If I were given a penny each time someone asked me for some “simple” investment advice, I probably would not have had the need to do some investing of my own, says Pieter Willem Moolman.
It is a simple question, but common belief is that the answer must be complicated. After all, thick books have been written on the topic by a number of big-shot investment experts.
My simple answer usually comes down to the following: start early, set your time horizons and diversify.
Someone once asked a wise man when the best time was to plant a tree. His answer was: “Twenty years ago and the second best time is now!”
The same basic principle applies when making investments. However, before you start building your investment portfolio, it is important to be able to distinguish between investing and speculating.
I often hear people saying they invest in property when they are actually speculating. The latter is a trend that has come to the fore over the past decade.
Although some people will buy and sell property in the hope of making a quick buck, property actually falls in a specific asset class that historically gives a steady return over a long period.
Another way to invest in property is to buy listed property shares. These are again long-term investments and the advantage is that your funds are readily available in times of crisis.
An asset class can be defined as a set of related investments with similar risk and return characteristics. Cash (money market, bank deposits etc) is one asset class and then you also have bonds, shares or equity and, of course, property.
All the different asset classes have similar levels of risk and respond similarly to market conditions.
When we talk about diversification, we are referring to different asset classes as explained above. Another aspect that comes into the mix is liquidity – in other words, how accessible are your funds?
I have heard people saying that they will buy a few townhouses and then “just sell” one when they need the cash. Over the past five years, this was easier said than done and many investors would have realised that property is in fact a long-term investment where your money is locked in.
When you approach retirement age, your focus should shift towards protecting your investments. Therefore older persons should keep a large percentage of their investments in less volatile vehicles such as cash or bonds, or balance share investments with the aforementioned.
Although the basic principles are simple, it is always best to consult a professional financial planner to help you determine your investment strategy in terms of asset class, diversity and liquidity.
If you have not acted just yet, remember that today is the second best time!
Pieter Willem Moolman is the owner of PWM Financial Management in Port Elizabeth. Visit www.pwmfb.co.za or phone 041 582 3034.