Updated: Mar 1, 2022
People new to investing may feel overwhelmed by where they should put their money. There are so many products and funds to consider, but which one is right for you? Let me break it down for you.
Traditionally you can only really invest in 4 different things or asset classes. That's all. You can:
Buy shares in a company or equity
Buy property - either physical property or listed property on the stock exchange
Buy a government or corporate bond (You basically are loaning them money that they will pay back in full with some interest)
Keep money in Cash
Overtime the best performing assets have been equity and property. Cash is the least performing asset class. It's not meant to grow like the others but to keep up with inflation. Equity & property carry more risk or volatility and therefore offer a higher potential return. The higher the risk, the higher the potential return. It's always recommended when investing in these asset classes, that you invest for the long-term. This means at least 5 years, preferably 10 years, and ideally 20 years or more. In the short-term and medium term you will see alot of price movements. Your investment value could drop, then go up again, and then drop further, but the longer your invested, the more growth you can expect. You just need to be patient. See graph below showing what I mean.
Source: Jnienhaus - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=90582496
Then there are Bonds. Bonds generally have offered downside protection for people's portfolios. So if equity is going down, bonds will be more stable. The more conservative you are as an investor, the more bonds you will have in your portfolio because you want more stability. People who also invest in bonds have shorter investment time horizons and who are older investors who don't want alot of volatility in their portfolio.
My recommendation: If you want to be able to retire comfortably or have financial freedom you have no choice but to invest in growth assets. The younger you are the more exposure you should have to equity. Yes its volatile but over the long-term, and if you stick it out you have a great chance of increasing your wealth. Volatility is just the price you pay for the ride.
Products to invest in: Mutual Funds/Unit Trusts, Index Funds & ETFs
All these products will invest in one of or a combination of the 4 different asset classes. These are the most common investment options people have when they want to invest their money besides buying physical property. Indexes, Mutual funds and ETFs are basically a basket of assets pooled together. Only Mutual Funds or Unit Trust funds can be actively managed. This means you have professional asset managers who will change the weighting of assets in their fund. They will make changes as they see fit to try and beat the market or their respective benchmark. Index Funds and ETFs are passive so what you see is what you get. This is why they are cheaper. Here is a comparison table:
My Recommendation: Index Funds and ETFs are simple, cost effective and get the job done. Some mutual funds or unit trusts are worth considering but they can be expensive. Some are worth it, some are not. In reality, its very hard to beat the market so most people don't see alot of reason to pay the extra fees since they erode performance.
What about creating your own portfolio of shares?
Everyone has the option of opening up a brokerage account online and directly buying shares in companies. Companies like EasyEquities in South Africa and Robinhood in the US offer this service. You can manage your own portfolio of shares and buy and sell them as you see fit. It sounds exciting to some people but it's very tricky given the research you need to do.
Personally I stay away from this. I am not an asset manager and don't have the time or energy to research and analyse different companies for my portfolio. I will either leave it up to the professionals and buy a Unit trust or Mutual fund or just buy an index fund and track the market. For those people that enjoy stock picking, I would recommend setting aside money you are prepared to lose and go wild if you really do want to do it.
Ah yes. To sit back on holiday while rental income from your investment properties just flows into your bank account. Cha-Ching!! This is the dream for alot of us. Many people swear by real estate investing. If you know what you are doing, love the game, know the rules and regulations and tax implications it can be worth it. But its worth knowing the following when it comes to investing in real estate:
It's alot of work and will be a part-time job. Dealing with tenants, finding the right tenants, answering their calls and maintaining the property, paying the monthly costs and annual taxes.
The initial costs are not cheap and much more than a investing in an Index Fund. Lawyer fees, bond/mortgage registration, admin fees, annual maintenance costs, insurance etc. It adds up.
You need to put in alot of time and energy. People who don't have the time or energy can hire a property manager to deal with all the ongoing administration but this is an extra monthly cost and will ultimately erode into your overall annual return. It could be worth it but its worth looking at the numbers. Do the research.
Before you jump into purchasing an investment property, consider all the costs, get a proper idea of what is involved and understand that there is work to do.
Cash, Banks and their products
All banks like to advertise how they are the best. They are mostly the same. Banks also like to push their fixed deposit accounts on everyone. I find this is mostly fear driven. Fixed deposit accounts have their place but don't get fooled into the hype. No one gets rich leaving their money in the bank! Sometimes you do need to keep money safe for a period of time and get a guaranteed return on your money. However keeping your money locked away in a fixed deposit for more than 12 months is unnecessary.
My Recommendation: Look at Money Market Funds to preserve your capital and grow with inflation. This is perfect for your EMERGENCY SAVINGS ACCOUNT! You also have more flexibility with these funds and can access the funds sooner. They are not locked in for a set period. While the returns are not guaranteed they are comparable to fixed interest rate returns.
Be mindful of Tax
The tax man will always want his cut so it's important to consider your options and the type of account you want to keep your investments in. Tax-free savings accounts and Retirement accounts will offer tax relief. They do come with terms and conditions so its important to know how much you can invest each year into them. Structuring your investments so you can get the maximum tax benefit is crucial.
Best of luck.
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