Top 5 investment lessons from 2024

Astonishing! Here I am writing my final blog for 2024, yet it seems like only yesterday I was pulling down last year's Christmas lights.  

Apparently, there are valid reasons why our perception of time changes as we age.  

For a one-year-old, for example, one month represents one-twelfth of their existence. That's a big chunk of time.  

If you're 70, a month works out to about 1% of your time on the planet so far - a far smaller chunk, and this contributes to the feeling that time flew past more quickly.

That's the theory anyway.  

Whatever the case, one of the upsides of getting older is that we have a greater number of experiences to draw on when it comes to making decisions.  

And 2024 has certainly dished up plenty of experiences that, for better or worse, have reinforced valuable lessons for investing.  

Here are the top five lessons I've taken from the past year. 

1. We need to protect our wealth from inflation 

Inflation is the financial equivalent of termites. It will eat away at your wealth if you let it.  

The last few years have really thrust inflation into the spotlight. For many years, inflation in Australia was below 2.5% annually.  This all changed with COVID, which (for a variety of reasons) saw inflation skyrocket to 7.8% by the end of 2022.  

Since then we've had to live with high interest rates as the Reserve Bank tries to get inflation under control. 

This has been a plus for savers who've benefited from high returns on savings accounts. 

But here's the thing. Australians currently have over $1.5 trillion sitting in bank accounts. And yes, if you can meet various conditions to earn bonus interest, you could earn a secure return of up to about 5.6%. Is that beating inflation though? 

Australia's CPI currently sits at 2.8%. So, on a 'real' (after inflation) basis, a return of 5.6% is only worth 2.8% once inflation is taken into account, and that's disregarding the impact of tax.  

The single best way to beat inflation is by investing in growth assets such as shares that generate long-term capital growth.  

Yes, this involves more risk, so it's essential to find the portfolio mix that is right for you.  

But even when we hit retirement, with 10, 20, or maybe 30 years of living ahead of us, growth assets can still play a role helping our wealth outpace inflation. 

2. Expect the unexpected - stick to a plan 

Oh boy, didn't 2024 dish up some surprises?  

I don't know about you, but I'm beginning to lose faith in pre-election polls following the results of the US election. What was tipped as a 'tight' contest proved to be anything but.  

On the plus side, elections - be they here in Australia or overseas - have set dates and reasonably binary outcomes.    

Over time, investors can face far greater surprises. 

Having lived through the dot.com crash, the Global Financial Crisis and COVID, I've seen firsthand how unexpected events can trigger swift and widespread market losses.  

The best way to protect yourself is to have a long-term plan and stick to it. 

This is something I've learned from sailing several Sydney to Hobart yacht races. You can't guarantee what the weather will be like. But by planning in advance, you and your crew know what you'll do if you get hit by a whopping gale. 

It's the same with investing. If a market downturn hits, you're better off sticking to a long-term plan and sailing into the storm as a way of staying on course. You'll eventually encounter calmer seas. 

3. Diversify your portfolio 

I love that portfolio diversification is a Nobel Prize-winning strategy. 

A lot of people aren't aware of this, but diversification isn't just an investment mantra spruiked by stock brokers. It's a proven strategy that lowers risk and reduces volatility. 

And 2024 has delivered lots of volatility.  

We've had to navigate a variety of crises from the ongoing conflict in Ukraine to troubles in the Middle East. 

The thing is, life is never predictable. There is always some issue or other for us to worry about. 

The beauty of being an investor in 2024 is that it has never been easier to diversify a portfolio. Technology is making it easier and cheaper to invest in Aussie shares as well as overseas stock markets.  

If you really want to diversify with very little capital and for a very low cost, exchange-traded funds (ETFs) are a game changer. They have made diversification simple and affordable for all Australians. 

4. Fees matter 

Faced with a cost-of-living crunch, 2024 has been a year when we've had to make every dollar count. The same applies to investors. 

No matter how you invest - be it in directly-held shares or ETFs or through an automated service like InvestSMART - the common thread is that you will pay fees.  

These fees deserve your attention because you'll pay them regardless of whether your investment makes or loses money. 

5. Be prepared to enjoy your wealth 

The past year has dished up plenty of negative headlines, and it can be tempting to squirrel our money away and only dip into it when absolutely necessary. 

Never forget though that your money is no good to you if you forget to enjoy it.  

Yes, money is important. But health, family and friends are more important. Money only provides choices about how we lead our lives. 

Allow yourself to enjoy those choices after years, possibly decades, of tucking money away for the future. 

As we head towards the festive season, I'd like to wish all our InvestSMART clients and their families a safe and merry Christmas and a prosperous New Year. I'll be back with more money tips in 2025.