I almost choke on a shortbread after Christmas dinner when my cousin, just 17 years old, says he wants to start investing and asks me how he can get rich. Some minutes and a few slaps on the back later, I started to think about how to explain it to someone who wants to begin building their wealth.
First of all, we need to consider the type of investor in question. My younger cousin and my 55-year-old uncle will not invest in the same way (nor should they), since their time horizons are very different. Each investors’ objective may also differ greatly. For example, you can invest in order to buy real estate, or to generate future returns that will allow you to be more comfortable in your retirement. Ultimately, it is about putting your money to work to make a profit at some point in the future.
Given the uncertain future of pensions, let’s take retirement as our objective. The closer you are to your goal, the more cautious you should be about investing. There are several stages that are determined by age range.
A young investor, from age 35–40, is at the ideal time to start developing a steady pattern of savings. You should not procrastinate with this, as it is at this stage that you can take the most risks with your investments. Asset allocation will never be as aggressive as in the early years, allowing for the high volatility of equities, and even taking short-term losses that will be recouped in the years to come. A rigorous selection of quality companies with stable revenues and independent of the economic cycle could help to avoid or mitigate the effects of any market downturns.
After 40, this investor will have advanced in their career and will have a higher and more stable income. They will even have lower or, in the case of the more fortunate, non-existent mortgage charges, so they will be able to devote more capital to savings. With 25-30 years ahead of them, they can still maintain a portfolio dominated by equities. However, other more conservative asset classes, such as fixed income and certain alternative products, will gradually have to be added as we approach our golden years.
Lastly, once we reach retirement, we will steadily begin using the wealth built up over a lifetime of work and saving. Capital preservation is paramount in asset allocation, and the portfolios should be fully invested in fixed income and money market products. That said, it is true that we are living longer and longer, so a small allocation in equities that continue to provide attractive returns is acceptable and will need to be reduced as our health requires us to allocate more and more of our capital to medical expenses.
Investments to generate this wealth will depend on financial literacy, investor profile and individual wealth. So, with my cousin in mind, and given that during the initial years the accumulated capital is insufficient to ensure proper diversification (key to mitigating risk), an optimal possibility may be to invest in collective investment vehicles such as ETFs and funds. Within the latter category, there are also funds that combine fixed income and equity instruments, the weighting of which vary according to different risk profiles. For someone without the knowledge, or simply lacking the considerable time needed to analyse a single company, it may be the perfect vehicle to get started slowly on the road towards a cushier retirement.
Diari d’Andorra 17.01.2024