When it comes to putting together an investment strategy, it is important to understand how intelligent investors think #MumbiStrategy
Regardless of the asset class you choose to invest in, Mumbi Properties will always point out that one of the most important fundamentals of investment success is a long-term investment horizon. There are many valid reasons why a long-term perspective allows for intelligent investing.
Dr du Toit says intelligent investors understand that while the growth in property values may well fluctuate over the short term, a well-maintained property in a well-selected area will always increase in value over the long term.
This is according to Dr Koos du Toit, CEO of P3 Investment Group, who says firstly, a long-term perspective cultivates discipline and the ability to delay short-term gratification in favor of achieving more important long-term objectives.
Dr du Toit says, for example, a long-term perspective makes it far easier to save for future goals and large purchases, while avoiding unnecessary spending on consumables and gadgets that do not increase in value over time.
“In particular, a long-term perspective discourages the use of expensive, short-term debt like credit cards, store accounts and personal loans to fund purchases, which has trapped many South Africans in a spiral of debt that leaves little spare cash to invest.”
Dr du Toit says this doesn’t mean that investors never use debt. With a solid, long-term perspective, investors can use debt intelligently to achieve their long-term goals.
This involves longer-term debt that is available at much lower interest rates, like a home loan, which allows investors to acquire assets such as property, education or collectibles that increase in value over time and raise their income-earning ability in the future.
In investment circles, he says the intelligent use of debt to build wealth is called ‘gearing’ or ‘leveraging’.
A long-term perspective further ensures that investors do not react to short-term volatility in the markets. Dr du Toit says one of the greatest investment pitfalls most investors face is their own human nature which, in financial circles is known as ‘investor risk’.
It refers to the fact that investors are often swayed by emotion, ranging from wild optimism to sheer panic, which results in buying high, selling low, getting the timing wrong or abandoning long-term investment strategies in response to short-term market fluctuations.
The result of this type of emotional investment decision-making is that investors often sell at a loss and then miss the recovery, which would have seen them recoup their losses.
Dr du Toit says many investment advisors and experts warn investors not to overreact to short-term volatility and to stick to their long-term plans, because over the long term, the short-term volatility is smoothed out and the long-term trends begin to yield results.
“So, instead of basing their investment decisions on short-term events that affect the markets daily, intelligent investors heed this sage advice and stick to their long-term investment plans based on the real long-term trends over a 10 or 20 year period,” he says.
A long-term perspective will also influence an investor’s asset choices. Many so-called experts advise against property investment, based on the fact that property is an illiquid asset that cannot be converted into cash quickly, as is possible with, for example, shares or short-term fixed deposits.
However, investors with a long-term perspective do not consider the illiquid nature of property assets as a drawback. In fact, they consider it a significant benefit, protecting them against ‘investor risk’ and poor decision-making based on short-term volatility.
Furthermore, Dr du Toit says intelligent investors understand that while the growth in property values may well fluctuate over the short term, a well-maintained property in a well-selected area will always increase in value over the long term.
In fact, he says over the last 20 years, the average price of a house has doubled, but only those who invested in property with a long-term perspective would have benefited from this increase in value.
“In our experience, a direct investment in property is undoubtedly one of the best investments those with a long-term perspective can make,” he says.