When constructing an investment portfolio, the savvy investor knows that shares are the single asset class that provides real returns over the long term. However, for those who are new to investing, shares can seem intimidating. Short-term market fluctuations (otherwise known as ‘market risk’) can cause them to be hesitant to take that first step. In this article, Wendy Myers breaks down the benefits of investing in shares and offers simple, practical guidelines to help you get started.
WHY INVEST IN SHARES?
Many individuals are hesitant or fearful of opening a share portfolio yet investing in securities offers numerous benefits. Below are the top six benefits of investing in a share portfolio:
- Performance − Shares beat inflation and provide capital growth in the long run. Those who stay the course by investing over the long term reap the rewards, as investors benefit from companies delivering on their growth strategies. Warren Buffett is quoted as saying, ‘If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.’
- Dividends − Shares can provide a regular income stream through dividends, which may also be reinvested to enhance returns.
- Compound growth − In addition to benefiting from reinvested dividends, investors in equities benefit from compound growth over time.
- Market opportunities − Market volatility can work in equity investors’ favour, as it can present opportunities to buy shares at lower prices. Staying invested also allows investors to benefit from market recoveries and rallies.
- Diversification − Shares enable portfolio diversification across different sectors, reducing overall portfolio risk.
- Global access − Investors who wish to participate in offshore equity markets can make use of their single discretionary allowance or foreign investment allowance to gain access to global stock exchanges delivering returns in foreign currencies.
GETTING STARTED
To begin investing, it is essential to choose a stockbroking platform that meets both your current and future needs. Once your account is opened and funded, you’ll have access to various products, such as:
- Local share portfolio − Offers access to shares and exchange traded funds (ETFs) listed on the Johannesburg Stock Exchange (JSE).
- Offshore share portfolio − Provides access to a range of offshore stock exchanges such as the New York Stock Exchange (US), Nasdaq (US), the Hong Kong Stock Exchange and the London Stock Exchange (UK). The range of available offshore exchanges available will be dependent on the platform you select, so be sure to do your homework.
- Scriptfin facilities − Some platforms allow you to borrow against your existing local share portfolio. This can increase your investment exposure and potentially enhance your returns.
AVOIDING COMMON MISTAKES
Think long-term
As mentioned earlier, investing should be approached with a long-term mindset − ideally five years or more. Over longer periods, returns are more likely to be positive, but your investments will still rise and fall in value. Choose your investments wisely, stick to your strategy, and rebalance your portfolio when necessary.
Part of the planning process is choosing how much risk you want to take. To stand the test of time, a portfolio should be diversified. This means having a broad range of investments in different countries and industries, as well as the right mix of shares (portfolio percentage allocation). Diversification will mean that, as parts of your portfolio underperform, other parts might perform better. Understanding this can help you make decisions and give you peace of mind.
Avoid the noise
Short-term news and market movements has the potential to influence your investment decisions, so it’s important to recognise that some events are just bumps in the road. If you have a diversified portfolio, some investments not doing as well as others is par for the course. The same goes for checking your investments: you don’t need to check your portfolio daily, reviewing it at least every six months is recommended. Stay focused on your long-term goals and avoid making decisions based on short-term noise.
Don’t wait for the ‘perfect’ moment
There is a saying that ‘investing is about time in the market, not timing the market’. Generally, the longer you’re invested, the harder your money can work for you. Pretty often, the best time to invest was yesterday, but the next best time is today.
CONCLUSION
Adopting a long-term strategy when investing in shares will ensure that you benefit from compound capital growth. Ensuring your portfolio is diversified will assist you in achieving your long-term investment goals, as your portfolio will be less reactive to the small bumps in the road. At best, use these ‘bumps’ to increase your exposure. Take that first step with confidence − because the journey to financial growth starts with action.
Author
Wendy Myers is the Head of Securities at PSG and boasts a 21-year career in the financial and investment industries. Myers is a qualified CA(SA) and has a Bachelor of Commerce and a Postgraduate Diploma in Accounting from the University of Cape Town.
