Written by Duggan Matthews
- Don’t speculate with your life savings. Speculating invariably involves buying and selling investments based on very little fundamental knowledge and typically produces enormous anxiety and poor results in practice.Invest for income and let the capital take care of itself. The value of a business is based on the income or earnings it can generate. Only through increasing its income can the value of a business increase, a maxim well known by those running their own businesses. Over the long term, this principle holds true for investments.
- Start saving early. The earlier you start saving for retirement the more time your investments will have to benefit from the compounding effect of reinvesting income and accumulating more capital.
- Ensure you save enough. It is generally accepted that you need to save at least 15% of your annual income for 40 years in order to have saved enough to replace 70% of your salary at retirement.
- Avoid capital erosion in retirement. Capital erosion occurs when more income is drawn from an investment portfolio than is being produced by the underlying investments. By eroding capital, you reduce the ability of your investments to generate income in the future.
- Don’t pay too much for an income stream. Avoid any investment where the dividend yield is well below the historic average.
- Invest in consistent and reliable income streams. Certain companies will continue to produce reliable and growing income regardless of global slowdowns, exchange rate volatility and declining interest rates. Choosing to invest in these companies will significantly reduce the risk of an investment outcome not meeting expectations.
- Know what you are investing in. When investing in a unit trust try to look through the unit trust and understand in which asset classes and in what businesses your money is actually being invested.
- Diversification makes sense. Investment diversification is one of the fundamental building blocks of a solid portfolio. Diversification is just another way of saying ‘don’t put all of your eggs in one basket’.
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