Here are some basics that will get the investment novice started
By: NICHOLAS RIEMER
Educating yourself before investing is vital in becoming a successful long-term investor. Before investing in anything, potential investors must ensure that they have a basic understanding of the financial markets, as well as of the potential instrument or vehicle.
Education is available at the touch of a button through articles, videos, and podcasts, offering investors the opportunity to upskill themselves in their financial decision-making process. Knowledge is key.
Develop clear goals
Too many times investments are made without considering the end goal. If you are booking a holiday, will you book the transport first or the destination? You will obviously choose the destination first—as whether to fly, drive, or go by boat depends on where you are going.
It’s the same principle with investing. If your goal is to beat inflation over 20 years, selecting a high-risk asset that puts your capital at risk would not make sense. Aligning your investments to your goals ensures that you adopt the correct strategy, and makes achieving those goals more realistic.
Stick around for a while
Don’t jump in and out of the market. When placing a long-term investment, ensure that you are giving that instrument enough time to perform. Changing investments regularly means paying higher commission costs, as well as not allowing short-term market moves to be overcome in the long-term.
Don’t spread yourself too thinly
Beginners sometimes think that investing in lots of assets helps to diversify their portfolio—and while this is true to a certain extent, diversification is only effective when assets that move in different directions to each other are incorporated.
Investing in many assets without a clear understanding can increase the risk of the incorrect investments being made, and losses to be incurred. Rather stick to a handful of assets that are understood and in line with that investors long term goals.
Avoid high-risk assets
Investing is a long-term journey. By investing in high-risk assets early on, the risk of decreasing capital balances will also increase. This can potentially deter that investor from investing in future.
Dip your toe in carefully
Use balanced instruments such as unit trusts and exchange traded funds when first investing, as these offer lower risk, balanced fund options, meaning that an investor can build up confidence slowly and get an understanding of how the market works before expanding their portfolio to individual shares and other assets that come with a higher risk profile.
Establish a solid base
Build a strong foundation on income-earning assets such as cash instruments and bonds. Shares are not the only option when it comes to investing. Long-term cash instruments offer regular income in the form of interest payments, ensuring that returns are made.
Bonds also offer regular income payments in the form of coupon payments, and offer attractive yields to investors. Building onto this in a portfolio means including multiple asset classes, reducing overall portfolio risk.
Don’t follow the herd
Make your own decisions, and invest in assets that you have researched and feel comfortable with. Tips from friends or associates should be researched and followed up by investors, but nor immediately actioned.
Herd mentality can be dangerous to beginner investors as thought processes can be forgotten, and investments entered into based purely on the fear of missing out. Ensure that all investments made have sound principles to them and meet your investment mandate.
The world is your oyster
Explore different geographic locations. The JSE is not the only stock market, and instruments such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs) offer SA investors exposure to international markets immediately, further assisting in reducing overall risk as other markets perform differently to the JSE, potentially offering investors a shield should the JSE pull back.
Phone a friend
Lastly, never be afraid to ask for help. Whether it’s a friend, your banker, or financial advisor, ask for help and ensure you have clarity on a topic before making the decision to invest.
Nicholas Riemer is head of investment education at FNB Wealth and Investments.