Highlights in this issue:

*** It’s time to refresh your investment policy…
*** Just getting this one thing right will determine 90% of your portfolio’s long-term return...
*** 5 good reasons why you shouldn’t worry about the market… and more…

-----------------------------------------

From the pen of Karin Iten

Dear Investment Academy Reader,

Imagine trying to tackle algebra, geometry, or calculus without understanding basic mathematics.

You wouldn’t get far.

Yet it’s not uncommon to run into investors who are knee deep in trading, currencies, short selling, or sophisticated arbitrage strategies without mastering – or even understanding – basic investment principles.

Even seasoned hands can benefit from a refresher course from time to time.

So today I’ve asked Alex Green – chairman of Investment U (our sister publication in the US) to revisit Investing 101 and talk about the six factors that’ll determine the future value of your investment portfolio, whether it’s worth R10,000 or R10 million.

6 Ways to determine the future value of your portfolio

1. The amount of money you save.
To put it bluntly, you have to start by maximising your income, minimising your outgoing and paying yourself first. Why? Because expenses always rise to meet income available. As soon as you get a raise or a higher paying job, you’ll find that you need a new car, a bigger house, better furniture and a new set of Callaway irons. But you have to draw the line somewhere. You can’t save a pittance and expect your portfolio to perform miracles each year.

2. The length of time your money compounds
The sooner you start investing, the better. And the longer you leave it alone, the better. If you start too late – or raid your portfolio to redo the kitchen or take the kids to Disney Land – you’re going to have a lot of catching up to do down the road. The old chestnut is true: Don’t touch your capital. It’s like eating your seed corn.

3. Your asset allocation
Studies consistently show that how you divide your portfolio among non-correlated assets – shares, real estate, precious metals, etc. – determines 90% of your portfolio’s long-term return. (The rest comes down to actual share selection.) If you’re too conservative – or too aggressive to stick with your programme – you simply won’t meet your goals.

4. Your assets’ annual return
This, of course, is the great unknown. Not even Warren Buffett can say what his portfolio will return each year. But the better your security selection and asset allocation decisions, the higher your annual compounded returns.

5. What you pay in expenses
Don’t be oblivious to what all those financial intermediaries are charging you. You can sacrifice far too much in commissions, management expenses and other costs. All things being equal, the lower your expenses, the higher your net returns.

6. How much you pay in taxes
Too many investors are oblivious to the tax ramifications of their investment moves. Remember to offset your capital gains with capital losses if possible when you do your annual tax return.

Remember, only one of these six factors is beyond your control: Your assets’ annual compounded return. That means it only makes sense to focus on the other five.

So instead of worrying about what the market will do between now and year end – something you can’t possibly know and has nothing to do with what your portfolio will be worth five or ten years from now – focus on:

*** Saving more,
*** Leaving it alone longer,
*** Getting your asset allocation right,
*** Lowering your expenses
*** And keeping a close eye on taxes.

Get these big questions right and you’ll find the details will take care of themselves.

Better still, in your golden years, your portfolio will take care of you.

Here’s to your financial freedom,

Alex Green and Karin Iten
For the Investment Academy