The guy leaned in and asked, “So what will the stock market do this year?”
To which I replied “There’s no way to be sure, and it’s not something I focus on when investing”
“How about the economy, will it grow again in 2019?”
“I can’t guarantee it,” I said
“And what share should I put all my savings in?”
“I wouldn’t put all my cash in any single share”, was my reply.
At this point I got a perplexed look. “I thought this is your job?”
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What makes for successful investing
Yes, as investment analysts and economists we sometimes make predictions’ and forecasts.
But our jobs don’t entail guesswork and wishful thinking.
In fact, the vast majority of forecasts never pan out.
For example, at the beginning of 2014, The Wall Street Journal asked several top economists to predict inflation, unemployment, interest rates and oil prices.
The results weren’t pretty.
For example, US inflation averaged 1.3% in 2014. But the consensus was 46% higher at nearly 1.9%.
The Fed left interest rates unchanged and the year-end yield on a 10-year U.S. Treasury was 2.17%. The experts said the Fed would raise rates and the year-end yield would be 3.52%.
They forecast that December unemployment would be 6.3%. It was 5.6%.
And - drum roll, please - they believed that oil would finish the year at $94.65 a barrel. It was $53.27. Not even close.
But the fact is – you don’t need these forecasts to be a successful investor.
Sure, knowing these things would make it easier in the short run.
But good investors make money in the long run without the need to forecast what the economy will do, or who will be the next president.
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The ONLY six things you should focus on for successful investing
There are only six things you should focus on as an investor:
1. The amount of money you save: If you don’t save money you have nothing to invest with. The more you save, the more you can invest. And the higher your potential returns will be.
2. The length of time you let it compound: You need to give investments time. It’s not much use starting to invest at age 60, and hoping to make a fortune by 65. Then you’re hedging your future on luck. The only true, nearly guaranteed way to ensure prosperity is to invest from as young as possible, and for as long as possible.
3. Your asset allocation: Where do you invest your money? Some investors put everything in property. Others are risk averse and stick everything in a bank savings account. The more adventurous want to put their life savings on the line investing in penny stocks and crypto currencies. None of these options will serve you in the long run. You need to have your money in more baskets than one. Invest in the stock market. Invest in property. Invest in fixed income investments like bonds and the money market. By allocating money to different investment classes you ensure smoother returns. In years the stock market struggles your money market fund will pay off. When interest rates are low, shares will give you good returns…
4. Your investment selection: Obviously – there’s no use in following the first three rules and then still picking only losing investments. So, your investment selection has to be a successful strategy. When picking winning shares, I stick with proven strategies and investment criteria. Financially sound companies with track records of growth and the ability to weather storms. Picking the right kind of shares mean that your investments outlast forecasts and investment ‘trends’.
5. The expenses you absorb: Too many investors completely ignore investing costs. That’s a big mistake. If you pay 2.5% fees on a R1 million portfolio that’s R25,000 in a year. If that portfolio grows 10% this year and you pay the same 2.5% again, your fees come to R27,500 in year two. In this example you’d pay R1.716 million in fees over 20 years. If you only paid 1% fees on your investments you’d save more than R1 million over that period and your investment will have grown by more than R1.1 million more – without the need to invest a cent extra.
6. The taxes you pay: If you continually buy and sell shares you attract income tax on your returns. That means high taxes. If you hold shares for a longer period, you attract capital gains tax – which means a lower tax burden. Then there are a range of other tax benefits you can take advantage of as an investor. Section 12J is a tax benefit where you can write off your ENTIRE investment against your income tax (only applicable to specific kinds of investments). Or the tax benefits you gain by investing in retirement annuities and pension funds. Don’t ignore taxes when you invest – they could eat away at your hard- earned returns.
In short – if you want to grow your investment portfolio in a few years, save as much as possible. Keep your money invested. Spread it out in different investments – and pick good investments
. Minimize your expenses and taxes.
Predicting politics, inflation or interest rates don’t put returns in your portfolio. It only creates noise that takes your eye off the game.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares