The intelligent investor

Lately I’ve been thinking about “grown-up problems” and Investment was one of them. So I decided my first article should be about investment. As I was reading what the definition of investment on Wikipedia, which says: “To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future.” It then clicked, Investing is not a “grown-up problem”. But rather a decision one needs to take at a very young age to avoid ‘grown-up problems” in the future.

Today we will be looking at three different types of Investment one should start considering . Whether you approaching retirement age, just started working or you in school, you need to think about your financial future, but not only think but do something about it.

Let’s look at these three types of investment:

1. Investment in Shares

This is when one buys shares from a company and becomes part owner of that company, which means you have a right to share in the company profits (which are called dividends). As a shareholder you make money in two ways: by selling shares at a higher price than you paid for them and also by receiving dividends.

I had a chat with a friend a few weeks and the conversation led the reasons why he sold his Audi. He said “I sold my car because I realised I was paying so much for it (Instalments and other costs) while the car was just depreciating in value. So I decided I need to change my way of thinking, which led to me selling it and buying a smaller and cheaper car. The money I was using to pay for the car’s monthly cost, I’m now buying shares with it”

I wish you could have seen the look on my face. Shocked! I know how much he loves cars, so that got me really interested into knowing more about his decision. I was interested  in knowing why he decide to start buying shares out of all investment classes one could choose from. Why shares? I said: 

Which he responded: “Based on the internet research I did, the stock markets have consistently earned more than bonds over the long term, despite regular ups and downs in the market. So I decided to invest on shares for higher returns.”

Here are advantages of investment in shares (equities)
•    Ability to diversify
•    Higher returns in the long-term
•    Liquidity
•    Flexibility to spread your risk
•    Ability to invest small amounts more often
•    Benefit from company profits and gaining returns
•    Can keep your shares for as long as you like (if you want) 
•    Receive dividends
 

2. Investment Property

“Investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavour or an intended short-term investment such as in the case of flipping , where real estate is bought, remodelled or renovated, and sold at a profit”- Investopedia.

I personally like this kind of investment because of the following reasons:
•    As the property market is more stable than the other markets, investment property generates fixed returns to the investors.
•    The income is more certain because you receive constant rental payment from the tenants. In the case that the rental income is higher than the mortgage repayment, you do not need to put any extra money to pay off the loan and you may also have surplus funds to cover any property costs incurred.
•    If you purchase the property in a good location, the property value will increase and you can generate more profit.
•    Any tax associated with the expenses paid on the investment property, such as property maintenance, municipal rates, fees charged by managing agent can be claimed back at the end of the financial year.
•    If you have an investment property, you can also use the existing equity in the property to get another loan or to purchase another investment property.

While doing my final year as a Trainee Accountant, I decided to start investing in property. I bought a one bedroom flat and started renting it out. Best decision I’ve ever made! My plan is to have at least 5 apartments by end of 2020 (one apartment per year). The Minister of Finance on 2017 Budget speech said that relief will be provided in the affordable housing market through an increase in the threshold above which transfer duty is paid from R750 000 to R900 000. That is more incentive to start buying. You can read the budget speech in full here

3. Government BondsA government bond is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date. RSA Bond, are issued by the Asset and Liability Management division of the National Treasury. The bonds are listed on the Bond Exchange of South Africa. They trade in the capital market at the yield to maturity. The yield to maturity is the rate that your holding will yield over the life time of your Bond. There is an inverse relationship between a bond’s yield to maturity and the price. If the yield goes up the price will go down and vice versa. Various economical internal and external factors e.g. the inflation rate, GPD, the currency etc. will influence the yield to maturity on a daily basis. RSA Bonds can be bought at any Bank or Broker who is a member of the South African Bond Exchange.

More information can be found on the National Treasury website.

So how does one choose to allocate their investments between these asset classes?

Kevin Lings STANLIB Chief Economist and Vaughan Henkel, STANLIB Investment strategist advised ”we think the most provident strategy in 2017 is adopt a cautious outlook. Short-term forecasts contain a very high level of uncertainty, we prefer investing for the long term where process and strategy offers a higher level of certainty on an expected .An investor’s risk profile, which is most easily explained by their age will impact on the basic level of risk they are comfortable with”

My advice: Start as soon as possible. Start small. Beware of get “rich easy” schemes. Remember if it sounds too good to be true, it probably is. While it is important to start early it is equally important to invest wisely. Read books and articles about investment and make an informed decision. Here are five classic investing books that can provide essential business and finance insights for young investors according to Investopedia

•    "Rich Dad, Poor Dad" (2000) by Robert Kiyosaki
•    "The Essays of Warren Buffett: Lessons For Corporate America" (1997) by Warren Buffett
•    "Beating the Street" (1994) by Peter Lynch
•    "The Intelligent Investor" (1949) by Benjamin Graham
•    "Think and Grow Rich" (1937) by Napoleon Hill