When starting off your investment journey, the sooner you do it, the better.
This is one of the greatest gifts you can give your future self.
As Albert Einstein said:
“Compound interest is the eighth wonder of the world, he who understands it, earns it; he who doesn’t, pays it.”
1. Is it ever advisable to take out a loan and using those funds to invest?
Yes, in certain market circumstances this can be a very good opportunity. When interest rates are at a low (as currently) and market returns are very promising (as we are also currently experiencing), technically at an all-time high locally and globally, you can make exceptional returns.
The correct asset allocation and strategy here is however crucial, and I would advise working with an experienced wealth advisor to manage this process. If you are not invested where the opportunities are, and therefore benefitting from the higher returns, there isn’t a benefit for you here – or you might even end up making a loss. The situation can also turn around again once interest rates increase again, and of course, should market cycles change.
But if you had to ask me at the time of this article – yes, definitely!
2. What taxes can you expect to pay for directly holding shares?
There are a few tax implications that you need to be aware of when you start off your investment journey. The specific tax implication may differ depending on if the shares are held in your personal capacity as a natural person, or if the portfolio is held in a trust or company. The following tax laws are relevant:
For an individual:
- Income tax;
- Capital gains tax (CGT) in the investor’s hands at the marginal rate (after CGT and interest exemptions); the maximum individual CGT rate is 18%;
- Dividend withholding tax withheld at 20% (some foreign dividend exemptions apply).
For a company or trust:
- CGT is taxed in the hands of the investor (vehicle);
- A trust – 45% income and 36% CGT;
- A company – 28% (April 2022 it will be 27%) income tax, and 22.4% CGT;
- Dividends withholding tax is 20% (some foreign dividend exemptions apply).
3. Taxes you can expect to pay with other investment vehicles?
Once again it will need to be defined are you investing as a natural person, or as a company or a trust. Herewith a summary that might be helpful:
4. When should you consider trading shares on your own?
As with most things in life, I believe in working with a professional in this terrain. I’m not going to try to operate myself should I need surgery, or try to repair the electric work in my house if there is a short circuit – I will ensure I get the specialist needed for the relevant job required. I feel the same about an investment portfolio – for a few reasons:
- Portfolio managers are managing this 24/7 – this is their main focus – not juggling it between life and another full-time job.
- Your personal emotion is taken out of the decision making – which protects investors during market cycles, on the days when it is really difficult to just be patient and do nothing.
- Research and analyst teams that are doing the work on the relevant portfolio every second of every day – ensuring you are investing in the right place, at the right time – suitable to your needs.
If you prefer to manage this yourself, or to just “play” with a certain component of your portfolio – I do advise reading A LOT – you need to understand everything about the share/company you are looking to buy – together with the timing of the markets. Understanding the price, the company’s intrinsic value, the political/economic space the company is operating in, any possible risks associated with the company – internally and externally – and the list goes on. If you don’t understand exactly what you are buying and why – you are essentially just gambling.
5. Which trading platforms are legit?
Depending on whether you are working with an advisor or not, it will depend which platform you work with. Many investment platforms offer direct share trading platforms – for example, FNB Securities, and PSG Online. Easy Equities is also a platform I find quite user friendly for someone wanting to start off their portfolio and buy a few shares.
Working with a stockbroker/wealth manager – I will advise working with a large, reputable firm. The days have gone where you manage your portfolio with the advisor next door or a family friend – it’s just not worth risking your future. So I would advise first finding the correct portfolio manager – and this manager will advise the correct portfolio – locally and offshore. PSG Wealth, Investec, FNB etc.
6. Risks you should be aware of when investing?
Risk – understanding risk is probably the most fascinating topic when it comes to investing – and also the most important one. To master risk, you need to master your own emotions.
Every asset class holds its own type of risk – risk is defined and measured in terms of volatility. Just owning cash I believe is one of the largest risks an investor can take as you are not even outperforming inflation – and therefore technically losing money every day. Having any exposure to the market – you will be exposed to market fluctuations – and that’s important to understand.
Ensuring you understand the term (time) you have to work with, all possible tax implications, what happens at death, but mostly volatility – understanding market volatility will happen – and making the correct decisions (or none at all) when they do happen – is what will ensure success or failure in the world of investing.