There is no magic trick to retiring comfortably. This can be hard to accept. It is human nature to rely on fate. We often look for a quick and easy solution to a problem that may require a plan, commitment and time. By following these 5 principles of investment you may increase the probability of creating this “magic” for yourself.
Formulate a plan
Start by setting realistic goals with the help of a Certified Financial Planner. Here are a few simple parameters: Aim to accumulate at least 17 times your pre-retirement salary. This is, however, based on a set of general assumptions. Your circumstances may require you to adjust your plan.
You need to account for inflation
Investing is not always a smooth ride. Earning returns that beat inflation (i.e. real returns) requires you to take on some risk. This means you might need to make investments, which have uncertain short-term outcomes and prices. Even the most prudently managed portfolios may experience fluctuations over the short term. The key here, as an investor, is to remain calm during this period of variable investment or unit trust prices. Try and take a long-term approach and evaluate your returns over longer time periods. In the end, short-term fluctuations tend to smooth out with time and when you use dollar cost averaging, you lower your average cost per share.
Try and avoid switching
Don’t try and predict the future. It rarely plays out the way you think it will. Switching involves selling one investment or unit trust and buying another, but this is often done at the worst time. By taking a wait-and-see approach you increase your chances of making the right choice. You will often be confronted by an uncertain market, which will inevitably lead to a self-proclaimed call to action. Admittedly it is difficult to stand by and do nothing, when facing a market in a down turn, but this is often the best course of action if you have a long-term investing horizon. Switching during a down period can often destroy value. Stay focused on your long-term goals. Not everything requires you to act.
Diversification works best when investments are spread across different assets or across unit trusts that are managed in different ways. Diversification can break down if the unit trusts you invest in are very similar. Balanced funds can give you good exposure to different asset classes. It is important to note that investing in various balanced funds won’t necessarily make your investments more diverse, it simply refines the spread of your investment. Thus you may end up paying higher fees, while getting average market returns.
Begin as soon as possible
Waiting to start your retirement savings can have huge consequences. The key here is compound interest, which requires time. Missing those first few years of saving may result in losing almost half your final return. Do not despair; even if you have not started yet, the best time is still now.
These tips may seem quite basic, but trying to implement them consistently is hard. There is no magic involved in retiring comfortably, only a steady, committed plan.