Asset allocation key to sound investment strategy - CNBC Africa

Asset allocation key to sound investment strategy

Financial

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If one starts saving early, they can take advantage of the compound interest on their investments. PHOTO: Getty Images

“Often we’ve got these investment anchors when it comes to how we think about stuff to invest in and the perceived returns that we see,” Henry van Deventer, head of wealth development at Old Mutual Wealth, told CNBC Africa.

(READ MORE: Right time frame essential for lucrative investing)

“The reality is if you’re going to be good at investing your money, the single most important decision you need to be able to make well is the one of asset allocation. It’s not just sticking everything into shares or into property but being able to move from one asset class to another as the opportunities and the risks present themselves.”

Most would define wealth as a measure of the value of all of the assets of worth owned by a person, community, company or country. Van Deventer however, believes that the establishment of wealth is about one’s potential and ability to create that wealth.

“Many of us have got the potential to become financially independent, to give ourselves a sound foundation to be able to sustain ourselves, if we get the right guidance. Instead of thinking about wealth, we prefer to think about your ability to get there and how we can help you,” he said.

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“If we look at financial advice and the dynamics around that, often it is scary, intimidating, daunting, there’s so much complex stuff that people can throw at you. The reality is, if you’re getting any form of financial advice that doesn’t make sense to you and that you don’t understand, rather go find another adviser that can help you get there.”

He also indicated that there are simple ways to measure one’s ability to create wealth and to determine one’s financial stability.

“It’s about your ability to answer four questions:  how much do I need to save, how much can I afford and to spend, and that’s not just a monthly budget, [it’s] understanding the long-term financial consequences of your lifestyle decisions,” van Deventer explained.

“Sometimes small things like how often I replace a car, how often I choose to go on those big holidays or eat out has got a massive impact going forward. The other two is how much growth I’m going to get and, eventually, when I’m going to retire. If you know the answer to those four questions, then odds are you’re probably going to end up in a pretty good place.”

However, issues like debt can become a hindrance to wealth creation. According to South Africa’s National Credit Regulator, the number of consumers with impaired records increased by 171,000 to 9.93 million in the December 2013 quarter.

(READ MORE: Debt administration a precarious consumer option)

Van Deventer stated that debt isn’t always a bad thing but that bad debt needs to managed effectively before it becomes a problem that is too big to handle.

“They often talk about good and bad debt. If you’re going to look at taking out debt in order to increase your ability to earn an income, maybe [to] get an education, sometimes you have to incur those. But then there’s the other stuff – clothing accounts, furniture accounts, microloans – those are often ridiculously expensive,” he said.

“If you have got those, pay them off as quickly as possible. Make sure you’ve got a debt redemption strategy but at the same time, make sure that you start saving because if you’re not in the saving habit, and if you’re going to wait a while to get there, it’s much tougher to get into it and you miss out on all that powerful compounding on investments that you can enjoy over time.”

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