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South Africans are no strangers to uncertainty and volatility, but that doesn’t make it any easier to stomach the ups and downs of the rand, interest rates or inflation.
As I always advise, in times of turmoil it’s best to stick to the basics. You can easily lose your mind and make rash decisions that could do more harm than good. Investing is a long-term game, and you’ll be successful over this term if you can shake off the desire to do something drastic because of short-term shocks.
Herewith is my list of 8 basic fundamentals that need to be part of your financial planning. By sticking to these principles, you give yourself a far better chance at success.
Principle 1: Budgeting
Financial budgeting is the foundation of effective personal finance management. It helps you set clear financial goals, to control spending, and to improve your overall financial health.
Why budgeting matters:
- It helps set financial goals; analysing your income and expenses makes you focus on where you can rather save money. Set respective goals for saving, investing, and reducing debt.
- It controls your spending habits; by creating a budget, you can identify areas of overspending and adjust to ensure you don’t spend more than you earn.
- It helps to avoid debt; budgeting helps you to notice where you can cut back on spending and where you can rather use the savings to pay off debts.
- It gives you financial clarity; tracking your income and expenses allows you to live within your means. If you’re not, then it’s best to make some adjustments.
Read also: Five pillars for investment success in troubled times
Principle 2: Managing debt
Debt management is crucial for your financial stability. The key to achieving this is to understand the difference between good debt and bad debt.
Good debt refers to investments that generate income or capital growth, while bad debt includes credit cards and unnecessary loans. My suggestion is to pay off high-interest bad debt so that you reduce interest payments, free up money for savings and investments, and regain control over your finances.
Principle 3: Avoiding knee-jerk reactions
One of the biggest mistakes you can make when market volatility hits is to panic and sell your assets to avoid further losses. While it’s understandable to feel anxious about market fluctuations, you need to stay calm and avoid knee-jerk reactions.
Instead, take a step back, assess the situation, and make rational decisions based on your long-term investment goals. Remember that investing is a long-term game. Short-term fluctuations may cause anxiety, but a disciplined approach is key to success.
Principle 4: Diversify your portfolio
Diversification is a fundamental strategy for managing investment risk. By diversifying, you minimise exposure to any single asset or sector so that if one investment performs poorly, others may offset the losses. Diversification allows you to capitalise on various sectors of the economy, ensuring you’re well-positioned to benefit from potential growth.
Principle 5: Focus on quality investments
You can weather the storm partly if your investment portfolio is made up of quality investments that are more likely to withstand the test of time. I suggest you focus on quality investments that have a proven track record of stability and growth. Look for companies with strong balance sheets, stable earnings, and a history of dividend payments. A worthwhile strategy is to include blue-chip stocks; it is well-established companies with a history of stable growth.
Principle 6: Considering alternative investments
Alternative investments, for example, private equity and hedge funds, can offer further diversification, as well as potentially higher returns than traditional investments. Be wary though, alternative investments come with higher risks and may not be suitable for all investors.
Before investing, conduct extensive research and seek professional advice to understand the risks involved.
Principle 7: Watch emerging trends
While uncertainty can be unsettling, it can also create new opportunities in emerging industries and technologies. Keep an eye on emerging trends and consider investing in sectors such as renewable energy, e-commerce, or healthcare, which are likely to experience growth in the coming years. However, always conduct your research and evaluate the long-term potential of these trends before making any investment decisions.
Principle 8: Stay disciplined and patient
Last but not least, staying disciplined and patient is crucial. Market volatility can be emotionally draining, but remember that investing is a long-term game. Stick to your investment plan, stay focused on your goals, and avoid making impulsive decisions based on short-term market fluctuations. Stay the course and trust in your long-term strategy.
I’m sure you’ll agree that these principles are not difficult to understand or appreciate. What often is difficult is staying disciplined. If you have a clear financial plan, this will allow you to stay on the straight and narrow and it will prevent you from making rash decisions when uncertainty strikes.
- Johan Burger, CFP®, is head of Brenthurst Wealth Pretoria [email protected].
