Where and how to start investing

Part 1

Where and how to start investing

Over the last few weeks, we’ve explained some crucial principles about investing and what you should anticipate when you get around to actually depositing some money with a financial institution. It was important that you learn these keys components of a good investment strategy because as you will see, how your investments perform and how they ultimately grow to meet your goals, all largely rest on these truths.

These building blocks were as follows:

  • Knowing the difference between investing and speculating;
  • Understanding asset classes and how each one behaves;
  • Appreciating the theory of efficient markets, and that nobody is going to earn good returns for you;
  • The higher the risk, the higher the reward, and the lower the risk, the lower the reward.
  • Learning that just as easily as compound growth can grow your wealth, so compounded costs that add no value will destroy it;
  • Passive vs Active management and an introduction to ‘Index investing’.
  • That old adage of not putting all your eggs in one basket

If you’ve read these articles and tried your best to understand them, as hard as we’ve tried to make them approachable and easy to understand, then this author gives you his solid guarantee that you’re by far ahead of your peers when it comes to taking Finance DIY by the scruff of the neck.

This article starts a new mini-journey within your bigger personal finance journey. A thirteen-part saunter through some applied long-term investing ‘must-knows’.

Good luck and let us know if you run into any difficulties.

So what now?

Well now we tell you a little bit about the types of things you could consider investing in. We’re not back to our discussion on asset classes, no – we’re talking about actual, off-the-shelf investments that are typically marketed to the public at large, or that a financial advisor might suggest you invest in.

No better way than to jump straight in.

Unit Trusts

A unit trust is by far the most common off-the-shelf type investment product in South Africa. You get many different kinds and each unit trust will have its own mandate. The mandate basically dictates what kinds of assets it holds. If you invest in a property unit trust, the unit trust will likely be limited to buying commercial property and shares in commercial property companies.

Accessing unit trusts can be done through many different financial services companies, as each one will have their own licence to manage unit trusts.

Unit trusts can be bought and sold within 48 hours and they are highly liquid – meaning you can get your money out very quickly.

Remember also that it’s not very helpful to say that you’ve invested in “unit trusts”, as it’s what sits within the unit trust that counts. Ten different people can all invest in unit trusts, but ultimately all experience very different investment returns, based on the underlying asset classes within their own respective investments.

Unit trusts are a great way for small investors like you and me to get access to all kinds of assets that we would otherwise not have been able to afford to buy directly. When placed inside a unit trust, even our small monthly contribution allows us to share in the returns (and losses) of even the most exotic and diverse companies.

Policies issued by a life insurance company

A policy is nothing more than an I.O.U given to you by a life insurance company. When you take out a policy with a life insurance company, all they are really doing is promising to pay you an amount of money at some future date. The exact amount will depend on the nature of the policy. If it is an investment policy, the amount that you would be due at some future date would be linked to the performance of some underlying unit trusts or funds.

Policies generally have finite terms and getting access to your money during the term of the policy is not as simple and as easy as it would be with a unit trust.

Retirement Annuity

A retirement annuity or RA is a tax-deferred way of saving for retirement. In most circumstances, you will ultimately be exposed to unit trusts within the RA, but what an RA does for you is allow you to invest without paying tax on the returns on your investment. This allows your investment to compound at a higher rate every year. When you exit from your RA, there are rules as to what you’re allowed to do with the money.  We will discuss the tax benefits of investing in an RA in a future article.

As with unit trusts, it’s what’s inside the RA that counts. An RA is merely a vehicle to help you invest in a formalised manner, but what you put inside is ultimately what makes the difference.

Getting money out of an RA prior to retirement is a near impossibility, so an RA is pretty much for life.

Shares on a stock exchange

Then of course you’re always able to buy shares directly via a stock broker or online share trading platform. We would not suggest you give this a go from day one, given all the risks involved.

So what do I choose?

What you invest in and how you do it should all be based on what your investing goal is. All investing should be based on well thought-out goals. Things like your investing time frame, tolerance for volatility, personal feelings about money and investing, will all dictate the ideal vehicle for your investing.

If you want to start investing, regardless of your goal, we would suggest that you contact a financial advisor. This step is made more important when your goal is investing for retirement or any other long term investing objective.

It is over the long-term that the effects of poor decisions and clever thinking are amplified the most, given the powerful effects of compounding. A good financial advisor will take the time to understand your investing needs and help you decide on the most appropriate investing vehicle.

If you do set up a meeting with a financial advisor, take this article along and question them on all the bullet points above. Understand how their recommendations address these critical truths.

We have not gone into a great deal of detail on each type of investment that you might consider for your needs, but over the course of the next several articles, we’ll go into a lot more detail on some of the more familiar retirements savings vehicles, after which you’ll feel ready to take some action.

And please remember that it’s not an RA, or a policy that will meet your investing goals, it’s what’s inside that matters!

The Editors

People who Rock

Take Charge of Your Money TaxTim