July 4, 2024

Is it too soon to consider an equity portfolio?

By: Wendy Myers, Head of Securities, PSG Wealth

There is no ideal age to start investing. In fact, the greatest asset any investor has is time, which implies that the earlier and younger an investor starts their investment journey, the better.

Warren Buffet has said that “the stock market is designed to transfer money from the active to the patient”. The word ‘patient’ here implies the long term, which is relevant when one considers investing in equities, as this is the single asset class that repeatedly beats inflation but does require a long-term approach.

This article answers some of the questions that young investors frequently ask when commencing their investment journeys, specifically focusing on considering an equity portfolio in your overall financial plan.

How much money will I need?

In short, you don’t need a lot of money to get started with your own equity portfolio. The minimum amount required will, however, depend on your financial situation and your investment goals. Once you have an idea of what you can afford to invest each month, you should try and invest this amount regularly to ensure you achieve your investment goals. Many young investors start their investment journeys by making regular investments into listed exchange traded funds (ETFs). These instruments offer exposure to a range of underlying assets, and are therefore a cost-effective choice for those who want diversification in their investment portfolio. As you start to gain confidence in your investing ability and look to leverage the research provided by your stockbroking platform, you can consider investing in specific shares that will position your portfolio to benefit from specific industries poised for growth.

An alternative option for investors who have limited funds available is to consider investing in derivative instruments that offer increased leverage or exposure to a share. Single stock futures, index futures and contracts for difference (CFDs) are all examples of these instruments, which are designed to offer greater exposure to a share or index than would be the case if the same amount of money were invested directly into that share or index. The difference between futures and CFDs is that while futures are listed, CFDs are ‘over-the-counter’ or unlisted instruments.

This increased leverage does, however, have a downside to it, namely that these instruments can be relatively volatile and investors need to ensure they have sufficient liquidity to fund margin requirements due to negative market moves. For this reason, only investors who are comfortable with volatility should consider these instruments as a means of gaining market exposure. Derivatives can form an effective part of your investment plan as they can be used as part of a strategy to hedge against possible market events that could negatively impact your existing share portfolio. Investors who want to benefit from share price increases without realising a capital gain can look to use CFDs to short the share to protect any possible future downside.

Due to the complexity and volatility of derivative instruments, working closely with your financial adviser will ensure these options are brought into your holistic financial plan.

What are the benefits of making regular contributions over time?

By starting your investment journey early, investing regularly, and making limited to no disinvestments, you position your portfolio to take optimal advantage of investment gains. Not only will a longer time period allow your portfolio to benefit more from share price increases, but if you construct your portfolio to have exposure to high dividend-yielding stocks, your portfolio will benefit significantly from compounded returns – especially if you re-invest your cash dividends into the market or if you elect the ‘share’ option for elective corporate action events that offer either a cash or a share investment option.

Here are three keys to successful investing that relate to time:

·       Start early. “Invest for the long haul. Don’t get too greedy and don’t get too scared” (Shelby MC Davis).

·       Invest regularly.

·       Avoid trying to time the market. “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves” (Peter Lynch).

Which stocks should I consider?

Young investors embarking on their investment journeys need to consider their risk tolerance – specifically what risks they will be comfortable with. Diversification across sectors and geography ensures that portfolio returns are not widely volatile, and this is important when investor risk appetite is considered.

To achieve this diversification, some choose to invest in ETFs, as these instruments offer balanced returns across asset classes. Those who are comfortable to embrace both market volatility and currency volatility may prefer to consider investing in dual listed stocks, which have exposure to both local and global markets. For investors who want to gain exposure to offshore markets, and particularly stocks not available on the JSE, opening an offshore account with your stockbroker is another way to gain diversification across geographical locations. At PSG, we recommend a 60:40 split between local and offshore markets.

Time is an investor’s greatest asset, so it is a good idea to start investing as early as possible and to make regular contributions. It’s also important to consider that each individual’s situation and financial needs are different, and there are many factors to weigh up. A financial adviser can guide you in making suitable financial decisions from an early stage to help you realise your desired investment outcomes.

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