PLANNING POINTS:
All of us are defined by our habits. Habits are patterns of behaviour that are automatically downloaded into our unconscious mind. Once there, they run on autopilot.
Lottery wins aside, financial success is generally the result of consistently applying good habits over time to achieve a specific set of goals. I’m going to talk about three habits that have been rendered more important than ever by the Covid-19 pandemic and its associated economic fallout.
Habit 1. Learn to manage risk
Successful investors acknowledge and manage risk. Risk management is the process of understanding, analysing and addressing risks to ensure that investment objectives are achieved. Put simply, this means developing a strategy to avoid losing money when things go Pete Tong.
Risk management is all about protecting your means, hopes and dreams from the “what-ifs” in life. And Covid-19 is probably the biggest what-if in our lifetimes.
Two of my clients were retrenched at the start of the lockdown. He worked in construction and she was an assistant at a medical practice. They both phoned me asking to cut their life and medical scheme cover to help them to cope with the loss of income. I urged them to find other ways to save money and suggested they dip into their emergency funds to cover the short-term costs. (Any adviser worth their salt will ensure their clients have enough cash squirrelled away to cover three to six months of expenses.)
During any crisis - and particularly during a health emergency - insurance cover and medical scheme membership are the absolute last expenses to cut back on, as they’re specifically designed to protect you from the what-ifs.
Habit 2. Don’t put all
your eggs in one basket
My father passed away when I was quite young, and we had to sell our family farm. We were advised to invest the bulk of the proceeds from the sale into a property syndication scheme, because - according to the broker - that was the best investment we could make. Needless to say, the property syndication went belly up, and we ended up losing most of the family inheritance.
This could have been avoided if our portfolio had been properly diversified. The only way to manage risk in investing is to diversify your investments.
Wealthy people adhere to the age-old investment policy of diversification. They invest in different asset classes, industries, and in various geographic locations, to minimise risk. Gold also forms part of a well-diversified portfolio.
The same rules apply for the self-employed. Savvy entrepreneurs don’t plough all of their cash back into their own business. They also invest in unrelated, external investments, such as retirement funds and share portfolios. It’s also possible to diversify within your business by having a diverse set of clients and several different sources of income.
Habit 3. Talk to an expert before making financial decisions
You wouldn’t try to extract your own tooth or highlight your own hair (admittedly, this may have changed since lockdown) but many South Africans continue to make important investment decisions without taking professional advice.
When we’re stressed - and what can be more stressful than a pandemic? - we tend not to make the best decisions. This is why you need to have an ongoing dialogue with a professional financial adviser. Years spent studying investment theory and dealing with hundreds of clients in similar situations means we’re best placed to help you to make sound and objective investment decisions.
The news has been awash with stories of South Africans (including a couple of Springbok rugby players) putting their money into a suspected pyramid scheme, which has already been banned in other countries. The sad thing is that the people who’ve been duped by the scheme could have avoided disaster by making a single phone call to any Certified Financial Planner (CFP) in the country. There’s no way I, nor any of my colleagues, would have recommended investing in something like this.
The final word
Managing risk, maintaining a diversified portfolio, and taking professional advice always make good investment sense. But
Covid-19 has made them more important than ever. If you’re not already implementing them in your life, speak to an adviser now. Go to www.fpi.co.za to find a CFP professional in your area.
Hardi Swart is director of Autus Private Clients and Financial Planner of the Year 2019.
PERSONAL FINANCE