By Sydney Sekese, CFP® professional and FPI 2016 Media Award Winner

At the time of writing this article, South Africa experienced excitement at the 2018 Gold Coast Commonwealth Games as the country’s swimmers, track athletes and lawn bowlers won a clutch of medals. One of the characteristics of these champions is that they are the best they are within their respective sporting codes. They are focused and specialists within their talented sports. Most people will only accept the amount of coaching their egos will allow. Champions like Olympic athletes are well known for being the most open to world-class coaching.

Championing your financial future with a suitable investment portfolio is best executed when you have a credible coach like a CERTIFIED FINANCIAL PLANNER®/CFP® professional. Investment portfolios are fundamental to wealth generation. There are a number of investment portfolios and options making it a challenge for investors to make an optimal decision. For example, there are more than 900 collective investment schemes (unit trusts) in South Africa. The purpose of this article is to outline some tips on the selection criteria that can be adopted to ease the challenge of choosing the appropriate portfolio at the right time.

Let me start by expanding on the difference between savings and investments. These terminologies are used interchangeably. There are however subtle differences. The collective investment schemes information booklet provides explanation of the differences by stating that savings enable you to plan for your future and that of your family. You may wish to own a home by saving for a deposit to buy the home. You may also want to save enough money to pay for your children to study at tertiary level.

Investments on the other hand have some of the same characteristics as savings. Generally investments make it possible for you to use your money to make more money. Instead of spending your extra money, you can invest this money, either regularly or as and when you have money to invest. Investing money for when you are older and no longer able to work allows you to “save” money for your retirement when you no longer earn a wage or a salary.

With the above background; I conclude that it is a prudent criterion to determine the time horizon for investing in a particular portfolio. This is a crucial step which will also determine the reason an investor purchases a particular portfolio. The important question to ask is whether the investor is trying to meet short, medium or long term goals?

The following tips are practical and could assist investors in determining the selection criteria. These criteria can be adopted to meet investment goals stated above:

  1. Investment term/horizon: The period of investment will determine among other things the level of risk of capital loss an investor is willing to assume. The old saying “It’s not timing the market, but time in the market” matters in this instance.
  2. Risk tolerance: Risk can be defined in many ways. For the purpose of this article, the investor needs to determine how tolerant he or she is to a sudden drop in their accumulated investment value. Again, time will also play a role here.
  3. Costs: The Total Expense Ratio (TER) should also be analyzed as this will have an impact on the investment growth and therefore wealth creation. A CERTIFIED FINANCIAL PLANNER®/CFP® professional would assist in analyzing this ratio.
  4. Liquidity: The structure of the investment portfolio should be determined in relation to the flexibility of early withdrawal should the need arise. The purpose and term of investment come to play once more. Some portfolios have lock-in periods and penalty for early withdrawal.
  5. Tax: Every investment has tax implications. You will either be taxed directly at your marginal rate (with possible exemption) or indirectly within a particular investment portfolio. This is an important consideration that will impact the pace of investment accumulation.
  6. Inflation: This erodes the capital value of an investment. The desired investment portfolio should be assessed in terms of its targeted inflation objectives. These portfolio objectives should be aligned to the investor’s goals and objectives.

The above criteria are scientific steps that could go a long way in curbing an emotive approach that is often carried out when an investment portfolio is purchased. These guidelines are potential winning formulae for a successful financial journey.

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