‘It is not about how much money you make, how much money you keep but how hard it works for you, and how many generations you keep it for.’-Robert Kiyosaki much money you keep,]
Financial wellness is the ability to manage short-term finances while also saving for long term goals. Signs of financial wellness may include among others:
- Being able to pay monthly mortgage
- Affording to maintain a good standard
- Confident in ability to afford health-care related payments
Financial objectives are rarely achieved without foregoing or sacrificing current consumption (spending on goods and services). This restraint is accomplished by putting money into savings for use in achieving future goals. By saving, you are much more likely to have funds available for future consumption. Effective financial management separates the haves from the have-nots. The haves are those people who learn to live on less than they earn and are the savers and investors of the society. The have-nots are the spenders who live from pay-check to pay-check, usually with high consumer debt.
This article seeks to address concerns with saving and investment planning, one of the key pillars in financial planning. Discussed will be the fundamentals of establishing goals and objectives, investment portfolio and investment portfolio attributes. The objectives may include safety and security of the funds invested (principal amount), profitability (through interest, dividend and capital appreciation) and liquidity (convertibility into cash as and when required). These objectives are universal in character as every investor will like to have a fair balance of these three financial
objectives. Determining your objectives means that you must have a good understanding of your short-term, medium-term and long-term investment objectives. This is where a risk analysis must be completed in order to see your willingness or ability to take risk. You should consider one important thing and that is your income. It is important to note that your income and your ability to earn income are your biggest assets when it comes to accumulating wealth so protect it by taking out income protection insurance.
An investment portfolio is a set of financial assets owned by an investor that may include bonds, stocks, currencies, cash and cash equivalents, and commodities. Further, it refers to a group of investments that you can use in order to earn a profit while making sure that capital or assets are reserved.
Components of a Portfolio
The assets that are included in a portfolio are called asset classes. The investor or financial advisor needs to make sure that there is a good mix of assets in order that balance is maintained, which helps foster capital growth with limited or controlled risk. A portfolio may contain the following:
Stocks are the most common component of an investment portfolio. They refer to a portion or share of a company. It means that the owner of the stocks is a part owner of the company. The size of the ownership stake depends on the number of shares he owns.
They are a source of income because as a company makes profits, it shares a portion of the profits through dividends to its stockholders. Also, as shares are bought, they can also be sold at a higher price, depending on the performance of the company.
When you buy bonds, you are loaning money to the bond issuer, such as the government, a company, or an agency. A bond comes with a maturity date, which means the date the principal amount used to buy the bond is to be returned with interest. Compared to stocks, bonds don’t pose as much risk, but offer lower potential rewards.
Alternative investments can also be included in an investment portfolio. They may be assets whose value can grow and multiply, such as gold, oil, and real estate. Alternative investments are commonly less widely traded than traditional investments such as stocks and bonds.
There are essential attributes of an investment that need to be considered when making an investment decision and these interact with your personal needs, goals and objectives. These attributes include but not limited to:
- Interest rates
Risk is the potential to make a loss from an investment. The risk profile of your portfolio of investments should change depending on your personal attitude towards risk. The more risk-averse you are, the more cash and fixed interest you will want to hold. People who are not risk-averse will be happy to carry more shares, property and perhaps debt in their portfolios as they seek better returns over the long term.
Liquidity is the ability to turn your investment into cash. It is very important during times of financial stress especially with the economic meltdown in Zimbabwe where people are in dire need of liquid cash. This one is also a double-edged sword. What good is an investment if you cannot get your money back out? What if you come across a better investment how fast can you get access to your money in another investment to go with the perceived better investment? On the other hand, the ease of getting access to your money potentially could aid you in making less than optimal investment decisions. Many great investments like many valuable things take time to mature.
The longer you must invest, the more risk you should be able to theoretically be able to tolerate as markets tend to move in cycles. Should you need to realise money within one year, you will have very little tolerance for risk since there is no opportunity for you to wait for your capital to recover in poor market conditions. If you have a long-term strategy, you will be able to ride the ups and downs assuming you’re properly informed of the investment process and cycles. Its recommended not to change your investment strategy purely because of underperformance. You should rather stick to the asset allocation for you risk profile and maintain exposure to the higher risk investment vehicles.
High “rates of return are deceitful sirens that sing but to lure the unwary upon the rocks of loss and remorse,” Arkad, the richest man in Babylon. Investments that promise high rates of return should be considered carefully. Conversely, an investment with a low rate of return should not be scorned. Make sure you consider the investment over a long period of time, say 10 to 20 years. Some investments that look terrible in the first three to five years may be one the best investments out there.
The risk of inflation depleting an investment portfolio is a real threat. In a country such as Zimbabwe where inflation keeps plummeting with Zimbabwe’s month-on-month inflation rate decreased to 17.70 percent in September 2019, its lowest level since May, from 18.07 percent in August, investments must outperform inflation otherwise the steady erosion of your investment in real terms reduces the buying power over the long-term.
Investments such as government bonds and money market instruments are very closely linked to interest rate movements. In a lower interest environment, you may find that low risk fixed interest rate investments do not give sufficient income to live on. If interest rates go up, the capital value of a bond will decline, and opposite is true. If you were to speculate as to whether interest rates would go up or down, you could make a fatal error and invest in a long-term investment that is pegged at lower interest rate or suffer a capital loss if he sells it.
You should always make sure to have a personal investment portfolio to support your retirement portfolio. A well-diversified portfolio reduces risks and with the current economic conditions, it is recommended to invest offshore.