By: Peet Serfontein
How to build a long-term investment plan
A well-structured, comprehensive long-term investment plan is vital to achieving financial stability and reaching significant life goals, such as retirement, funding education, buying property or attaining financial independence.
1. Define clear and specific financial goals
Establishing clear and specific financial goals is the cornerstone of any successful investment strategy. Without well-defined objectives, it becomes difficult to measure progress or select the appropriate investment vehicles. In the South African context, these goals may include, but are not limited to:
Each of these goals carries their own time horizon, risk tolerance and capital requirements, which directly influence your asset allocation and investment choices.
Clarifying these goals helps you set realistic expectations, allocate resources and determine the appropriate investment strategy.
2. Evaluate your risk tolerance and capacity
Your risk tolerance and risk capacity determines the types and proportions of assets you should include in your portfolio. While they are closely related, they address different dimensions of risk.
Risk tolerance refers to your emotional comfort with investment volatility and short-term losses. It reflects how well you can psychologically handle market downturns without making impulsive decisions—such as panic selling when prices fall. This is subjective and varies from person to person. A risk-averse investor may prefer steady returns with minimal fluctuation, while a more aggressive investor might accept high volatility in exchange for potentially greater returns.
Risk capacity is an objective assessment of your financial situation—how much loss can you afford without compromising your financial stability. Risk capacity is largely a function of the timelines by which you want to meet your goals. For example, if you are close to retirement, you will be able to take much less risk with your retirement savings. In the South African context, evaluating risk must also account for local economic conditions, such as currency fluctuations, inflation and market liquidity.
Aligning your investments with both your psychological tolerance and financial ability ensures you are not overexposed or underexposed, and it supports a strategy that you can stick to over time, even through periods of market turbulence
Your risk tolerance and capacity will determine what your portfolio composition will look like:
3. Determine your investment time horizon
This is the duration you expect your money to be invested, and this can significantly influence your strategy:
4. Diversification, diversification, diversification
Diversification is a fundamental principle in long-term investing that aims to reduce overall portfolio risk by spreading investments across a variety of asset classes, sectors, and geographies. The idea is simple: different assets behave differently under various economic conditions. By not putting all your financial eggs in one basket, you reduce the impact that a poor-performing investment or sector can have on your total portfolio.
A well-diversified portfolio typically includes a mix of equities, bonds, property, and cash or cash equivalents. Within each asset class, further diversification can be achieved by spreading investments across different industries, company sizes (small-, mid- and large-cap), countries and currencies. For example, South African investors might hold a combination of JSE-listed domestic shares, global equities via offshore exchange-traded funds (ETFs), government and corporate bonds, listed property funds and money market instruments.
Diversification also helps manage both systematic risk (broad market risk) and unsystematic risk (specific to an individual asset or sector). While diversification does not eliminate risk entirely, it plays a crucial role in enhancing the risk-adjusted return of a portfolio and smoothing out performance over time.
A moderate portfolio will typically have 35% offshore exposure, 60% local exposure, and 5% allocated to gold. The asset class exposure will typically be 55% to 65% in equities, 15% to 25% in bonds and fixed income, 5% to 10% in cash, 5% to 10% in property and then the 5% gold exposure.
5. Opt for low-cost, efficient investments
Cost efficiency plays a pivotal role in successful long-term investing. By selecting low-fee investment vehicles, investors minimise expenses that would otherwise steadily erode returns. Even a seemingly minor difference in fees, such as 0.5% per annum can compound substantially over several decades, potentially resulting in a significantly different final portfolio value. For example, a 0.5% reduction in fees over 30 years can lead to approximately 15% higher returns, all else being equal.
6. Make regular and consistent contributions
Consistently contributing to your investments through a disciplined approach known as rand-cost averaging significantly reduces the risk associated with trying to time the market. Rand-cost averaging involves regularly investing a fixed amount—monthly, quarterly or annually—irrespective of market conditions. This strategy naturally smooths out market volatility, as it ensures investments are made during both market highs and lows. When markets decline, your fixed contributions purchase more units at lower prices; conversely, fewer units are purchased when markets rise. Over extended periods, this disciplined and systematic approach lowers the average cost per unit of your investments and mitigates the psychological challenges associated with market fluctuations. Additionally, making regular contributions instils financial discipline, reinforcing your long-term commitment and enhancing the potential for substantial wealth accumulation over time.
7. Stick to your annual review dates and rebalance your portfolio
Conducting an annual review of your investment portfolio is essential to ensure that it continues to reflect your personal risk tolerance, time horizon and financial objectives. Over time, market movements can cause certain asset classes, such as equities or bonds, to become over- or underrepresented relative to your original allocation.
For example, if equities perform strongly each year, they may come to dominate your portfolio, exposing you to more risk than intended. Rebalancing involves selling a portion of the outperforming assets and reallocating the proceeds into underperforming ones to restore your original asset mix.
This disciplined process not only helps manage risk but also reinforces a “buy low, sell high” approach, enhancing long-term returns. Moreover, an annual review provides an opportunity to assess changes in your personal circumstances, such as income, goals or life stage, and adjust your strategy accordingly to stay on track with your long-term financial plan.
8. Think about tax efficiency
Maximising tax efficiency is an essential element of a sound long-term investment strategy in South Africa. The South African Revenue Service (SARS) provides several tax-advantaged vehicles that investors can use to enhance their after-tax returns. Chief among these are Tax-Free Savings Accounts (TFSAs), that allow individuals to invest up to R36 000 per tax year (and up to R500 000 over a lifetime) without paying any tax on interest, dividends or capital gains earned within the account. TFSAs are ideal for long-term growth and can significantly improve net returns when used consistently.
Additionally, contributions to retirement annuities (RAs) and other registered pension or provident funds are tax-deductible up to a certain level, offering immediate tax relief while deferring tax until withdrawal, typically at retirement. This can be especially beneficial if one expects to fall into a lower tax bracket post-retirement.
Investors should also be aware of annual capital gains tax (CGT) exemption, which currently allows individuals to realise up to R40 000 in capital gains per year before any CGT is payable. Strategic timing of asset disposals and the use of allowable deductions can further reduce taxable income.
By thoughtfully using these tools and planning investment withdrawals with tax implications in mind, South African investors can retain more of their investment returns and build wealth more efficiently over the long term.
It is important to seek tax advice from a registered tax professional specific to your circumstances, particularly if you are uncertain how your investments can alter your tax profile.
9. Establish an emergency fund
Establishing and maintaining an emergency fund is a foundational aspect of financial planning that supports long-term investment success. In the South African context, where economic volatility, job insecurity and rising living costs are ever-present risks, having a readily accessible emergency fund is especially prudent. A well-funded emergency reserve, which is typically equivalent to six months of essential living expenses, acts as a financial buffer in times of unexpected events such as medical emergencies, job loss, vehicle repairs or unforeseen home maintenance.
This fund should be held in a high-interest savings account or money market account that offers immediate access without capital risk, ensuring liquidity without compromising safety. By relying on this reserve rather than drawing from long-term investments during crises, investors can avoid premature withdrawals, which could trigger capital gains tax, penalties, or forced sales during market downturns. Protecting your investment portfolio from such disruptions helps preserve the compounding effect that drives long-term growth. Ultimately, a strong emergency fund not only provides peace of mind but also allows your investments to remain untouched and continue growing as intended.
10. Monitor and adjust your portfolio according to life changes
A successful long-term investment plan is not static, it must evolve. As your personal and financial circumstances shift over time, so should your investment strategy. Major life events such as career advancement, marriage, having children, starting a business or nearing retirement often come with changes in income, risk tolerance, and financial priorities. For instance, a young professional may prioritise aggressive growth through equities, while someone approaching retirement may shift towards capital preservation through bonds and income-generating assets. In South Africa, where inflation, interest rates and policy changes can also influence financial planning, it's important to reassess your portfolio regularly, particularly when life events happen or your financial goals change. Reviewing your asset allocation, contribution levels and risk exposure ensures your investment approach remains aligned with your updated goals. This might also include updating beneficiary nominations on retirement funds or adjusting insurance cover in line with your dependants' needs. By remaining proactive and responsive, you can ensure your investment journey stays relevant, resilient and reflective of your evolving life path.
11. Maintain discipline and patience
Finally, it is vital to avoid making emotional investment decisions driven by market volatility. Long-term investment success depends heavily on discipline and patience to fully realise the power of compound growth. It is extremely beneficial to seek financial advice - at any stage of your investment journey and particularly if you find the prospect of managing your own investments confusing or overwhelming.
