With all the information and finfluencers out there, investing can feel confusing. But when you strip away the noise, there are only four simple ways to start your investing journey.
But first, two key concepts:
1 Single shares vs a basket of shares
When you invest, you have two basic choices: put your money into one company or spread it across many.
Single shares
This means buying shares in just one company. If that company struggles, your money takes the full knock. It’s higher risk and can feel a bit like gambling, especially for beginners.
Unit trusts & exchange-traded funds
These investments hold small pieces of many different companies. If one company does badly, the other “pieces” or shares can help soften the blow. That’s why they’re often a safer starting point.
2 Active vs passive funds
Active funds are managed by an investment professional who selects and adjusts investments to outperform the market.
Higher fees
Passive funds follow a market index (such as the overall stock exchange) and aim to match its performance.
Lower fees
In the past 10 years, only 32% of funds outperformed the S&P South Africa Index (a stock exchange index that tracks the performance of large, listed SA companies on the JSE). In simple terms, this means that 2/3rds of active funds could not outperform the passive funds.
1.Choose a financial planner
This is the easiest route. You built a relationship with a professional financial planner who gets to know your financial goals and how much risk you can handle. They can guide you, answer your questions and handle the admin for you. Their services usually come with higher fees – but remember that a financial advisor looks at your overall financial journey, not just investments. Things can get tricky, especially as your income and investment portfolio grow. Always check the FSCA website to make sure the advisor is a registered financial service provider.
2. Choose a unit trust (active fund)
A unit trust is an investment fund that pools money from multiple investors (like you) and invests it in a mix of assets (shares, bonds, property…).
The only decision you have to make is which asset management company and which unit trust (a balanced, property, or equity fund) to invest in.
This option offers a hands-off approach and peace of mind for beginners, especially in uncertain times when the market is volatile, and for folks who have no interest in investing.
Tips
• Make sure the unit trust you choose invests in a range of assets.
• Professional management comes at a cost. Always compare the fees of different unit trust funds and consider whether the expected returns justify the cost. Understand the fee structure before you invest.
3. Choose an exchange-traded fund (passive fund)
Beginners can consider investing in the entire market rather than choosing individual shares. Take the JSE FTSE Top 40 Index, for example. It is a stock market index that tracks the 40 largest companies listed on the JSE and has delivered strong long-term growth.
Today, you can invest in low-cost unit trusts and exchange-traded funds (ETFs) that follow or track these indices. By investing in one of these, you get exposure to many companies in a simple, affordable product.
An ETF is a fund that trades like a share but tracks an index, commodity or other basket of assets (like tech companies or renewable companies or just the 20 best companies).
Challenges if you only invest in index type funds
Lack of downside protection
When the overall market drops, the index drops too — and so does your investment. Index funds can’t adjust or move into safer assets during bad markets because they must follow the index exactly.
No control over what you own
Index funds hold every share in the index, including companies you may not want to support for personal or ethical reasons (for example, fossil fuel companies). They may also have small holdings in companies you like, simply because the index is weighted in a certain way.
Tips
- Make sure your index-fund investments match your risk tolerance and your time horizon.
A simple guideline: Subtract your age from 110.
That number is roughly the percentage of your portfolio that can be invested in shares. The rest should go into bonds or other steadier investments.
4. The DIY investor
You do your own research and build your own investment portfolio by choosing which shares, bonds and cash and other assets to invest in.
It takes years of experience to do this well — and even then, these portfolios often fail to outperform the broader market. In fact, investment managers themselves often struggle to beat the market.
Main challenges with DIY investing
Every day, millions of highly trained professionals trade in markets across the world. Beating them consistently requires exceptional skill — or a lot of luck.
Before you start picking your own shares, ask yourself: How comfortable am I with risk? Can I stay patient during market dips or periods of uncertainty? Do you have the capacity to spend hours studying the markets and companies?
Markets can be volatile, and even seasoned professionals make poor decisions when emotions run high. When you pick your own shares, your decisions are influenced by your feelings and instincts — not just facts. For example, you might panic and sell when prices drop, or buy a share just because everyone else is talking about it. These reactions are called biases, and they can lead you to make choices that hurt your returns.
Tips
• Build a well-balanced and diversified portfolio that can weather different market conditions.
• Avoid overreacting to market sentiment, dips or sudden events.
Whichever method you choose, make sure you understand the following concepts before you invest:
Saving vs investing
Compound Interest
Asset classes
Further reading
Investing: Where to start
What is a unit trust?
Sources
Wealth 101: How to start investing, Tips for beginner investors, Mutual funds
Mr Money TV: ETF vs Unit Trust: Which Is Better?
S&P Global: SPIVA
