How to build an investment strategy that works for you
BY: Helen Baker
The world of investing contains a plethora of options, but only by understanding their pros and cons can you build a personalized investment strategy that will help secure your long-term financial prosperity.
Contrary to what you might have learned in your high school economics class, there is a lot more to investing than simply ‘buy low, sell high’. Investing is a long-term journey, requiring preparation, diligence and an ongoing commitment to its core objective: to generate a profit.
Of course, the purchase and sale prices of any asset are important considerations when investing. But these are just two factors to consider among many, with others being far less obvious for the untrained eye to spot.
So before you part with your hard-earned money, consider this: Is your investment decision wise and cost-effectively? Is it in accordance with the relevant laws? And is it part of a holistic approach to maximize returns?
Retirement funds
Retirement funds are the most commonly used investment vehicle for individuals looking to ensure their long-term financial stability. But how you structure your retirement fund, and how you manage it over your working years, will have an enormous bearing on the size of your nest egg come retirement. Here are some considerations to make.
Type of fund: Everything from options available to legal obligations, asset rules and costs involved vary considerably between the different structures and within different countries, so it’s important to choose the right one for your circumstances.
Many countries offer tax incentives to make additional contributions into your retirement fund rather than toward other investments.
In particular, weigh up the stringent regulatory, accounting and time costs involved in managing your own retirement fund versus the cost of outsourcing these responsibilities to a managed alternative.
Insurances: Life, permanent disability and income protection cover are useful safeguards to have. It may be possible to take out such policies from within your retirement fund, preserving your post-tax earnings. Be sure that any cover is sufficient, especially as your income grows and circumstances change over time.
Taxes: Since self-funded retirement is cheaper on the public purse, many countries offer tax incentives to make additional contributions into your retirement fund rather than toward other investments. These benefits can be lucrative in minimizing short-term income tax while maximizing retirement income.
Property
The popularity of property as an investment is due to its relative stability and long-term growth prospects. There are, however, cost considerations that investors often underestimate at their peril.
Upkeep: Ongoing costs will affect both everyday cash flow and overall profitability. Be sure to factor in property management, maintenance, repairs, taxes, local government rates, utility connections, strata and landlord insurance.
Environmental risks: Natural disasters, such as floods, fires, storms, coastal erosion can impact tenant occupation, insurability and resale potential. This risk will only continue to rise as the regularity and potency of natural disasters are increased with climate change.
Opportunity cost: Money invested in property is not readily accessible, potentially restricting uptake of other investment opportunities.
Equities
Equities and shares are in many ways the direct opposite of property ownership – readily accessible, easily and quickly traded, and values fluctuate by the second.
This presents opportunities to move quickly in order to maximize gains and minimize losses. It is also inherently easier to balance risks and diversify investments across national borders.
Investing is a long-term journey, requiring preparation, diligence and an ongoing commitment to its core objective: to generate a profit.
But conversely, this flexibility presents the temptation to move too quickly – buying without having all the facts or selling in an unfavorable market. Consider too the relevant laws and taxes, especially on international investments where you may be taxed in both your home country and the investment’s host country.
Cash
Cash investments are typically seen as a safe-haven – money is low-risk, readily accessible and has few restrictions attached.
Investment options include traditional savings in high-interest accounts or term deposits, foreign currency exchanges, cryptocurrencies and government bonds.
The flip side is that cash investments are typically slow growing. If interest earned is lower than inflation, you’re effectively losing money. There can also be costs involved, such as currency or bond trader fees, or penalties on early access/not making minimum contributions.
Collectables
Some people use professional knowledge or personal interest to invest in niche collectables. Fine wine, art, vintage vehicles, jewelry, watches, coins, stamps, antiques, designer handbags, comic books – the opportunities are virtually limitless.
The biggest risks with these include:
Emotional impulse: Buying something based on passion rather than financial logic.
Changing trends: Today’s fashion may be tomorrow’s eyesore, diminishing its value and buyer interest.
Upkeep costs: Storage, security, insurance.
Specialist fees: Valuations, sales.
Strategy = success
Scaling your wealth means devising and following a well thought-out strategy. Include safeguards against investment risks, such as by diversifying assets and maintaining an emergency cash fund to avoid forced sales in a crisis.
Purpose will ultimately guide your timeframes and your approach.
Tailor the ownership structure. Regulatory obligations and tax liabilities may differ depending on whether an asset is owned by you personally, your retirement fund, your business or a trust. Budget for good accounting and financial advice, to keep your strategy comprehensive and compliant.
Finally, align your strategy to your goals. Are you building wealth for retirement? Using investments to save up that first house deposit? Maximizing cash flow to support business growth? That purpose will ultimately guide your timeframes and your approach.
This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice and does not constitute an attorney–client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
