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Your starter kit to Investments
02 Jan 2017

What should I consider before investing?

In the current economic scenario, where interest rates are still at record lows, if you choose to keep your money in a savings or current account, you may actually be losing out because of the impact of inflation. Investing in the markets may be an alternative that provides an inflation-beating return. You should however look at the investment option as a long-term financial goal. Concurrently, it is important that you are aware of the different levels of risks attached to the underlying assets, when investing in the market.

What should I look out for before investing?

Planning and discipline are key attributes of any successful investor. Before investing, you should have a clear and well thought-out plan, which takes into account:

• your investment goals – what are you after?

• timeframes – how long do you want to hold your investment?

• target selling price – at what price would you be prepared to sell?

• transaction costs – what costs are you willing to pay?

• your risk appetite – what level of risk are you prepared to take?

With a clear plan, you are in a better position to make logical decisions to improve your profit margin. On the other hand, if you do not have a plan, it is easier to get caught up in emotions and end up buying or selling at the wrong time.

With a disciplined approach, you are more likely to keep market movements into perspective, recognising the potential impact of risk and regularly rebalancing your portfolio. It is imperative to have an adequate cash pot, prior to investing in the markets. Unfortunately, life’s least predictable events tend to come with a big price tag attached to them. Therefore it is not advisable to keep all your capital

tied up, in case you need fast access to cash. Furthermore, it might take some time to redeem investments.

What are my goals and timeline for investing?

Your investment time frame should provide clear guidance for deciding which investments to choose. Generally, investors have different goals at different stages during their life. The old saying ‘time is money’ sums up precisely why it is important to invest in the long term. Retrospectively, it is evident that investing with a long-term perspective pays off.

What level of risk am I comfortable with?

When developing your investment plan, you should identify and understand the potential risks. As a rule of thumb, if you are afraid of losing your capital, you should think twice before investing in risky assets. There is a very basic investment principle that you should take note of – the higher the risk potentially leads to higher returns, whilst the lower the risk potentially results in lower returns.

Spreading your funds across a spectrum of investments is one of the best ways to mitigate risk and protect against sudden falls in any particular market, sector, or individual investment. With a diversified portfolio of investments, returns from better performing investments can help offset those that under perform.

What are the different methods available for investing, and what are the related costs?

Investing directly – You should consider investing directly if you prefer to manage your own portfolio. Costs may vary depending on how you invest. Investing in collective investment schemes may incur additional costs, such as initial charges, exit fees, and annual management fees.

You should also consider the broker’s fees whenever you invest directly in securities, such as equities or bonds.

Investing through a financial advisor – A financial advisor can help you to build a portfolio that has a fit within your risk profile and return requirements. If you receive investment advice, you may also bear the cost of that advice or service.

As Warren Buffet said, "Investing is laying out money now to get more money back in the future." You should think of investing as a marathon, rather than a sprint whilst looking to grow your wealth over time and not overnight.

Published on Shareholders' Link Issue 41 November 2016

To download the publication, please click here

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