Investment

Five investment principles to remember in May

Lynn Bolin, Head of Communications at M&G Investments 

May, the fifth month of the year, is a month of transition. In the northern hemisphere, May sees the emergence of spring, a move from winter to summer. In the southern hemisphere, autumn arrives, with its colder weather and shorter days. In South Africa, it’s the perfect time to pause for a moment and make sure that you’re ready for the upcoming rainy months; whether clearing out the gutters, fixing those leaks in the roof, or making sure that your trusted rain jacket is still up to the task. 

The month of May is an excellent opportunity for us to review the various aspects of our lives to ensure that they are ready for the change in season – including our investments. So, in the spirit of the “transition month” this year, we would like to share five investment principles to help you “winterproof” your investments.

1. Diversification does it best
We all know the saying, “there’s no such thing as a free lunch.” This axiom holds true for investing as well, with one exception: diversification.  This was originally pointed out by Nobel Prize winner Harry Markowitz* who is credited with saying, “The only free lunch in investing is diversification”.  What this means is that having the right mix of assets in your portfolio helps you to protect your capital by spreading out the risk, while also giving you exposure to several different opportunities to generate returns. With inflation on the rise around the world currently, make sure you have enough exposure to equities to outperform inflation, while also being diversified in your equity holdings. At M&G Investments, we believe SA equity as an asset class is still cheap relative to other developed markets like the US, so it’s a good time to add some exposure to your portfolio if your risk profile allows.

2. Staying the course counts
Investors are constantly bombarded by alarming headlines and messages from both traditional and social media. This creates fear and uncertainty and can result in impulsive decisions, such as taking your money out of equities and moving it to cash, a decision that can destroy value in your portfolio and set you back in your quest to grow your wealth. This is where the principle of staying the course comes into play.  Avoid the noise out there – or at the very least apply a hefty filter to it. Establish your financial plan, either by yourself or with the help of an adviser and stick to it. Choose a fund manager with a sound long-term track record and trust them to make the appropriate adjustments to your investments on your behalf.  

3. Don’t try to time the markets
Don’t wait until you think the market is rising to start investing. There’s an old saying that the best time to invest was 20 years ago, and the second-best time to invest is now. If you’re already invested, avoid the temptation to constantly switch from one investment to another, trying to capture growth as markets rise, and avoid losses as markets fall.  Most times you’re likely to get it wrong and end up losing capital. As mentioned in the previous point, it’s usually best to leave the timing of your investments to the professionals.

4. Remember your retirement
When you’re younger, retirement feels very far away, and you think you have plenty of time to save for it. But having enough to retire comfortably takes a lot of capital, and the best way to have enough is to start young, allowing the power of compounding to give you a helping hand. Save automatically by using a monthly debit order; that way there’s no getting around it.

Regular, monthly saving also gives you the benefit of rand cost averaging. So, if you’re investing offshore, the value of the rand and investment markets will be changing, but you’ll receive the average value of both over time. Equally, you’ll receive the average value of local assets by consistently buying them whether cheap or expensive. 

5. Have enough for an emergency
While investing for the long term is vital, also make sure you have some money on hand for emergencies. The typical rule of thumb is to save anywhere from three to six months’ worth of expenses and to have that in an investment that is easy to access.  The Covid pandemic, where many people lost their jobs, has taught us just how essential this is. Given that these types of investments should be easily accessible, delivering returns above inflation, while assuming low- to-medium levels of risk, you may want to consider a good fixed-income unit trust.

As we watch the seasons change and our lives transition from the outward orientation of summer to the more inward focus of winter, it’s a good time to review your investments and to make sure you’re still sticking to the basic principles, especially those we’ve mentioned above. 







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