Why is it that investors feel anxious and want to sell when market volatility arises? After all, this correction has been expected for some time. Is it because investors suddenly forget about the wisdom of their long-term investment strategy or do they believe that in a few months, long-term economic growth in the world, and particularly South Africa, has come to an end?
Unless you are a trained financial professional or an active securities trader, investment decisions and choices are a challenging exercise and can lead to confusion, frustration and, the worst possible outcome, poor investment selections and unnecessary loss of wealth.
So how do you tackle your financial planning for 2009? As with most complex issues in life, you need to work from ‘the ground up’. In other words, identify the main concerns that influence your decisions, and prioritise them according to your own lifestyle and financial needs.
In my experience, it helps to begin this list by asking the question: ‘What will bring me and my family peace of mind?’ In general, the immediate response to this question has to do with being able to ensure your financial stability. To achieve financial stability, there are a number of issues and scenarios that we need to take into account.
1. Death too soon.
The contingency is to provide life cover capital for families in the event of premature death. You need to assess all of your debt as well as future events such as schooling, varsity, weddings, etc. Life insurance can be bought at a very reasonable cost, especially if you exclude any investment.
2. Death too late.
It’s good to have a large amount of life cover, but what if you survive to reach retirement without having provided sufficiently for it? Membership of a company retirement fund is usually no longer adequate. So often we believe that we will not need any extra plans because the dream of making large amounts of money is always prevalent. What if your dreams don’t materialise and you are left with inadequate funding for your retirement? You should have something else to fall back on.
3. The living death.
You do not die or retire, but sickness or disability, (permanently or temporarily) occurs. Medical aids will cover hospital procedures, but how will you generate income once you’re out of hospital? It is often difficult to substantiate a disability claim. The cover for dreaded disease (which includes ailments such as cancer, heart attacks and many more) must be included in your plan.
4. Factor in inflation.
Whatever you do today needs to be reviewed because of the effects of inflation, and no plans made today will ever be sufficient in the future, so reevaluate regularly.
5. Focus on health cover.
As it is your health that guarantees you the ability to purchase life and disability insurance, do not escalate life policies but rather purchase future guaranteed insurability.
6. Tax concessions.
Make use of the deductions allowed under a retirement annuity to provide a pension at retirement.
7. Plan for marriage and divorce.
In South Africa today, most families are joint-income generating. It is no longer sufficient for just one of the spouses to provide for both. Can you imagine reaching retirement and having to live on only one of your two salaries? In many instances, the one salary will not even be the full 100% prior to retirement, simply because in business today many of the benefits are not calculated into one’s retirement package. Many marriages do not survive and therefore both spouses should ensure that they plan together, but that each also has their own financial plan.
8. Diversify your interests.
The last principle relates to geographical and asset diversification. You can’t have all your eggs in one basket and you need to diversify between equities, properties, bonds, cash and hedge funds. On the geographical front, many families are faced with children living abroad and the cost of visiting them is quite restrictive due to the rand depreciation.
Not all of the above principles apply equally to everyone, but if you use them as a guideline in your financial planning structure, I can assure you that your foundations will be solidly laid.
If we agree that some of these points encompass the biggest financial concerns (which at some point keep most people awake at night), then we can also agree that any proper investment strategy must provide solutions.
Once you have addressed these needs, wealth creation is likely to be the next item on your financial priorities agenda.
You will need to decide what part of your investment portfolio will be responsible for income creation, and how much will be assigned to creating wealth. The income creation portion of your portfolio will need to be invested accordingly, using instruments that can provide you with regular income, based on your family needs. Inflation is an important factor to consider while developing your income creation strategy.
In order to generate wealth, different investment avenues need to be explored. As a rule of thumb, long-term investments (10 – 25 years) in portfolios including equities and real estate have proved to be a good source of wealth generation.
The key is to understand that a fortune is not created overnight (usually). It takes time for the real gains to be realised, and therefore, the investor needs to be prepared to view these investments as long-term, and not fall into the trap of checking performances on a regularly and making rushed decisions to sell or buy based on monthly statistics.