By Johnson Ateghie
Here are some principles in brief that you must consider in making any investment decision:
(i) Invest to keep pace with inflation,
(ii) Adequately diversify your portfolio, and
(iii) Keep tabs on your investments. Just as important:
(iv) Maintain short-term reserves to fund your expenses and carry you through down markets, periodically re-balance your portfolio to maintain your target mix and to lock in your gains, and don’t try to time the market.
Keep Pace With Inflation.
Even a mild rate of inflation will increase your cost of living and erode the purchasing power of whatever amount of money you have over the years. For example, let’s say you need to initially withdraw N20,000 from your savings to cover your expenses monthly. In 5 years you’ll need to withdraw about N45,000 to keep pace with even a modest 15% average annual increase in inflation. In 25 years you’ll need about N100,000.
Set-Up a Spending Account
A good way to fund your annual living expenses is to set up a cash flow reserve account. Keep about two years of living expenses in this account that your savings has to cover. For example, if you need 50,000 a year from your investments to supplement your pension payments and other income source, you should maintain a cash flow reserve account of N100,000, adjusted annually for inflation. This you must keep in money market deposit accounts or any other short-term money market instruments.
With this account you will avoid having to sell investments at a loss if the market is down when you need money. It is also easier to keep your investment portfolio in balance if you do not have to sell small amounts all the time to cover your expenses.
Maintain Short-Term Reserves.
In addition to your cash flow reserve, maintain a cash cushion of about three to six months living expenses for emergencies, such as medical bills or home repairs. Also keep cash on the sidelines for any major purchases you plan to make in the next few years especially liabilities. In addition to these cash reserves, build and maintain a reserve of short-term, fixed-income investments to carry you through any extended down markets. Consider this reserve part of your investment portfolio, and keep about five years of living expenses in it that you are dependent on your savings to cover. With these reserves as a safety net, you will be able to maintain better control of your investments and you would not be affected by the short-term ups and downs of the market.
Keep Your Balance.
Review your portfolio at least once a year and consider re-balancing if your investment mix has strayed from your target mix by certain percentage. That means selling investments that have performed best and are over weighted and buying investments that have become under weighted. You can re-balance your portfolio several ways. You can sell your over weighted investments and use the money for your everyday expenses or to replenish your cash reserves. Or you can sell your over weighted investments and use the proceeds to buy under weighted ones. Either way, before you make any moves consider the tax implications and seek assistance from a tax advisor, if necessary.
In addition to periodically re-balancing your portfolio, as you get older gradually decrease the stock percentage and increase the fixed income portion since you have less time to ride out a bear market. The exact amount to maintain in stock investments depends on the amount of money you have, how much you are withdrawing to live on, your estimated life expectancy, and your overall financial situation.
In Summary
The Choice Is Yours: What we have encapsulated in the foregoing discuss is wrapped up in the analogy presented below to explain that despite the quality of advise you receive from your financial advisers, the final decision resides with you. The analogy has tended to explain why some are poor and others very rich. The quality of your decision will determine the quality of life you will live.
God tries to level the playing field. He creates people almost equal; all naked, helpless, and dependent at birth. Man sees it another way; some are born with a silver spoon in their mouth, others have no spoon at all. Man, like all beings, things, and processes, follow a natural cycle: birth, growth, deterioration and demise. Some people never seem to move to the growth stage or they move quickly to deterioration and demise. A few have mastered the art of living in abundance, accelerating the growth process and decelerating the deterioration and demise. The “sour-grapping” many believe and live like they are children of a lesser God.
John 10:10 reminds us that God came “to give life, and life abundant.” More than two-thirds of the world’s population today wallows in hunger, while a third suffers obesity from sheer overeating and affluence. Did God err somewhere and fail in his mission? After the Creation and the Passion of the Christ, God must have left man to determine his fate. God has a perfect will: abundance for all. Man has his own free will: he can choose life or death, abundance or poverty. It is sad to note that many of us do not learn how to manage our fate and our choices. So the choice is yours, chose wisely and lives a happy life thereafter.
Thank you and note that your comments are most welcome.
[Johnson Ateghie is a certified management consultant and a strategist and business optimization expert specializing in helping business improve operation and grow their bottom line. Get more free business growth resources from [www.gta-consulting.com.]
Resources
There are many resources available on financial planning. Here are some that you may find helpful:
• Guide To Investing, Kiyosaki, R. T. and Lechter, S. L; 2ed. 2002, Warner Books, Inc, USA, 1997.
• Moneywise; Financial Standard. Vol. 5, No 45, August 2004
• Set for Life: Financial Peace for People over 50, Bambi Holzer with Elaine Floyd. Wiley, John & Sons, Inc. 1999.
• The Purpose Driving Life: What On Earth am I here for? Warren, Richard, Zondervan, Grand Rapid, Michigan, 2002.
• Your Living Trust and Estate Plan: How to Maximize your Family’s Assets and Protect your Loved Ones, Harvey J. Platt. Allworth Press, 1999.