Siboniso Nxumalo, portfolio manager at Old Mutual Investment Group, draws an analogy between seven basic investment principles and wine:
1. Keep investing at regular intervals over the long term
Most people want to invest when markets are doing well and tend to disinvest when the markets fall.
It makes better sense to keep on investing through market lows when share prices are undervalued and a lot cheaper, so that you gain more wealth during the highs.
Growing top quality grapes requires constant attention, hands-on vineyard management, pest control, pruning and replanting to ensure a steady supply of premium quality grapes from which to make wine.
2. Understand your time horizon and risk profile
They affect how you invest. The younger you are and longer you have to invest, the more risk you can afford to take.
If you have 18 years or so to invest, you could invest in high-risk markets.
Focusing on the end destination instead of the short-term ups and downs should ensure the best return on investment.
On the other hand, if you only have five years to invest, you should consider a more cautious investment strategy, because you won’t have the time to make up for market losses.
Remember that cash is unlikely to outperform inflation over the longer term, although it may be seen as a safe haven during uncertain times.
From a wine perspective, the sooner a vineyard is planted, the sooner the farmer reaps the rewards in terms of harvest.
Time also allows for experimentation in different cultivars and blends, which would ensure the best return on investment.
On the other hand, with only a short time to invest, planting known and trusted cultivars is a more cautious investment strategy.
When one market does not perform well you will still have other investments doing their best for you and thus managing your risk in the process.
Don’t focus on returns from individual investments. See your investment portfolio as a whole.
Similarly, with wine, growing different cultivars spreads the risk.
If adverse weather conditions, for example, negatively affect an early ripening variety, having a later ripening cultivar is a necessary hedge – a sound risk management strategy.
4. Balance your portfolio
Do not put all your eggs in one basket by only investing in property or only in cash.
Seek to maintain a sensible balance between different types of investments.
There will always be times when one asset class outperforms another.
Remember that cash and bonds provide stability whereas shares and property provide growth.
Much like having a good season for pinotage grapes, but a bad one for another variety.
5. It is time in the market that counts
It is time in the market that counts – not timing the market.
The longer investors are in the market, the better the likelihood of making up for losses.
Furthermore, the sooner you start saving, the more time you have to earn compound interest.
The principle of compound interest basically means that interest is earned on the interest already earned, so that the effect is a dramatic snowballing effect of the money invested and the interest earned.
By starting early you may only have to invest a small amount as opposed to investing a larger amount at a later stage to get the same investment growth.
One bad year in the vineyard may well be followed by two bumper crops – if you don’t give up too soon, and older vines tend to make better wine.
6. Each person is unique
What is a good investment for one person is not necessarily a good investment choice for you.
Much like wine, which is a personal taste. What appeals to one person doesn’t to another.
7. Proven track record
Invest with a company that has a proven track record and is well known within the industry.
Do not invest with a company that offers astronomical returns that are simply not viable in current market conditions.
Choose a professional portfolio manager whose job it is to investigate opportunities and make sound investments and who is registered with the Financial Services Board.
Who would buy a two-litre box of Vin de Cardboard on the advice of an uninformed salesperson and expect it to be drinkable in ten years’ time?
No profit there, only a headache.
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