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I run a young investors club made up of students that get together once a month to broaden their investment horizons and to learn something different about investing each time we meet.
When youth look at their grandparents and their grandparents' peers, do they really question why some senior citizens can hardly afford their daily bread, while others of the same age live in the lap of luxury? I don't think they consider this for more than a second, because old age is something young adults think happens only to others.
But it's very dicey to gamble on one's life expectancy. It's prudent to bet on the reality of what we in the industry describe as living too long. That is, living so long after retirement that one's cash resources dry up.
Young investors usually understand what benefits accrue when one compounds one's investment returns, but they don't always appreciate that their time horizon for saving passes all too quickly. They have so many salaries ahead of them, yet how many actually start saving as soon as their first salary is issued?
I highlight my statement above with the following example of R200 invested to age 65, which will escalate by 8 percent a year (this means that in the 13th month the premium will increase from R200 to R216, in the 25th month from R216 to R233,28 and so on). I have also assumed that the fund will achieve a growth of 10percent a year.
30 - R1 830662
35 - R1 002294
40 - R534 072
45 - R273484
It is frightening to see the difference five years makes. I hope this encourages younger readers to start investing as soon as possible.
I'm talking about personal financial planning and long-term investment horizons, something young people don't always understand, or take full advantage of. Being young and adventurous, they typically have a higher risk profile that enables them to invest significantly in volatile asset classes like general equities. And if they don't have the stomach for too much risk, then there are the multi-asset class funds worthy of their consideration.
Don't only look at equities when orchestrating a financial portfolio. There's a huge array of tools available to help create wealth. The prerequisite is to first clearly understand the importance of knowing what one's financial goals are, what their time line is, what one's personal risk profile looks like and then, how to apply all these factors in a professionally-structured financial plan. Add to this commitment and discipline and you will have started right.
Whatever your risk profile, it's how long you invest in equities that makes the difference, not when you invest.
My advice is, find a good financial planner immediately and consistently contribute something to your long-term wealth.
l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail firstname.lastname@example.org