Five factors to consider when constructing your investment portfolio

407
Schalk Louw, financial adviser at PSG Wealth

For anyone interested in improving their financial outcomes over the long term, a carefully constructed investment portfolio is crucial. If you have the important resources of time and commitment available, it is possible to compile your own investment portfolio, and these basic guidelines can help you get started.

1. Speculators are not investors

According to historical data (which is no promise for future performance), equity investments still deliver the best returns over the long term. If you had invested in the JSE in May 2008, for example, when the market reached an all-time high, but was also on the verge of one of the biggest ever corrections, and held on to this investment until the end of July 2020, you would have earned 141% growth. And this despite two of the greatest corrections of all time, the Great Recession and the more recent COVID-19 pandemic.

Would that have been phenomenal growth? Not necessarily, but you still would have been able to beat local inflation by 2% per year despite two of the most difficult market periods in history.

2. Diversification reduces risk

This is a simple concept, yet many people struggle with it. This is usually due to personal preferences and emotional involvement. One investor may have lost capital value in shares over the short term and may have decided to only focus on money market going forward, while another investor may have had so much luck with his property investments, that he now refuses to ever consider another type of investment again. Historical figures show that diversification, or the spread of capital across different types of investments, not only reduces risk, but it can also provide better returns.

3. Focus on time, not timing

Due to the fact that share prices fluctuate constantly, many speculators would have become incredibly rich if they had bought when share prices were at their lowest, and sold when share prices were at their highest. But if that were as easy as it sounds, we would all be wealthy. The fact is that even the biggest and most successful investment experts cannot get it right 100% of the time, and this can be seen quite clearly in historical returns. As an example, only 15% of General Equity Unit Trusts managed to outperform the FTSE/JSE All Share Index’s total returns over the past 3 years, and this includes returns from passive funds such as ETFs.

The best approach is to stay invested through the ups and downs, rather than attempting to time the market.

4. Understand the power of compound returns

This concept requires roughly the same amount of self-control as not using the brand-new credit card you just received in the mail. The investor that managed to exercise self-control over the last 25 years, for example, by investing R1 000 in shares in 1995, would have had an investment worth R23 256 today. If the same investor had withdrawn from his investment on a regular basis, let’s say 10% every year, things would look drastically different as he would be left with only R2 545 today. It’s easy to understand why Albert Einstein claimed that compound growth/interest (growth earned on growth) is one of the most powerful forces in the universe.

5. Invest in what you know

Don’t look at your investments as just figures on a page. If you want to invest in shares, make sure that you invest in good reputable companies, and make sure that you know these companies well. You should know where your money is going and you should know your investments. Not everyone has the time available to do this kind of research on their investments, however. If you are unsure, rather consult a professional to guide you.