It’s in their behaviour, not luck
1. They know their limitations. Investment is complicated, even new financial advisors will shy away from giving investment advice or recommend safe, well known funds. The more you know about investment though the scarier it becomes – but that is way better than thinking you know everything. There is nothing like being unconsciously confident. Unless you’re prepared to spend a considerable portion of your week keeping up with the global trends, tax implications, regulatory changes, economic indicators etc get a trusted advisor to give you a hand. That advisor can do due diligence on the Unit Trusts or Shares that you buy, investigate the fees on the platforms you use, investigate the investment philosophy of the asset managers you want to use, divert your funds into the right types of investment and alert you to macroeconomic changes. I know that paying your advisor a fee is a grudge, but regulations are changing to make it a win-win. In return for that fee you are entitled to feedback and ongoing monitoring of the appropriateness of that investment. As much as a fee will erode the investment, believe me, a park-and-leave approach to investing can be even more dangerous. I continually come across investments that have been in place for 20 years or more and not even keeping up with inflation.
2. They know that you can’t buy respect: Keeping up with the Joneses is probably one of the most toxic behaviour traits when it comes to wealth accumulation. Wealth is what is left after you have consumed your income. It is as simple as that. There is no point in seeing yourself as a smart investor if you don’t leave yourself anything to invest with at the end of every month. If you worry what people will think about the car you drive or the house you live in, perhaps you need to spend some time with a shrink or a coach and not on property.com or going for test drives?
3. They get pleasure out of saving, not spending. Retail therapy is a ‘thing’. Buying ‘stuff’ releases endorphins. The molecular structure of an endorphin is similar to morphine or heroin, is it little wonder that the behaviour can become addictive (basically a shopper’s or runner’s high). Fortunately the brain is a very plastic organ and you can teach it new pathways. I am not saying that it is easy, and cold-turkey in this instance works – but is painful. Whatever method you use to get the endorphin pleasure, get it from the right things and not those things that destroy your wealth.
4. They know the difference between a classic and the flavour of the month. Chasing the flavour of the month in anticipation of better returns has another, not so cool, descriptor. It is called greed. We are all driven by either fear or greed to some proportion, and if you want to be a smart investor you need to learn to take a step back from an investment decision and decide which of the two is driving your decision. If you’re doing your investment yourself and find yourself making numerous fund switches in the year – is it fear or greed driving it?
5. They understand the difference between active and passive investing: Not only do Smart Investors know the difference, they know that it is not either/or. Over the last 8 years passive ETFs and Trackers have way outperformed most active managers once their low fees have been factored into the equation. Will they still do that as the global economies come off the boil? Do investors have the same appetite for volatility when the market is turning South?
6. They have clearly defined investment objectives. We all have different goals with different time horizons, but smart investors know that different timelines mean different asset allocations and tax implications. Investment is not a one trick pony, investments need to be split according to objective and managed accordingly.
7. They diversify their types of investment. As I said above, investment is not a one trick pony. Smart investors have a fully stocked emergency fund, Tax Free Savings Accounts, Retirement funds (using tax breaks), Flexible investments, Stock portfolios, Rental portfolios and maybe an Endowment (if the pros and cons have been properly weighed up.) Maximising your tax breaks is smart, that is not just the retirement breaks, but annual CGT and interest allowances.
8. They understand the power of passive income: Smart investors think laterally about their investment, and weigh up the risk versus return. Dividends can be a good source of passive income, so can rental income. There are also careers or part-time careers that can fill this gap. If you’re an employee and your company is going to put you out to pasture at 60 – what are you going to do for the next 30 or 40 years?
9. They build their retirement savings from day one. In your twenties and thirties retirement seems so far into the future it is quite understandable that present financial pressures take precedence over retirement. You might feel that there is always time to catch up, and that might be true. It is in those early working years that wealth habits become entrenched, and part of that is ‘saving’. Given time, investments compound and a small nest-egg can grow massively in 40 years. If you don’t trust yourself not to dip into a pension preserver put it into a retirement annuity (that cannot be touched until you’re at least 55). Be your own ‘nanny’.
Action: Unless you’re lucky enough to inherit your wealth, every fortune has been built one Rand at a time. Make ‘catching’ those slippery little smutties a game – you future you will thank you.
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Author Dawn Ridler ©