Not even a year ago, I knew absolutely nothing about investing. Investing, to me, was reserved for the financial elite and required you to sit in front of your computer almost 24/7 watching and timing the markets.A year later, I find myself in a position with several investments , having bought shares in several locally and internationally reputable companies like Apple, Netflix, Google and Naspers.
For this post, I’m going to be focusing more on investments that you own , lend or gain short-term interest from .When I first started researching my options to invest, I was overwhelmed by the number and types of instruments into which I could place my money. Below, I want to break it down for you into simple terms, to help you understand the differences in the most common types of investments.A stock in a company certifies that you literally own a portion of that company.
Because bonds are not typically affected by price swings or general market volatility, they are considered a lower risk investment relative to stocks.Listed property is pretty self-explanatory. Property developers or agencies can list their company on the stock exchange . The fund is then divided into individual units, each unit containing an equal proportion of assets that make up the fund. Based on how each asset class performs, the price per unit within the fund will usually be updated at the end of each trading day.
Cash investments are considered low risk investments, but, as a result, provide inferior returns compared to stocks or listed property over the long-term. Now, let’s say you have R100,000 to invest initially and you’d like to top it up each month with a debit order. How would this affect your return? Well, your investment payout would be R6 million higher if you initially invested a lumpsum amount and contributed R1000 per month from the age of 25. Isn’t that amazing?Investments in high-return equities are never smooth sailing. Your interest return is likely never going to remain stable at 12% per year.
On the other hand, low risk investments will earn you a stable, secure return in the short-term, but will likely barely break above inflation in the long-term, meaning that you could possibly lose value over time. You will also miss out on some potentially mind-blowing market returns that only equities can provide.
However, on the other hand, you have passive investors claiming that 90% of active managers are unable to beat the market and that you’re paying higher fees for a below-market return. See this article by 10X Investments that describes the advantages of passive investing. It’s important to know that investing offshore doesn’t necessarily mean you need to physically move that money abroad. You can get exposure to international assets through local ETFs or unit trusts. For example, I’m invested in the Sygnia 4th Industrial Revolution fund , which is predominantly invested in companies off the shores of South Africa.
So, what’s the best way to diversify? Either you personally buy stocks in multiple different companies that you trust, spreading your capital between them. But the easier route is to place your money into a unit trust or ETF, where the fund automatically diversifies your portfolio based on their selected portfolio holdings.
I won’t get into the nitty gritty about all the different fees that asset managers charge . But, I will tell you that fees have a significant effect on your investment portfolio. Just as interest returns can compound over many years, so can your management fees. This erodes the potential value of your investment portfolio over time.
Dividends tax: Remember how I told you that companies can give a portion of their profits to shareholders in the form of dividends? Well, yeah, that tax man comes for that too. Again, the tax rates will differ depending on the country and it’s worth it to find out these details. You’ll want to make your investments as tax efficient as possible, to maximize your return upon maturity.
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