Investing has always been something that many people assume will happen when they come of age. The older they get, the more money they’ll make and then maybe they’ll think about investing, because it seems like such an adult thing to do.
Being in your early 20s and starting out in the working world doesn’t mean that you should just pay your bills and party the rest of your salary away. At this stage in your life, you have to start thinking about making your funds grow – getting your money to work for you.
So, let’s talk about investing.
What is investing?
We invest money in businesses or in banks to get more money in return over a period of time. Head of advice at Old Mutual, Lizl Budhram, says: “Investing is where you have capital, or a fairly large sum of money, and you invest that with the objective to achieve a return that’s more than inflation.”
The process requires time, understanding, but – more importantly – savings.
Budhram says that if you, as a 20-something, have already started saving your money, you’re on the right path. The next step is to keep saving, budget your savings and then to make sure you manage and adjust (if necessary) your investments to meet your changing goals and needs.
“Make sure that you continue making the contributions – you’ve made a commitment that you are going to put away this amount of money, every week, every month, every year – make sure you stick to that and make sure you avoid temptation to stop saving or to use what you have saved for unplanned or unnecessary expenses.
“Do not liquidate that investment by spending it at one of your favourite shops,” she adds.
In addition to this, Petri Redelinghuys, a trader and the owner of Herenya Capital Advisors, says investing begins with understanding your money and knowing what the best way is to grow your money in the long term.
Where do I begin?
There are some key considerations to make before you start investing.
Begin by educating yourself about all the different options that are available. There are a variety of sources and tools that can assist you in making the right decision when entering the world of investing. There are simple options like unit trusts and then there’s the more complex company, property and asset investing.
Redelinghuys says: “Before you start just blindly investing into things, you need to start self-educating around investment.”
Budhram concurs that it’s important to look at options that suit your personal needs and your budget – invest in what you can afford.
According to Budhram, the beginner investor should start with an option that has more structure and is safer. Her suggestions for new investors to consider include:
- A unit trust;
- A savings policy;
- A retirement annuity;
- A tax-free savings account;
- Exchange traded funds (ETFs).
These options allow you to enter the investment markets in a secure and structured way. The investor can choose one of these vehicles based on what is important to them.
Budhram explains that the simplest way to start investing is to work through a unit trust company, an insurance company, or a bank and understand your provider’s investment products.
“What makes it safer is that you have a whole host of assets or shares, so if one asset class or share performs badly, there are others to pick up your portfolio, therefore every year, you are more likely achieve reasonable growth,” she explains.
Redelinghuys says that many people are blindly opting for structured products or ETFs because it’s easier and low-risk, however, he believes that individual companies perform better.
Buying company shares is also an investment option, he adds. How to go about it:
- Look for individual companies to invest in;
- Look at the company’s financials and understand its business;
- Think about whether the company would suit your personal interests based on its business;
- Consider whether the company will be around for the next 20 years;
- Ask a financial advisor for help.
When you are investing in individual stocks, Redelinghuys suggests buying 10 to 20 stocks so you can diversify your investment portfolio.
“You pick 10 or 20 stocks, and slowly over the next ten years, every time you’ve got a bit of spare money, you buy some shares,” he says.
Investing in individual stocks and shares can be high-risk, and business performance is unpredictable. However, Redelinghuys says that it’s better to take the risk while you’re in your 20s when you have nothing major to lose and you have time to recover, but don’t keep all your eggs in one basket, diversify your portfolio and “spread your risks”.
He therefore encourages people to study different companies and understand how a business works to decide whether or not they will invest in it.
How much should I invest?
There is no single, straightforward answer to this. You invest how much you can afford to and that’s it.
Budhram says how much you decide to invest depends entirely on how much you can afford to or how much your budget allows you to, but the key is to make sure you start investing sooner rather than later.
You need the money to build up overtime, so even if you start very small, start early.
The value of your savings and investments doesn’t only depend on how much you invested but rather how long you’ve been investing for, she explains: “The sooner you start saving towards that goal, the easier it is to get there.”
Redelinghuys concurs that saving and investing should be your priority. He says that if you find yourself with some leftover cash at the end of the month, stash it in an investment or use it to buy some shares, and hang on to those shares.
The money you are investing is working for you, not the other way around. So now you can just sit back and relax.
What do I get in return?
Here are two things you need to know for now: there are income investments and capital investments.
Both start off with you investing some capital in an investment vehicle, and both should give you inflation-beating returns after some time.
Capital investment is the money you put into structured investment vehicles like the unit trusts, tax-free savings accounts, retirement annuities or ETFs; or alternatively directly into your own share portfolio.
By putting money into these vehicles on a weekly, monthly or yearly basis – either in a pension fund, in property or in unit trusts – you build up capital over time. The more time you have, the more capital you build up, says Budhram.
Your money grows depending on the investment returns (which are made up of interest, dividends and capital appreciation of the underlying investments). These funds should only be used for absolute emergencies or for retirement, warns Redelinghuys.
Unless you have been saving for a purpose, like to go on a holiday or buy a car, this money should be guarded and kept in a place that is hard to access. Your future self will be thankful.
These are investments for growth.
On the other hand, you can also invest for income. When you have just entered the job market, you earn an active salary, because you working for it, but through income investments, you earn a passive income, says Budhram. A good example of this is when people retire – they stop working actively and no longer earn a salary, so the capital they have built up then needs to be invested to generate an income for them that will replace their salaries.
The stocks you bought and the money you invested in a business start working for you and can cover your bills, for the rest of your life.
Redelinghuys explains that when you buy shares, over the long-term, they return on average in excess of 10% to 11% a year over the long run – 30 to 50 years.
“Shares pay a dividend, so there’s cash flow that come from shares – it is very little in the beginning, but eventually you realise that the annual account fee is paid with one share’s dividend,” says Redelinghuys.
When you do your background check into a company, look at its dividend return. This will give you an indication as to how many shares to buy.
The trick? “Buy enough shares to earn a certain amount in dividends for the year.”
So pour money into shares until the dividends that you are earning are enough to cover your basic expenses, says Redelinghuys. In doing so, you will accumulate the cash flows to cover all your monthly expenses, for an entire year – passively.
Watch out for hidden fees
Redelinghuys says ETFs have fees that have been charged internally so you won’t notice them.
- Do fee comparisons between different product providers and different service providers;
- Pick the one with the best service at the best price (not necessarily the cheapest);
- Understand the fees – how they are structured and where they come from.
Give yourself time
Relax, this is just the beginning of the investment journey, it’s quite normal to feel overwhelmed by the choices and make mistakes along the way. At this point you should consult with a financial broker or advisor first and then make an informed decision.
And remember: “Once you’ve started, stay invested,” emphasises Budhram.