Investing
First of all, you must HAVE money to invest before you can actually
invest. A lot of people may be struggling to pay of debt and investing
may not be for them. Obviously, we recommend that you pay off your debts
as soon as possible and if you don't have any, GREAT. Time to invest!
Almost everyone will invest money at some point in their lives.
Even opening a bank account that pays an extremely low interest
rate can be considered an investment (although not a very good one).
I'm sure that most of you have already heard some investment advice
about planning for the future and at least saving up some money now
so that you have emergency funds or money for retirement and old age.
In fact, I'm almost positive that you've at least had a call from a
telemarketing campaign offering you some kind of insurance product.
Those, too can be considered investments, but we all generally want
to sift through the "bad" investments and at least have "average" or
"good" investments. HOW do you sift through the bad investments? Well,
hopefully we can give you some guidelines.
We have noticed that there are thousands, if not millions of sites out there promising
abnormally high returns if you use their "stock tips" or "proprietary modelling
software". It is my opinion that the majority of these sites promote high levels of
leveraging (borrowing) to achieve these high returns with the consequence that the
level of risk is also abnormally high (i.e. you can lose all your money). What we
promote is a more steady and conservative investment strategy to preserve your wealth
and give you a real gain (i.e. somewhat above inflation). If you're expecting to get
rich overnight, then this site is NOT for you. Nor do we promise that you will
outperform the market by following our advice. Our primary aims are to help you grow
your capital and beat inflation with low risk and the highest possible returns.
First, you will need to know what you can invest in. As we mentioned on the
homepage, the asset classes you can invest in are:
- Bonds
- Shares
- Property
- Money Market
- Funds, Hedge Funds & Fund of funds
- Unit Trusts
- Investment Vehicles
- Precious metals
- Alternative Investment Classes
- Derivatives
Now, lets discuss these in a little more detail.
Bonds
Bonds are just about the first investment you should consider. There is no other asset class that guarantees a return of capital and interest. They are thus the safest asset class and unless you have a reasonable amount of experience with investing in other asset classes, I recommend having at least half your savings in bonds. That is, if you are sure you don't need the cash for at least a year. Because this site caters mostly to individual investors, I recommend that you find out more at RSA retail savings bonds. At the moment, these are probably the best guaranteed returns you can get for your money. You can choose between 1 year, 2 year and 5 year bonds. You can also decide whether you want inflation linked bonds or fixed interest bonds.
Shares
This is one of the more popular asset classes. Unfortunately for most investors, it is also
a more risky one. Many people have gone from rags to riches and visa versa speculating in
shares.
One of the first things you need to decide is whether you want to "speculate" in shares,
or whether you want to "invest" in shares. By "speculation" I mean that you do not consider
the fundamentals of a company or other important factors into consideration before you
purchase them. If you buy shares simply because you "heard" it is a good share, or
because it is a "hot" stock, then you fall into the speculator category, and this site
may not agree with you. Here, we are geared primarily toward "investing". We define an investor
as Benjamin Graham does in his timeless classic, "The Intelligent Investor". Basically, it means
that you do your homework on a share before you buy it. We believe that this is the only method
that the general public should use to invest in shares. I know that you can make a lot of money
by speculating, but you could also lose a lot and we are concerned here primarily with safety
of capital, so make sure you know what you're doing before you invest, otherwise, see Unit Trusts.
For those of you who can spare some time to do research on the shares you wish to purchase, we
can suggest methods of valuing shares that are available. Of course, the method you would use
to value shares would give you an estimate of how much you should pay for it. The market price of
that share may be higher or lower than you price it, and you can make money by buying the shares
that are cheaper than what you price it at. Here are some of the methods you may employ:
With all of these methods of valuation, we recommend that you also include a "margin for error" of at least 30%. So, you would pay 30% less than the price you come up with. This should ensure that your investment is reasonably safe.
Property
Perhaps the MOST popular investment class as it gives the holder a greater sense of ownership and
pride, or what is usually referred to as the "feel good factor". The first mistake with investing
in property is that most people consider their primary residence as a property investment. According
to Robert Kiyosaki, your first home is NOT an investment and he explains why in his best-selling book,
"Rich dad, Poor dad". He considers a first home to be a liability as you usually end up spending more
money on your home than it gains in value. Also, in order to realise the value on your first home,
you would have to sell your house... and I don't think many people do that in a hurry.
Another factor that most people fail to consider is the high cost of trading property. There are usually
transfer costs, bond registration costs and attorneys fees which could turn out to be a considerable
sum. Also, properties are not as liquid as most other asset classes. Nevertheless, there are opportunities
to profit from cheap properties that other people fail to find. The trick to succeeding is hard work.
Dolf de Roos claims in his book "Real Estate Riches" that you need to look at about 100 properties to
find about 30 that are worth buying, where 10 are still available and 3 are affordable. After putting
in an offer, you may get 1. If you're seriously considering investing in property, I recommend that
you read his book. There is one concept in his book that I do not agree with, however, and that is the
concept of using the bank's money to buy property. Generally, I despise borrowing money unless
it is absolutely necessary (e.g. a couple starting out and getting a mortgage for their first home).
I have to admit though, that Dolf de Roos makes a good argument toward leveraging in the property
market. I believe that his concept only works when the property concerned can be bought for a huge
discount to what it is actually worth. It will also work when the rental on the property is greater
than the repayments due on the mortgage. These opportunities are hard to come by, but I do believe that
they exist for 2 reasons. One is that the tenant may prefer to pay a higher rent because he is expecting
interest rates to rise and therefore the rent will become comparatively lower. The second reason is much
more logical. It may be that you can obtain much lower interest rates on your mortgage than your tenant
(if you are a lower risk client to the bank).
The consequence of this is that if your tenant were to take out a mortgage to buy the place, his repayments
would be much higher than yours.
Money Market
I'm sure that all of you have a money market account. The rates you earn on a money market account are related
to the prime interest rate and vary slightly between banks. I can't explain why they vary exactly, but my guess
is that some banks take a larger cut than others for expenses and profit. Money market accounts are an extremely
useful tool to use when you need your funds to be liquid, but still want reasonable interest rates. Also,
remember to compare the interest rates on money market accounts to those you can get on retail bonds. If you're
only investing for a short term (less than a year), then money market is probably the best option. As a long term
option, your money is probably going to lose value if you keep it in a money market account.
It is in your best interests to find the money market account that provides the highest
interest rate for the sum that you are investing. There is usually a minimum investment amount, but this can be
as little as R100. The interest rates offered are higher for bigger amounts, so you should rather have one
money market account with most of your money in there so that you can earn the highest rate, than a few money
market accounts with a little money in each.
Funds, Hedge Funds, Fund of funds
A fund is basically a pool of money from different investors. The fund usually has a fund manager who decides
what assets to invest in and what investment strategies to employ. Many funds restrict the
type of trading they can do and often specify the sector, size or type of shares they can invest in. Funds can be
open or closed ended, which basically means that they accept and don't accept new money respectively. When investing
in a fund, it is important to take note of the fees charged. Some funds may charge initial fees of up to 6%. If
a fund charges such ridiculously high fees, then it MUST have a track record to match. Of course, the past performance
of the fund is not always a good indicator of it's future performance. It is, however, the best inidicator that is
available. We do not recommend that you buy into a fund with particularly high fees (say, higher than 2-3%) and an
average or bad track record. Some funds may not be very liquid and there may be waiting periods up to a month
or more before you can take your money out. Be sure to enquire about this before you enter into a fund and also
that you do not require the funds in a short time period. It takes some time (at least 3 months, say) before
the initial charges can be recouped and you actually begin to make a gain on your capital.
A fund of funds is just that. It is a fund that buys into other funds. Basically, it is
supposed to do the homework and research on other funds that I am trying to advise you on. But, as always, there's
a catch. There is usually a double layer of fees, since the fund you are buying charges a management fee and so do
all the funds that the parent fund buys. The consequences of this are that the parent fund now has to choose funds
that do significantly better than the rest in order to make an average return for you. As you can imagine, this is
not easy. At creative wealth, we despise high fees as they instantly diminish your capital.
Hedge funds are funds that usually only have a few large investors. The investors usually
have a close relationship with the fund manager. This allows hedge funds to adopt much more riskier strategies than
funds are generally allowed to under legislation. The reason for this is that hedge funds hope to earn much higher
returns than other funds. They usually adopt measures such as short selling, leveraging and derivatives to enhance
returns. These measures introduce considerable risk and in our opinion, the expected return is not nearly high enough
to compensate investors for that risk. As far as we're concerned, unless you are a gambler or you know what you're
doing, stay away from hedge funds. We also believe that hedge funds were a major cause of the financial crisis of
2008-2009.
Unit Trusts
A unit trust is a fund that allows investors to pool their money. The pool of money is then entrusted to a manager or management company which invests in shares. Each investor then owns "units" in the fund or trust as it is called. The value of the units are related to the value of the shares in which the fund invests. The fund can take in more money by "creating" units and it can pay out money by "destroying" units. The management and administration of the trust is done for a fee of course, but these should be lower than in the case of "fund of funds" or "hedge funds". There are a couple of funds that have a phenomenal track record, so make sure you check the track record and fees before you put your money in. Among the best performers are the Allan Gray Equity fund and Balanced fund, and also the Coronation Balanced fund. There are of course other unit trusts out there with a proven track record. You should also be warned at this point, that there are periods during which these funds may significantly underperform the market. They are higher risk than other funds and if you choose to invest in these funds, you should be asked to do a risk assessment first which determines your risk appetite and recommends funds to invest in. If you wish to invest in these funds, you will probably need to sign an agreement stating that you understand that these funds are aggresive and that they carry a higher risk appetite than has been determined by your risk assessment. We believe that the definition of risk used in these assessments only refers to volatility of returns and that the investment principles employed by these funds are sound. We do recommend that you speak to an investment advisor before you invest.
Investment Vehicles
What we mean by "investment vehicles" is that you can invest in unit trusts, funds, shares, property etc. indirectly through a retirement annuity or endowment policy. The advantage of this is that your contributions are tax deductible and the interest earned is not taxed until you reach retirement. This means that the tax on your gains are deferred and as a result, you will earn more on your investments and once you reach retirement, you will be taxed at a lower rate than the working population. This may leave you wondering why everyone doesn't invest through investment vehicles such as these. Well, first of all, there are fees involved. Any retirement annuity or endowment policy will usually deduct a percentage of each contribution before it is invested. Thus, your contributions immediately decrease in value and it may take some time for your investment gains to recoup the cost of fees. Secondly, the funds you invest in these investment vehicles are not liquid. If you decide to invest through one of these vehicles, your funds will be locked in for the better part of a lifetime. With most funds, you will be able to surrender your policy before maturity, but you will be slapped with penalty fees which erode much of the gains you will have made. For this reason it is not advisable to surrender policies. Rather do your homework properly before you decide to commit your money to a long-term investment by choosing the funds that have proven track records, sound investment principles and reasonably low fees. Also make sure that you will not need the cash in the near future.
Precious metals
This is perhaps a favoured investment class for many investors. This asset class comprises of gold and platinum mainly.
Gold is often seen as a "safe haven" investment and a hedge for inflation. There are many trading platforms which
allow you to trade gold with up to 400 times gearing. We consider this to be extremely risky for the average and
possibly even an above average investor. We do not recommend that you employ gearing in any form whatsoever unless
you are a professional with considerable experience in this field.
Having said that, many people prefer in invest in gold jewellery. Gold jewellery is often priced at a much higher
price than gold at the market price. This makes it a relatively bad investment. Buying of gold jewellery should
be done more for aesthetic purposes than investment. If you want to invest in gold, a better alternative is the
Kruger Rand. These are usually priced at the market price of gold and there is some loading for profit and storage,
or, if you purchase them from an online dealer (which is usually cheaper), there are shipping and insurance costs.
The gold price is usually very volatile, so you should be prepared to see the value of your investment fluctuate considerably
during short terms.
Alternative Investment Classes
By "Alternative" asset classes, we mean art, coins, watches and anything else that we haven't mentioned above that appreciates well in value over time. We do not have much experience in this field and suggest that you only INVEST in alternative asset classes if you have enough experience. You could of course buy art, coins or watches simply for their aesthetic appeal or because you like them, but then, you should not necessarily consider it an investment.
Futures, Options and other derivatives
A derivative is a financial instrument whose value is dependent on that of some underlying asset. For example, a futures contract is a contract between two people to trade a specified amount of an asset (usually a share/shares) on a specified future date at a specified price. This contract has a value which is dependent on the underlying share. Derivatives are referred to by Warren Buffet as "financial weapons of mass destruction". Generally, we refrain from any derivative investments. They are a useful tool in managing a portfolio of shares, primarily to hedge or reduce risk, but unless you know what you are doing, stay away. Many hedge funds use derivatives to INCREASE risk with a view to increase return as well. The problem is that derivatives only take account of market risk (the risk of market fluctuations) when they are priced. There is no consideration of credit risk (or the risk that a party to a derivative will default on their obligations). Sometimes, even professional money managers get too euphoric about derivatives and the consequence is the financial crisis of 2008-2009. The first example of the financial destruction that can be caused by derivatives occurred with the collapse of LTCM (Long Term Capital Management) in 1998. They were bailed out by the government and the derivatives fiasco has run rampant since. It seems that derivatives are here to stay though, and as such they form part of your investable universe. So, even if you're a professional investor, we recommend extreme caveat when investing in derivatives, and if you've just began investing, stay away from them completely. If and when you do feel comfortable enough to invest in derivatives such as futures and options, keep one line in mind: "NEVER INVEST MORE THAN YOU CAN AFFORD TO LOSE!". When it comes to derivatives, know what your maximum losses could be and always make sure that you will be able to withstand that maximum loss.
