Creating wealth is a long-term process that requires patience, resilience and a strong strategy that can weather the global investment storm that has been raging in recent times. As you embark, or continue, upon your journey to financial independence, it is important to wholly understand the investment landscape, or have an advisor you trust, in order to successfully navigate the ups and downs of a stormy market and exploit the nuances of profit-yielding opportunities.
What exactly, has created the stormy conditions?
According to a recent article entitled Navigating Uncertain Waters, slower demand from China last year resulted in declining commodities prices and low levels of economic growth in many emerging market economies. Combined with the political developments in the UK and the US, which caught the world by surprise and created a great deal of uncertainty, 2016 saw poor investment returns that have left a wake of general unease.
Further pressure from the weak commodity markets, slow economic growth, global political uncertainty and two credit rating downgrades in South Africa have resulted in the local equity and property markets delivering below average returns.
Against the recent backdrop, most South African investors have at best been treading water or have seen their wealth decline in real terms, as portfolios have largely been unable to beat inflation.
According to the article; “the average balanced collective investment scheme, or unit trust, achieved a return of between 1.5% and 2.5% while the average offshore balanced portfolio delivered a return of around -7.5% for the year.”
Goodbye to the Past
It is important to put things into perspective and appreciate that investment markets often go through weaker growth periods of consolidation (this is technically known as a process of reversion to the mean). The below average returns achieved in 2016 followed the above average growth that started after the financial crisis in 2009, and weaker periods in investment markets create a more realistic long-term average and allow for better investment returns to be achieved in years to come.
Given the current political climate, 2017 could well be another year of consolidation. However, if you’re looking to achieve a long-term investment goal, it is important to not be swayed by short-term ideals or emotions, as you have a higher probability of growing your wealth if you stick to your investment strategy.
The Five Steps to Long-term Investment Success and Financial Independence
- Determine your investment objective by specifying a realistic goal you wish to achieve.
- Set your time horizon, which is the number of years you have to achieve your goal.
- Decide on an appropriate investment strategy by selecting a combination of asset classes in which to invest - bonds, property, cash, offshore assets, and equities.
- Select the most appropriate investment platforms, products and asset managers through which your chosen investments can be made.
- Monitor and review all of the above on an ongoing basis.
While a great deal of uncertainty remains for South African investors, it is important to understand that uncertainty, and even volatility, in investment markets do not only represent risk, they also represent opportunities.
The key is to remain informed and seek to improve your knowledge about your investments, then keep the various elements of your investment plan aligned to navigate uncertain waters and continue on your journey to wealth creation.