Investing is not something you just run into for the fun of it or because others are into it.
The financial markets are much more complex than they have ever been. The need to grow an investment portfolio, make a profit, meet needs and attain financial goals, has led many into investing.
In such a time as this, it is important one considers certain factors that are critical to the success of investing before venturing into the waters of the financial world.
In this post, we will detail ten things you should keep in mind while investing to ensure your financial goals are met.
- Have a Personal Financial Plan
The universal maxim “he who fails to plan, plans to fail” has never been truer. One of the most important steps in investment is analysing your goals and the amount of risk that you can take. This analysis can be done individually or you can use the services of a financial advisor. This will give you an objective look into your financial situation especially if investing is new to you.
While this is not a sure bet that your investment will generate return, however if a well-thought-out plan is drafted and meticulously executed, it will surely lead to financial security in the long run.
- Diversify your investments
It is common knowledge that Companies face several risks such as market risk, industry risk, regulatory risk etc.
For example, while a political decision could lead to a rise in the price of a particular company’s stocks, it can lead to a fall in the price of stocks of another company. Such as passing of laws to go carbon neutral could positively impact renewable energy companies and EV manufacturers on other hand it could negatively impact non-green energy companies like coal energy and traditional locomotives.
Similarly, some new trade restrictions or regulations or political tensions among countries could impact profits of a company.
Likewise, performance of other assets and instruments like commodities, bonds, forex are also dependent on various factors and risks arising from international and regional events.
It is for this reason investors are advised to aggregate different mix of investments in their portfolio such as different mix of company stocks, bonds etc from different sectors, so that profits from one can cover up for any losses from others.
As part of your mix, you can also include fixed deposits, retirement savings accounts, college education savings accounts etc.
- Create and maintain an emergency fund
In the event that you get laid off from your work unexpectedly, an emergency fund will be of great help in enabling you meet your expenses for the time being before you figure out your next move.
Investment advisors advise you keep around six months’ worth of your monthly income as emergency funds in the event things go sour with your job.
You should only invest surplus money from your income after keeping aside funds for emergency.
- Pay off high Interest debt
It is unwise to invest when you have unpaid high interest debt in Banks or any other financial institution. This is risky because the interests from the debt will cancel out the profit from your investments or sometimes eat into your investment capital. If you have high interest debt, experts advise you pay your debt as fast as possible before investing.
- Ensure you are dealing with regulated financial services providers & products
This is the most important point to keep in mind while investing.
Always verify the legitimacy of any investment opportunity you come across from independent sources and with the regulatory authority “The Financial Sector Conduct Authority (FSCA)”. This is because scammers parade the Internet all the time and are desperate to lure in unsuspecting and naive investors with lucrative investment options.
Always check if your financial service provider (FSP) is regulated by the FSCA in South Africa. Visit the FSCA website on www.fsca.co.za to check if a FSP is legitimate.
Search the FSP number of the financial provider on FSCA’s website to verify their claims, see if their address, contact details, products approved are correct as they claim.
Karan from Safe Forex Brokers SA cautions new investors, “Always remember, having a FSP number doesn’t mean a financial provider can offer every financial service, there are various types of licenses from FSCA under different categories having different compliances and requirements not each are same, so you need to verify it carefully.”
“Financial Services Licenses are different for Intermediaries, ODPs, CIS/Unit Trusts/Asset Managers, Investment advisors etc. For Example: CFD and forex brokers in South Africa have to regulated from FSCA to offer such services as an intermediary. Whereas, stock and derivatives brokers in South Africa have to obtain a membership from JSE and a relevant license from FSCA to provide services.”
Karan further adds, “Always remember, no legitimate investment advisor, fund manager or broker will contact you out of nowhere i.e.: through cold calling or over the internet or through friends or family.”
“And legitimate broker or investment advisor or fund manager will never falsify the facts. Always ask for as much detail as you can about the investment & the financial provider; and research & study about it independently and don’t invest if you are not sure about anything like how the investment product works, its risks etc.”
In South Africa, there is a rise in online investment scams related to Cryptocurrency and forex, with People and Companies claiming to give you guaranteed many fold returns in a few days which is illegal and impossible. In reality, these people are scammers disguising as forex and crypto experts and most likely running Ponzi Schemes.
Please note cryptocurrency investments are yet to be regulated in South Africa with possible regulation by the end of 2022. So, you must stay away from fake companies making promises of high returns.
- Always research before Investing
Smart investors are always very good readers and they ask a lot of questions. There is no such thing as a silly question; if you are not clear about anything, always ask questions.
Before you buy shares of a company, ask for its balance sheet, income statement, and cash flow statement. Sit down and do a thorough study to find out if its assets can cover its liabilities and equity. This will also give you information about the longevity of the company.
If you are looking to buy into a mutual fund, it is not sold on the exchange so you need to go to the fund manager to buy it. Ask the fund manager for the fund’s prospectus, take it home and study it.
Mutual funds could have a high expense ratio which is a collection of all the expenses the fund incurs to manage the fund. It is usually expressed as a percentage and is written on the prospectus.
Management fees, sales charges, advertisement fees etc. are what constitute the expense ratio of a mutual fund. The lower the expense ratio, the better. The point here is you should know about all the charges involved before investing.
- Use Risk Management like stop loss orders to limit loses
A smart investor knows that while investing, you win some and you lose some. However, you don’t have to lose everything.
A stop loss order is an instruction you give to your broker, to buy or sell an asset once the price of the asset crosses a stop price (to be set by you).
For example, if you intend to sell, and the current price of the asset is R10, you could decide to set the stop price at R8. Once the price of the asset goes below R8 a market order to sell off your assets will be executed at the next available price. This prevents you from selling at a very low price.
On the other hand, if you intend to buy, you could also set a stop loss above the stop price. This is because the price of an asset could rise to infinity. This means that should the price of the asset begin to rise and attempt to soar past your stop price, a market order is executed and the asset is bought automatically at the next available price. This prevents you from buying at a very high price.
- Consider Dollar cost averaging
This investment strategy helps investors manage the risk involved in investment of their funds during periods of high market volatility. Dollar cost averaging involves buying assets in small quantities, consistently topping your investment over a long period of time.
This strategy will help you buy more of an investment when the prices are low. This is especially useful when there is volatility in the market and prices move up and down regularly.
Experts advise investors that contribute a huge deposit to their portfolio yearly to consider this investment option.
- Consider readjusting your portfolio periodically
The importance of readjusting your portfolio is to check against lopsided asset allocation. This puts your portfolio at a tolerable risk level. You can carry out readjustment anytime you like.
Some investors readjust their portfolio once or twice a year. Some readjust when certain assets increase or decrease in price and others do so when some assets begin to have a positive correlation.
These different systems have their merits and demerits. However, the most important thing is to ensure your portfolio is healthy and in line with your investment goals.
- Avoid complex financial Instruments
Smart investors don’t take on unnecessary risk. Investing in stock, ETFs, and mutual funds is enough exposure already. It is better to stay away from derivatives which are contracts that derive their existence from another asset.
Options, futures, swaps, CFDs etc. are all derivatives and can be used in speculation, arbitrage and hedging risk. However, they are very complex and are better left to experienced fund managers.
When you invest in a mutual fund or an ETF, the fund manager (who is very experienced) takes on the burden of hedging risk by using derivative contracts. It’s safer to let them do the heavy lifting.
Remember
Investment is not as easy as one would envisage. It requires thinking and rethinking the best strategies to maximise profit and minimise loss. However, it provides an opportunity to earn income and achieve financial freedom.
If one must achieve financial freedom as an investor in the financial market, these ten points should constitute the starting point we think about as far as our investment is concerned.
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