First time investing – how and what to invest in
Investing is buying an income-generating asset with an expectation that your asset will grow in value or rather work for you. When you invest, you are buying a potential – this is why an in-depth research is needed before engaging in first time investing. You need to know how and what to invest in.
Relevant article:
How do you evaluate an investment?
Basically when you buy an asset, you expect it to grow in value. This is not so clear during the purchasing time. Investments have different risks and different potentials.
Other investments have prices that are more volatile while others have stable prices. If you want to benefit from capital gains you can buy assets with prices that are likely to increase in the future. Some assets generate more income in form of dividends or interest even though their prices are not likely to increase significantly.
It is important to know the volatility of the investment you are choosing. Volatility (or standard deviation) is the measure of the price changes of an investment over a specified time period. It is often associated with the risk of an investment. However, it is worth noting that short term volatility has nothing to do with long term performance.
For a risk averse person (an investor who prefers low risk), volatility can be spread by investing at regular intervals (Dollar Cost Averaging) or through diversification.
What to invest in
The type of investment you buy is greatly influenced by the risk you are willing to take as well as the money you have. Some examples of investments you may consider are Exchange Traded Funds (ETF), Unit Trusts, Shares and Bonds.
Unit trusts
Under a unit trust, your money, together with other investors’ money is pooled into an investment fund. The fund is split into equal portions called units. The money in the fund is invested in different financial assets (underlying assets) depending on your risk appetite and the returns are distributed among the investors.
The units you buy can change in value depending on the performance of the underlying asset the fund manager is investing in, therefore, you can enjoy capital gains. The income earned (dividends or interest) will result in an increase in the number of your units if you opt for the income to be reinvested.
Moreover, this investment is considered as a good starting point because what you only need to do is to choose the unit trust that matches your goals and your risk level. The rest of the job is left to the fund manager to choose the type of the underlying assets to invest in. Therefore, you can have the confidence that your money is in safe hands of a professional fund manager.
The graph above shows the fluctuations in the prices of a unit trust. Suppose you purchased 5 units on 2 January at R 50.51 but then you decided to withdraw on 30 December. The capital gain on this investment A is R 17.8 (that is 5 x (R 54.07 – R 50.51)).
In addition to that, there is a possibility of earning additional income in form of dividends or interest. As you can notice on the graph above, the timing of buying and selling an investment is very important. You gain more if you buy at the lowest price and sell at the highest price.
In South Africa there are several fund managers you can choose from for example:
You can find a lot of fund managers but I can not list all of them here. I have experience with Allan Gray unit trusts but I encourage you to compare other fund managers too. The advantage of unit trusts in South Africa is that you can start investing with as little as R 500 per month. For those in Zimbabwe have a look at Old Mutual Zimbabwe website.
Shares/Stocks
Shares/Stocks or equities are the type of investments that give you an ownership in the company. The more the number of shares you own, the higher the influence you can make. Shares give the investor (shareholder), the right to vote for the board of directors.
However, to invest in stocks you need to have a stock broker or an online share trading platform. The good news is that many banks offer this facility to access the stock market. Please be advised that these brokers may charge a lot of fees and it may be important for you to compare several brokers or platforms before you settle for one.
In South Africa, you can buy South African, USA and Australian stocks using a very cheap platform called Easy Equities.
Exchange Traded Funds (ETFs)
ETFs are products that track the performance of an index (a bucket of selected financial assets). The most popular indices in South Africa are FTSE/JSE All Share (bucket of all Johannesburg Stock Exchange shares) and FTSE/JSE Top 40 (bucket of top 40 shares). You can invest in ETFs through a broker or a share trading platform.
ETFs are generally less risk in comparison to shares because the index is diversified enough to reduce volatility. For example if you buy an Ashburton Top40 ETF, your investment tracks the performances of the top 40 South African shares.
Another great takeaway from this is that you do not have to spend many days analyzing the financial statements of an individual company. If one of the companies in the top 40 fails, it is replaced by another and your investment will be safe.
If you are still new to the stock market, it is advisable to invest in an ETF because it is safer than stocks. As you become more confident on taking more risks, you can carefully pick few stocks you know and understand.
Bonds
When you are investing in bonds, you are lending to the government (government bonds) or a company (corporate bonds). As your reward for taking the risk, you earn interest. The interest rate depends on the likelihood of default by the company or government you are lending money to. Generally, bonds are also considered more secure than shares and also suitable for first time investing.
Summary
When you are investing for the first time, it is advisable to go for ETFs and Unit trusts but if you are comfortable with taking more risk you can also go for Stocks. However, there are several investments you can consider when you are investing for the first time. Here we only pointed a few common ones. It is a good practice to take your time to analyze different investments before you make a commitment. Congratulations on being an investor!
The author is an Investor and a Software Engineer who provides consulting services to several Financial Services companies. He has background in Actuarial Science (BSc) and Financial Engineering (BScHons; MSc).
I’m not a finance expert but based on what I hear, there isn’t much reward for these type of investment when you have small money. Some interests only start making sense when you have made it to a point that you can just put 100k aside & earn an extra 30k by the end of the year.
My question is, why should I be investing in these asset management companies with my small money? Is it not an investment & a more rewarding one to sell chickens for example.
Hi Tari
When you invest, you are buying an asset that generates you income. Investing needs patience and it may take you a while before you start getting a big income. It also depends on the risk you are willing to take. It is very true that you will get more interest when you invest more money but it takes time to build a good habit of investing. The advantage of investing in unit trusts for example is that, with as little as R 500 you can be able to invest in great companies without having to raise a large amount of money first.
The idea about investing is that money should work for you. The Chicken business is a great idea if you are confident enough that the cost of production is low and the demand of the chicken is high. It is also good to know about your competitors. Since its more risk to have that chicken business, your expected returns are also high. An investment will only make sense if the expected returns are higher than what you can get from a savings account (about 5%) because the risk you are taking should be compensated by higher expected returns.