By Lesedi Masoko
The common denominator among wealthy elites is that they are investors who dominate the world economy through means to investing. One of the most promising ways to become financially powerful is by means of stock market investments. Quite precisely, creating smart investments can help improve one’s financial life. However, investors would never deny the importance of investment planning before establishing an investment because as argued by the CEO Magazine, “failing to plan is planning to fail and when it comes to investing, failure equals expensive costs” Business Analysis – Business Trends | The CEO Magazine.
Establishing an investment plan requires more than just selecting profitable stock markets. One has to take into consideration their current financial stance and what the plan for the future is. Therefore, the first basic question that any potential investor would ask themselves is, ‘what is the state of my financial ability, is my financial foundation sturdy enough to create an investment?’ And, an essential follow up question would be, ‘will I be able to survive should I make an investment and in relation, what risks am I willing to take?’ – This is where the relevance of an investment plan plays out, which is one of the most important factors in financial planning.
An investment plan, according to Unity Financial Partners, “is the process of matching your financial goals and objectives with your financial resources” What Is Investment Planning? (unityfinancialpartners.com). In a nutshell, investment planning involves a process in which financial goals are identified and then converted into a building plan. Investment planning “begins with the identification of goals and objectives, then we need to match those goals with the available financial resources” Investment Planning: How it works to make better financial life (elearnmarkets.com).
In relation, some of the advantages of investment planning include factors such as, and this is according to elearn markets by StockEdge Investment Planning: How it works to make better financial life (elearnmarkets.com), the ability to gain a good sense of personal financial management and understanding because once a you are able to understand the essence of your financial situation, and you are able to manage your income, the process of investing becomes more swift. Proportionately, you will be able to predict your financial situation as a result of the gained knowledge. Additionally, investments do become extremely useful when there are cases of family or business emergencies.
The First National Bank of South Africa (FNB), has provided guidance to potential investors with the following tips, that can be found using the following link, Savings and Investments Tips – Savings and Investments – FNB:
Principle 1 – “Identifying your saving and investment goals and sticking to your strategy.” As argued on the FNB investments website, most business have a planned strategy outlining their objectives and goals for the future, and how they plan to go about achieving those goals. This is the advice given to an individual looking to get into an investment because the cause will influence your decision-making, and it may help you commit to the strategy that you have put in planned.
Principle 2 – “Building a core portfolio.” It is crucial for an investor to establish a risk profile. Once an investor has established their long-term financial goals and timelines, the process of choosing the appropriate assets to meet the given criteria becomes more practical. Additionally, crafting an investment plan that analyses the risks that you are willing to take is essential however, some may argue that age contributes greatly to investment decision-making. Ideally, the younger you are, there are more risks that you are able to take because should there be any major losses, you have time to recover according to smart asset Making an Investment Plan: A Step-by-Step Guide – SmartAsset.
In relation, one of the factors that can influence the possibility of success in an investment is knowing which investment assets are appropriate for your risk profile – identifying the right assets that match your risk profile will direct you into a path of possible success where your goals may be achieved. Moreover, operating with a patient mindset and a committed mindset towards the strategy can be beneficial because pay-outs do not happen quickly, in most cases.
Principle 3 – “Diversification, asset allocation, and risk management.” As the saying goes, “do not put all your eggs in one basket.” Successful investors know this, and they stick to the principle. Financial goals can be reached in many ways and one of those ways is exposing yourself to multiple assets. Diversification is “spreading risks across multiple investments and saving vehicles” Diversifying Your Portfolio – Savings and Investments – FNB.
According to research, it has been found that that “there is a misconception that diversification means purchasing many assets in portfolio and the more assets one has, the better the portfolio. For example, simply increasing the number of shares in a share-only portfolio does not assist in balancing overall portfolio risk, as increasing shares is only effective to a certain point” Diversifying Your Portfolio – Savings and Investments – FNB.
Additionally, investors do not often invest in one asset class because different investment platforms respond differently to economic changes.
Principle 4 – “Use compounding to your advantage.” Compound interest is described as, “the process of generating earnings on an asset’s reinvested earnings,” according to Discovery Compound Interest | Reinvestment Benefits – Discovery. It is like earning interests on interests because the process enables you to earn returns on both the initial or original investment and on returns that you received previously. Compounding, in other words, means to reinvest your returns back into your account for it to grow more.
By a way of example, say you invested R1000, and your interest rate is 10% (R100) in the first year, compounding here would mean reinvesting the interest that you earned, which is R1100, the amount that will earn another 10% interest. This means that you will earn 10% on both the starting investment which was R100 and on the interest that was accumulated. Compounding is seen as a magic wand because it earns your more returns.
Principle 5 – “Protecting what you have worked hard to build.” It is important that you ensure that your wealth is protected because you have worked hard to earn it. There are several ways to ensure protection over your wealth, these include methods such as, creating a will or putting your assets in a trust fund – which is the legal transfer of funds or assets to a trustee that will administer the funds on behalf of the investor, and for the beneficiaries of the trust What is a Trust Fund & Should I keep it | Investec Focus.
If you are truly looking into establishing investments, be sure to exhaust yourself with research because the bold step into becoming an investor can transform your life and your financial reality. Be sure to do thorough research and ask the right questions to the right people and financial platforms. Additionally, it is important to also get a financial advisor who will have the knowledge and mindset to help you understand your finances better.
Additionally, do ensure that you protect your wealth because chaos is what your hard work will birth if you don’t have the necessary documents that enforce protection and clarity.