These five secrets can help restore your finances, writes Nicole Pedersen-McKinnon.
This is going to be uncomfortable reading if you are looking for a quick fix, an easy way out, or an antidote to the interminable market mayhem.
There isn't one.
What there are, however, are smart techniques that, when consistently applied, deliver long-term payoffs - hopefully, large enough to achieve your dreams - each and every time.
Secret 1: What's right for you is not right for the person beside you. The biggest secret of successful investing is to ignore the hot tips and helpful hints you might hear from friends, family and even the media, and chart your own course. Your investment decisions need, first and foremost, to be about your investment time frame, your age, your risk appetite (read willingness to lose your money) and your reasons for investing - the early retirement, the boat, the trip to Antarctica.
Once you have a clear picture of those things, you can set about dividing your money into appropriate portions across a range of assets along the risk continuum assets that we cover in the pages of this section regularly. Only if you determine you really are risk-averse should you invest wholly for capital stability and income. And only if you're happy for your funds to go backwards should you invest heavily in the "next big thing".
Secret 2: We all make bad decisions, and when it comes to money and the emotion associated with it, that's doubly so. Once you have split your portfolio among the asset classes (then split it further among a big enough selection of top investments within those assets), you need to do your best to leave it there. Not necessarily in particular investments, but definitely in the assets.
You need to get a grip on your fear and greed so you are not panicked into selling at the bottom or lured into buying at the top. These are the perennial errors retail investors make and why their returns are often sub-par. The fascinating discipline of investor psychology explains that reasoning is often clouded, for example, by vanity - we hold on to losing stocks longer than we should in the hope we will be proved right. Be aware that hindsight bias also causes us to place greater weight on recent past performance than on trends and long-term returns. Even volatility of the magnitude we've seen lately will appear relatively small if you chart the market's long-term performance.
Secret 3: Unsexy, yes, but successful? Just about every time, regular and early saving is your ticket to future wealth.
Let's say you manage to stash away $100 a month from age 30 - that's probably the equivalent of cutting out one coffee or sweet treat a day - and earn a pretty realistic 6 per cent average return on it. By 55, you'll have more than $70,000. Better still, what you have actually squirrelled away represents less than half that figure - most is earnings during that time. But wait 10 years before you start and to reach the same balance, you'll need to save $240 a month. You'll have to save $43,000 of your ultimate $70,000 yourself.
Procrastinate another decade and you'll need to find a painful $1000 a month to total $60,000 of your $70,000. The sooner you start, the easier building wealth is. And the less you have to rely on big returns - and the extra risks they entail - to get you across the line.
Secret 4: Debt is quicksand and one of the best money moves you'll make is to get rid of the personal stuff. That means credit cards, personal loans and mortgages - anything for which you don't earn tax deductions. This is a tax-free, risk-free effective return equal to your interest rate, which - on even the cheapest form of debt, your mortgage - will be higher than you can earn in a savings account. If you are on the top tax rate, you would need to earn about 11 per cent on an investment for that to be a smarter strategy than simply paying down your mortgage (based on a 7 per cent variable rate).
Secret 5: You've got to be in it to win it. There is a real danger right now that investors who have been burnt the most in the market downturn of the past five years will struggle the hardest to rebuild balances.
This will happen if they become too risk-averse and shelter too much money in low-risk, low-return investments to preserve what's left. Sure, every portfolio needs this component to anchor returns. But after inflation and tax, it can be very unrewarding indeed. (And some "safe haven" bonds actually carry heightened risk right now. Demand has pushed prices sky-high, so investors might actually lose money on them.)
Unless your dreams are very tame, you will need growth assets such as shares and property to achieve them.
Nicole Pedersen-McKinnon is the editor of Smart Investor magazine, afrsmartinvestor.com. Twitter @NicolePedMcK.