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Important decisions before entering an investment

A look at local vs offshore; active vs passive; best- or worst-performing funds; and equities, bonds, cash or property.

We live in world with a wide variety of opportunities when it comes to investing. What is the best investment? Is it the investment that is giving the best return? Is it better to invest locally or offshore?

Truth be told, there is no simple answer to the questions above. An investor needs to take into consideration their financial needs and requirements.

This article gives a view of the important decisions that need to be made before entering an investment.

Local vs offshore

Local: This would be investing in local instruments such as equities listed on the JSE All Share Index (Alsi), cash, bonds, and/or property, all based in South Africa.

Offshore: This would involve equities, bonds, cash and property across the globe.

The local JSE Alsi represents only around 2% of the world’s total listed equity market capitalisation. This gives an indication that there are a lot more opportunities if you invest globally.

It does not imply that one should not invest locally: a well balanced and diversified portfolio across different geographical regions can be beneficial to your portfolio.

Active vs passive

Active investing: Involves ongoing buying and selling of different instruments by fund managers or investors. The performance of the underlying holdings is continuously monitored, and decisions are made more regularly.

Passive investing: Reduces the amount of buying and selling which takes place. Passive funds usually track a particular index.

Each choice comes with its own advantages and disadvantages. Passive investments are cost effective and can bring down the fees which one will pay. However, if the index which is being tracked underperforms in the short-term, there is a possibility of capital erosion.

With an active approach you have more control over your investment, as you can consider alternative factors. A well-diversified asset allocation should provide long-term benefits.

A blend between active and passive investing can be beneficial to your investments.

Best- or worst-performing funds

The general consensus will be to invest in a fund which is performing well; however, that might not always be the best option. What goes up must come down and what goes down must go up, is a general rule for investing. One needs to look at consistency in returns, how the fund reacts to different market scenarios, is the fund being actively managed or is it just riding the wave?

Sometimes investing in a fund which has poor returns might be beneficial, as the price would be low and could be a great buying opportunity.

Equities, bonds, cash or property

Each asset class has its own advantages and disadvantages.

Equity: This is a company share, listed on the stock exchange that allows investors ownership of a small piece of the company. The fundamentals of the company will have an impact on the share price which fluctuates daily. There is also the opportunity of dividends being paid.

Bonds: Is a debt investment whereby you loan money to a business or a government, which borrows the funds for a specific period at a fixed interest rate.

Cash: Is a very liquid asset class, which is usually a money market sort of instrument, or money which is invested in a savings account.

Property: Aside from buying a physical property to generate rental income, one could also buy listed property which is like shares. These shares would offer a steady income flow as the company manages several buildings and distributes the rent it receives to shareholders.

A portfolio which is well-diversified in terms of asset allocation can be the most beneficial option. One also needs to take into consideration your requirements. As an example, let’s assume you have a living annuity investment and you’re drawing an income of 10% per annum, and you choose to invest in a cash instrument. Cash instruments are currently delivering returns of between 6% and 7%. This would mean that your investment could be subject to capital erosion.

This is just a brief summary of what one needs to take into consideration when making an investment decision. There is a lot more to consider and that’s one of the benefits of speaking to a financial advisor who has the capabilities of providing you, the investor, with the best possible solutions which can provide for your needs or requirements.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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