Haydn Johns, Head of PSG Life and PSG Invest from PSG Wealth, looks at the evolved world of investing but argues that certain practices will stand the test of time.

There is an old saying that goes: “A good man leaves an inheritance to his children’s children.” Leaving a legacy is a timeless principle that is passed on from generation to generation. While financial inheritance is important, it's also crucial to teach children how to manage wealth responsibly to avoid losing it. Beyond wealth, there are three other key forms of “inheritance” – financial education, common sense and generosity – which will help the next generation flourish.

The point of departure for parents is to acknowledge the reality that our children, Generation Z and millennials, think differently. They have grown up in a world where unprecedented technological changes are a constant and Generation Z are commonly referred to as the digitally native generation. They live on devices in a digital first world and are not afraid to seek answers from the internet and leverage technology.

It is therefore no surprise that Generation Z’s are five times more likely to make their investment decisions based on social media. Beyond seeking financial return and building personal wealth, they also want to invest in firms that align with their values and passions. Environmental and social justice issues in particular are focus areas for the next generation of investors. They are also inclined to favour alternative investments, such as cryptocurrencies and real estate crowdfunding, over more traditional investments such shares and bonds. Technology has also enabled them to trade and manage their portfolios from anywhere in the world, from their smartphones.

Despite these differences, there are fundamental investment cornerstones that can be passed down to our children to stand them in good stead.

Investment lesson #1: Know the three things you have no control over when it comes to investing

• Markets will move up and down, more than often on the back of a change in sentiment with no rational explanation so don’t fixate over short-term movements.
• Individual share prices will fluctuate over the short-term on the back of news flow.
• Your investment returns will fluctuate and never move in a straight line.

Investment lesson #2: Leverage what you can control

• Follow a goals-orientated investment approach. For example, consider whether you are focusing more on growth or capital preservation, how it aligns with your risk profile and how it matches your time horizon. An investment plan is a must as is a trusted financial adviser.

• The discipline of saving is key and another valuable skill we can teach our children – especially as we live in a world of instant gratification.

• Your asset allocation should be a balanced and diversified mix of investments, which align with your investment goals. It is also important to rebalance your portfolio when the mix breaches the upper or lower limits of your acceptable ranges.

• Avoid making emotional decisions due to changes on a particular day or markets movements by sticking to an investment plan, ensuring that you make strategic moves.

• The best advice is never free and the reality is that all funds incur transaction costs when buying or selling securities. There are no limits on fees on investment vehicles such as unit trusts, but it must be fully disclosed. Over the long-term, the amount of fees you pay will affect your investment performance, so it is wise to read all the fine print of any investment vehicle and familiarise yourself with all the costs you might incur. Again, this is where a trusted financial adviser can guide you.

Investment lesson #3: Know the basics

• Invest in what you know.
• Do thorough research and remember that quality companies generate strong cash flows and are easy to run.
• Remember that you are working towards a long-term goal and that patience, not genius, is the key to success.
• Time in the market always beats timing the market, as no one can consistently predict market turning points. Prices will fluctuate from day to day, but over the long run quality companies’ value will be recognised by the market.

“Be fearful when others are greedy and greedy when others are fearful.” This famous quote by Warren Buffet rings as true today as it did when he coined it in 1986. Avoid following the herd and chasing the current “hot” thing. Do your homework and don’t be afraid to buy when others are fearful. Severe market downturns can provide investment opportunities, setting you up for strong returns in the future.