks, bonds, cash, and property because each asset class has its own risk and return characteristics. This diversification allows investors to spread their risk across multiple classes of investments.
Costs
Most investors are familiar with the importance of managing risk in their portfolios, but they often overlook another key ingredient to successful investing: costs and fees. The costs and fees that come with investing can eat into your returns. You don’t have to be an expert to know that the lower your costs, the more you will save in the long run.
How can you know what stocks or bonds will do in the future? It’s impossible to predict the direction of the stock market. But investing also involves risk that is certain: investment costs and taxes. So if you want to hold on to more of your returns, keep an eye out for low-cost options. All else being equal, lower-cost investments tend to perform better than higher-cost ones over time.
Also, choose tax-efficient products. When it comes to investing, it’s not just how much you make that matters—it’s how much you keep after taxes. Taxes can be one of the biggest expenses and take the biggest bite out of your returns. Tax-efficient investing becomes more important when your tax bracket is higher. A big part of tax efficiency is putting the right investment in the right account.
Discipline
Investing is a long-term game. And the longer you stick with it, the better your chances of success. If you’re just beginning to build your investment portfolio, you may find it helpful to bring in an adviser who can help you create a plan and stick with it.
It’s easy to get swept up in the ups and downs of daily market movement, but it’s important to remember that investing for the long run isn’t about reacting to every little blip in the market. You need to be disciplined and not make investment decisions based on emotions. Ignore the noise. The easiest way to get caught up in short-term fluctuations is by allowing emotions to get the best of you. Don’t let the short-term volatility affect your long-term decisions. Progress toward your goal is more important than short-term performance. A good financial adviser is like a doctor to your finances. They don’t just treat you when you’re sick; they help keep you healthy. They’re in it for the long haul and want to build relationships with their clients, who trust them to make decisions on their behalf.
You now have the basic tools to formulate a successful investment strategy for yourself. From here, you can start on your way to making progress towards your financial goals. Now, with the basics sorted out, it is time to get down to business and start investing! Well then, what are you waiting for?
Chrisley Botha, Wealth Adviser at PSG Wealth, Stellenbosch
Affiliates of the PSG Konsult Group, a licensed controlling company, are authorised financial services providers. Visit www.psg.co.za for more information.
