Time, Risk Tolerance and Money Invested. It’s really that simple!!!
These are the variables you need to be most aware of when investing and beginning your wealth creation journey. It is essential to understand that these three variables are interconnected and should be considered together. According to Morningstar, as of March 2021, the top performing asset class in South Africa across a 5, 10 and 15 year period was Global Equities. 5-year returns were 14,07%, 10-year returns were 19,48% and 15-year returns were 14,28%. As Warren Buffet says: “Spend time in the markets; do not try and time them.”. Trying to time the markets can lead to poor investment decisions and can create an environment where wealth creation through investing becomes near impossible. Wealth creation is a process, but here is the long… and short of it.
Whether it’s for retirement, creating an estate to pass on to future generations or simply using investments as tools to meet short and long-term financial goals – your unique circumstances need to be factored in. Risk and reward models are key components of investment analysis, with the emphasis firmly on tailoring a portfolio of investments to suit your individual needs and goals.
What is wealth creation?
In simple terms it’s about using investments to help you meet your financial goals. More specifically, it’s a combination of the two main methods used to create wealth over time: investing and saving. Investing involves buying assets that are expected to appreciate in value over time, while saving involves putting money aside for the future or a rainy day. They are both valuable to creating wealth – however, figuring out the correct combination can be difficult.
What are your short-term investment goals?
Short-term investment goals are usually geared towards meeting financial needs within the next few months – 2 years or for quick access to cash if an unexpected need arises. Short-term investments are typically safer options, have lower risks and offer a reasonable return. The most important thing to note is that short-term investments are used to secure your money for the future, rather than earning significant returns. This is due to the limited time you have and the investment vehicles available. Your short-term needs may be saving for a down payment on a car or apartment, saving up for a wedding or even a holiday away with the family. The short-term investment options include money market funds, savings or fixed deposit accounts and government or corporate bonds. These are the most popular short-term investment vehicles, but they are not the only ones… Be sure to do your homework before making a decision!
What are your medium-term investment goals?
Medium-term investment goals are usually geared towards those who want to meet their financial needs in the next three or more years. There is no fixed time horizon that classifies a medium-term investment, but rather the intention behind the investment will determine if it is a medium-term goal or not. Examples of medium-term financial goals could include financing your children’s education, starting a business, buying property or a similar goal. The emphasis for this type of investment is on capital growth, as opposed to getting your money back quickly, so that you can receive some of the benefits of compound interest. This means that medium term investments offer you the ability to choose riskier investment assets and ride out some of the market volatility. But you have less time to make adjustments and diversify your risks compared to long term investments. Typically, medium-term investment options include unit trusts, ETFs (Exchange Traded Funds) and listed securities on the stock exchange.
What are your long-term investment goals?
Long-term investment goals are usually towards those who want to meet their financial needs in the next five, ten or even thirty years – think about your retirement for example! The emphasis for these investments is on preserving wealth and maximizing the investments growth through the wonder of compound interest. Typical long-term investments include property and listed securities. These options offer the potential for substantial growth over time. The longer your time frame is; the longer your money has to work for you and the longer you can endure market volatility. Long-term investments also allow you more flexibility to diversify your portfolio between a combination of asset classes that offer a suitable balance between risk and reward.
Wealth creation is not one size fits all; it involves an in-depth understanding of your unique situation and of the goals you want to achieve, but the main aim is to help you achieve your financial goals. Every investment carries some element of risk, which means that you should always understand the investments you choose. Remember that an investment is only as good as the person or organization who is managing your portfolio. Get in-touch with an IWCP financial professional to help you with your journey to financial freedom
