In the previous articles, we explored budgeting and insurance; two elements of the wealth creation journey. Now we turn to savings and investments.
A good financial plan should be based on your personal goals; you are more likely to stick to a plan that is specifically based on your unique goals. Your goals can be something like ‘going on a dream holiday,’ ‘buying a house or car,’ ‘starting your own medical practice,’ ‘retiring well,’ ‘reaching financial freedom,’ etc. Whatever your goals are, you need to plan how your money can work for you in order to make your goals a reality.
Below are a few things to consider in your roadmap.
An emergency fund is the foundation of your investment plan. Emergencies tend to happen when you least expect it, so you should be able to access this money with no hassles in the event of an emergency. The amount should ideally be 3 to 6 months’ worth of your living expenses. You can keep this money in a savings- or a money market account. The interest that you earn on this money may not be good but remember that the aim is to have the funds readily accessible for emergencies and not tied up to earn a higher return.
Once you have put aside your emergency fund, you can consider where to invest further. The time that you set for a goal usually determines how you should invest the money for that specific goal.
For any goals that you would like to pay for over a 1-to-3-year period, you should put the money in a savings account. This can be a fixed deposit or money market account. The reason for this is that you should not take too many risks with this money. You want the money to be available when you need it. It will be beneficial to compare the interest rates on different accounts offered by different banks and choose the account with the best interest rate and the lowest charges. You can also consider using a money market unit trust for these savings.
For goals that you need to pay for in 3 years’ time or more, you should allocate some of your money to growth assets such as shares and listed property. The longer the investment time horizon, the more you should be invested in shares. Remember that exposure to growth assets will come with volatility, this means that the value of your investments will move up and down (perhaps even below the amount that you have invested). The key is to stay calm and remain invested, to allow your investments time to recover from the market downturns. If you sell out during a market downturn, you will be locking in a permanent loss of capital. Do not try to time the market by switching in and out – you are likely to get in and out at the wrong time. When it comes to investments, time and patience should be your best friends.
You can get the required exposure to shares by investing in unit trust funds or Exchange Traded Funds (ETFs). You can also buy individual shares through a stock broking platform. My personal preference is to invest in ETFs because they provide exposure to a broad range of shares while being low-cost. Keeping the costs of your investments low will help the average long-term return of your investments.
Shares are volatile assets and require you to have a high level of risk tolerance. If you want to tone down the volatility of your investments, you can add exposure to defensive assets such as cash and bonds to your portfolio. The best way to do this is by investing in multi-asset unit trust funds that have exposure to shares, listed property, bonds, and cash. Remember to consider your investment time horizon as well. You do not want to have too much exposure to defensive assets for an investment that is intended for 10 years or longer. A high equity-balanced fund would be my choice for long-term investments. This type of fund also has exposure to offshore markets.
It is better to be invested in a basket of different shares rather than a single share. The risk with investing in one share is that if things go wrong with the company you are invested in, you stand to lose all your money. It is wiser to spread your investment across different shares to manage that risk. You also want to be careful not to be invested in a specific sector, like financials or commodities. This is also true for your own business (medical practice); you may need to put in a lot of capital to get your practice started but remember to allocate some of your profits/money to other investments as you build your assets. This will help you to diversify away from your business.
If you get the above building blocks right, you should be able to build a good portfolio. You can then focus on the things that are within your control such as how much you contribute to your investments on a regular basis. The main thing is to keep your plan and investment portfolio simple and cost-efficient.
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