Many people are intimidated by the idea of investing their hard-earned money. In many ways the financial services industry has perpetuated this by making it seem like investing is a mysterious art that can only be successfully performed by the most astute professionals.
Thankfully this idea is beginning to erode. The truth is that while successful investing certainly isn’t easy, it can be simple. Investors just need to keep a few basic principles in mind:
The sooner you start the better
The greatest gift any investor can give themselves is time. The longer your money is able to work for you, the greater the benefit.
This is very simply illustrated by an example of someone who invests R500 every month. If they are able to earn a 10% return on that money, in 10 years it will grow into just over R100,000, in 20 years R380,000, in 30 years R1,14m and in 40 years R3,19m.
The wonder of compounding means that the longer the money remains untouched, the faster it will grow because you will start earning interest on top of interest.
Many investors make the mistake of chasing the “next big thing”. They are always trying to anticipate where their money will grow fastest and keep moving it into different funds or assets.
However, this is a strategy that is almost always destined to fail. Not only because it is impossible to predict the markets, but also because it is based on always having all your money in one place.
The best investment strategy involves putting your money into a selection of different funds and asset classes so that you have many different sources of return. If one underperforms for a while, you don’t need to worry because you will be getting out performance from somewhere else.
Stick to your plan
Because investing is always about your long-term future, it’s easy to be distracted by short-term issues. People see markets dropping or hear about economic problems and think that they need to do something to protect their money.
However, if you started off with the investment plan, you should have very little need to change it. What happens over one day or a week or even a few years is not that important. What matters is the full life of your investment over 30 or 40 years.
If you get your decisions right from the start, the small bumps on the way should smooth themselves out. Knowing what your plan is and being willing to stick with it, therefore, makes investing a lot less stressful and ultimately more rewarding.
Words: Patrick Cairns