In­vest­ing is of­ten a scary con­cept, par­tic­u­larly if you’ve never in­vested money be­fore. A be­gin­ner’s guide might come in handy.

Fairlady - - CONTENTS - By Magda Wierzy­cka

How to in­vest for the first time

The whole ex­er­cise is made even more daunt­ing by the jar­gon used in the in­dus­try and the many dif­fer­ent play­ers in­volved. Let’s start with the peo­ple who ac­tu­ally man­age the money – those who choose which com­pa­nies and as­set classes (cash, bonds, prop­erty, eq­ui­ties and in­ter­na­tional in­vest­ments) to in­vest in. These are the as­set man­agers or port­fo­lio man­agers. There are two broad ways in which they can in­vest your money. One is to make ‘ac­tive’ de­ci­sions or bets on the fu­ture price of a share. A lot of re­search goes into try­ing to iden­tify the win­ning com­pa­nies, but the proof of suc­cess lies in whether they beat the bench­mark or not. A typ­i­cal bench­mark is a mar­ket in­dex, like the FTSE/JSE All Share In­dex. Re­search sug­gests that af­ter all the fees and costs are de­ducted, only about 15% of ac­tive as­set man­agers beat the mar­ket in­dices over five-year pe­ri­ods.

The al­ter­na­tive, cost-ef­fec­tive way of man­ag­ing money is not to try to guess which shares will out­per­form, but rather to buy all the shares that make up a mar­ket in­dex like the All Share In­dex, in the same pro­por­tions as they are rep­re­sented in the in­dex. That way you are ef­fec­tively in­vest­ing in the en­tire mar­ket and will earn the re­turn of the mar­ket. This is called ‘in­dex track­ing’ or ‘pas­sive man­age­ment’. It comes at a much lower cost be­cause as­set man­age­ment com­pa­nies do not need to em­ploy ex­pen­sive port­fo­lio man­agers to man­age these port­fo­lios.

Most as­set man­agers of­fer in­vestors unit trusts that pool the in­vest­ments of many smaller in­vestors and are then man­aged as a sin­gle ac­count by the as­set man­ager. In­stead of own­ing shares di­rectly, you own units in the unit trust that owns the shares. So, with small amounts of money you can gain ex­po­sure to a large num­ber of un­der­ly­ing shares, all in a sin­gle prod­uct.

If you have some spare cash and are gen­uinely in­ter­ested in buy­ing shares, you can in­vest di­rectly and skip pro­fes­sion­ally man­aged unit trusts.

The var­i­ous types of unit trusts are dif­fer­en­ti­ated by what they in­vest in.

The next player in the game is the stock­bro­ker. Only a lim­ited num­ber of com­pa­nies are li­censed to buy and sell shares on the JSE. Every as­set man­ager has to em­ploy the ser­vices of a stock­bro­ker to ex­e­cute these trans­ac­tions on their be­half. The fee associated with each trans­ac­tion is called ‘bro­ker­age’.

The third player is the provider of sav­ings prod­ucts and ad­min­is­tra­tion plat­forms through which you can ac­cess the skills of pas­sive and ac­tive as­set man­agers. Ad­min plat­forms are like su­per­mar­kets: they of­fer you ac­cess to many dif­fer­ent unit trusts and sav­ings prod­ucts and charge a fee for do­ing so. Sav­ings prod­ucts in­clude tax-free sav­ings ac­counts, re­tire­ment an­nu­ities, preser­va­tion funds and liv­ing an­nu­ities. All these are le­gal ‘wrap­pers’ used as ac­cess points for in­vest­ing in unit trusts. If you want to in­vest in many dif­fer­ent unit trusts, it is worth sign­ing up to an ad­min­is­tra­tion plat­form, which will con­sol­i­date all your in­vest­ments in one place. They are called LISPs (Linked In­vest­ment Service Plat­forms) and most com­pa­nies such as Al­lan Gray, In­vestec and Syg­nia of­fer these. If you want to in­vest only in a sin­gle unit trust or the unit trusts of­fered by one as­set man­ager, and you don’t want sav­ings prod­ucts, don’t bother with a LISP – go di­rectly to the as­set man­ager’s web­site.

The fi­nal player you need to know about is the fi­nan­cial ad­vi­sor. There are two types, tied ad­vi­sors em­ployed by fi­nan­cial ser­vices com­pa­nies like Old Mutual and San­lam who will sell you only their em­ployer’s prod­ucts, and in­de­pen­dent ones who can of­fer you a range of op­tions as they are not tied to any one provider. If you’re pay­ing for ad­vice, make sure you only ever speak to an in­de­pen­dent fi­nan­cial ad­vi­sor. Robo-ad­vice is a new gen­er­a­tion of ad­vice emerg­ing around the world, in­clud­ing SA. These are in­ter­net-based tools that lead you to an ap­pro­pri­ate in­vest­ment so­lu­tion by ask­ing you a few fi­nan­cial ques­tions. Some charge for the service; some don’t. Want to play around with one for free? Try Syg­nia’s RoboAd­vi­sor at www.syg­

If you have spare cash and are in­ter­ested in buy­ing shares, you can in­vest di­rectly. In that case you need to open a stock­broking ac­count with a stock­bro­ker and in­struct them on what you want to buy or sell and when. A stock­bro­ker typ­i­cally charges a monthly fee for ad­min­is­ter­ing the ac­count, as well as bro­ker­age every time you trans­act. Look for the cheap­est stock­bro­ker as all those costs can eat away at the value of your in­vest­ments. How­ever, re­mem­ber that you are al­ways at a dis­ad­van­tage to pro­fes­sional as­set man­agers in terms of in­for­ma­tion. So un­less you have time on your hands, it is not an ap­proach I’d rec­om­mend to the av­er­age in­vestor. Also, if you do in­vest di­rectly, do it with spare change and not your main sav­ings.

Once you un­der­stand the play­ers, you need to un­der­stand the game. When you save, your main aim is typ­i­cally to have enough money for re­tire­ment. A sec­ondary aim might be to save for spe­cific shorter-term goals like a car, a de­posit on a house or a hol­i­day. Un­less you are ap­proach­ing re­tire­ment and want to re­duce your risk, in­vest­ing in well-di­ver­si­fied port­fo­lios that com­bine dif­fer­ent as­set classes in a sin­gle port­fo­lio is a good op­tion. You can con­struct a ‘bas­ket’ of in­vest­ments us­ing dif­fer­ent unit trusts, or you can opt for a on­estop shop or a ‘high growth global bal­anced’ unit trust. If in­vest­ing in in­dex-track­ing funds, the the­ory is the same: in­vest in prod­ucts that track broad, well-known mar­ket in­dices, such as the FTSE/JSE All Share In­dex, FTSE/JSE Top 40 In­dex or the FTSE/ JSE Capped SWIX In­dex. There are other eq­uity mar­ket in­dices, but those are trick­ier op­tions for the first-time in­vestor. On the bonds side, in­vest in a prod­uct track­ing the JSE All Bond In­dex; on the prop­erty side, the FTSE/ JSE Listed Prop­erty In­dex; and on the in­ter­na­tional side, the MSCI World In­dex. The per­cent­ages you al­lo­cate to each should be dic­tated by your goals and your risk pro­file. The more you al­lo­cate to eq­ui­ties, both do­mes­tic and in­ter­na­tional, the higher the risk. But re­mem­ber that if you want to gen­er­ate high re­turns over the long term you should have most of your as­sets in­vested in eq­ui­ties. Once again there are one-stop shops like the Syg­nia Skele­ton Bal­anced unit trusts that do the al­lo­ca­tions to dif­fer­ent as­set class in­dex track­ers for you. Make sure you al­lo­cate be­tween 25% and 30% of your money to in­ter­na­tional in­vest­ments. These of­fer you dual di­ver­si­fi­ca­tion: di­ver­si­fi­ca­tion away from the rand, and ex­po­sure to de­vel­oped mar­kets and sec­tors that be­have dif­fer­ently to emerg­ing mar­kets like South Africa.

On the topic of in­dex track­ing, a cru­cial de­ci­sion you need to make is whether you in­vest via a unit trust or an ex­change-traded fund (ETF) listed on the JSE. For the av­er­age in­vestor, I rec­om­mend a unit trust. If you trade ac­tively in shares, con­sider an ETF a core in­vest­ment that of­fers you ex­po­sure to ‘the mar­ket’ at a low cost.

The fi­nal note is on fees. In in­vest­ing, ex­pen­sive does not nec­es­sar­ily equal qual­ity. Al­ways aim to min­imise costs as they eat away at your in­vest­ments. So save where you can, shop around for cheaper al­ter­na­tives and do your own com­par­isons, even when us­ing a fi­nan­cial ad­vi­sor. The Na­tional Trea­sury puts it best: if you can re­duce your fees from 2.5% per an­num to 0.5% per an­num over a 40-year sav­ings time hori­zon, you will re­tire with a 60% greater ben­e­fit. In in­vest­ments, you get what you don’t pay for!

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