Establish a financial plan based on your goals

Build a diversified portfolio based on your tolerance for risk

Your financial plan will give you more insight into your risk tolerance. In other words, if you commit a certain amount to investing, what percentage are you willing to lose in the short term to receive greater return in the long run. Once you sell your investments at that percentage, the loss is realised. It is important to stay level-headed when investing. With greater knowledge on what the financial markets are doing and by doing research on historical data, an investor can become more tolerant for risk or stay level-headed during volatile times.

If you are not keen to stay on the investment wave throughout its ups and downs, then it’s better to take the lower risk investment strategy, even if it means that you may lose out on high investment returns as an opportunity cost. If you are still unsure how much risk you are willing to handle in your investments, an Investment Advisor can help you determine your risk and give you advice on what investment strategy to follow based on your risk tolerance.

Rebalance your portfolio regularly

It is good to rebalance your portfolio if needed. Some research says that this should happen once a year, others say once a quarter.

We thought as part of this investing principal article, we would list below the rules as shared by Jim Cramer, the host of CNBC’s Mad Money program that we consider as good practice when rebalancing a portfolio.

1. Avoid companies with inherent faults

An example would be if the company is responsible for business fraud (Steinhoff corruption scandal). That said, stock prices that would have dropped during a Bear market or when the markets are volatile do not mean the company is inherently broken. The mining industry for example can overcome transport challenges. Look at the company’s financials that you are interested in or ask a Financial Advisor to support you.

2. There is always a bull market

Look for the hidden gems, even during Bear markets or when it looks like the financial markets are declining. This is where research comes in and value stocks can be found.

3. Build in protection against significant losses

Long-term investing succeeds at its best when you don’t lose money when share values are going down. In other words, you would want to preserve your capital as best as possible. How do you build protection into your investment portfolio. Below are two ways:

Non-correlating assets

You can build protection against significant losses by having a multi-asset investment portfolio. That means your investments consist of a mix between equities, bonds, real estate, commodities, and currencies. As the global economy experiences shifts that influence the markets, the different types of assets will react differently, some will increase in value, some decrease, and other will stay stable. This makes your investment portfolio less volatile. Overberg Asset Management builds our portfolios to various degrees for volatility. Our Growth portfolio would have a bigger ratio of equities versus other non-correlating assets, and our balanced and defensive portfolios have a different ratio of multiple assets. For more information on different types of assets, please read our article inflation.

Dividends

By investing in companies who prioritise paying dividends, you don’t have to rely purely on the share price increasing in value, you will receive dividends that can be re-invested, therefore lowering your portfolio’s volatility. The benefit of investing with Overberg Asset Management is that we ensure that capital preservation strategies are implemented. Our financial advice will take this into account.

4. Manage your investment management fees and taxes

Investment management fees are taken out of your investment pool of money to make transactions easier and is normally a percentage of your investment amount. Depending on the amount that is invested, these yearly fees can add up over time. That does not mean that fees should be avoided. The annual management fee from your asset management institution, shows that you are receiving an asset management service, and that care is taken to manage your investments responsibly. Your responsibility is to ensure that the fee structure is transparent where you are investing, and to choose wisely. Ask what the investment fees structure would look like each year when looking at your investment options.

5. Ignore the noise

The possible challenge about compounding is that it needs time to become a reality. This might be the hardest principle to follow, however, seeing your capital increase feels rewarding. When the interest on your capital starts earning interest, that’s when the magic happens.

Volatility and risk could look like the same concept, however, volatility in the markets gives investors the opportunity to buy more shares at a good price. The volatility in prices over a few years stabilises. The role of the Wealth Manager includes helping you ignore the noise and stay invested. A lot of damage can be done to investments when shares are sold in haste.

Four ways to ignore the noise

1. 1. Wait 10 days before taking any action
   2. Seek out alternative opinions from people you trust
   3. Be selective in what you read, watch, or listen to
   4. Write down your decisions and look back at it a year from now to learn from them

Now that you know about some excellent investing principles, you can read more on investing behaviours/ investing lifehacks that Werner Erasmus, our wealth manager in the Pretoria office shared in one of our Weekly Market Reports in 2022.

How can Overberg Asset Management help you invest?

Investing is specific to everyone’s financial goals as mentioned at the beginning of this article. We would have a call/meeting with you to learn what you would like to achieve with your investment journey. Overberg Asset Management is a South African authorised financial advisor (783), with experienced Advisors who can guide you and become your trusted investment partner throughout the process. There is no need to try and look through the noise alone, we are here to be part of your investment team. Call us today.

This article, whilst providing good principles to follow, does not count as financial advice as many factors would need to be considered for you as an individual. Please speak to a Financial Advisor before you make investment decisions