Q: I am interested in investing in the stock market, but don’t know where to start.
Do I need a lot of money?
A: In Hollywood, corporate executives take calls from frazzled brokers, bark an order into a cellphone and, within seconds, have earned themselves another gazillion dollars to add to their already obscene wealth.
In reality, small steps are best employed when entering the stock market — unit trusts being the most popular vehicle for us ordinary folk.
When you start out and have just a small lump sum or a monthly amount to spend, it is extremely difficult to choose which share to invest in without putting “all your eggs in one basket”.
The sensible decision is to buy shares in a variety of industries and unit trusts provide the means. With a unit trust, the money from a group of people is pooled to form a unit trust fund. The unit trust fund manager can then choose from a wide range of investment options on the stock exchange. Such investments provide an investor with professional portfolio management at a low cost, and a well-diversified portfolio to limit risk.
If you’re looking to invest in the short-term or for a quick return on your investment, unit trusts are not for you.
Because they’re investing in shares on the stock market, unit trusts are affected by market trends and changes related to the demand for a product or service. For example, gas could be more in demand in winter, or at Christmas when spending on gifts is high, Mr Price or Woolworths shares may increase more than others. Shares fluctuate up and down due to demand, but this does not necessarily mean high risk as shares will generally increase over the long term.
A common concern: when is the right time to invest? To reduce risk, it is advisable to invest a smaller portion each month into unit trusts as opposed to a lump sum purchase.
Once you’ve decided to invest in unit trusts, how do you know which one to choose?
You could invest directly with a particular management company such as Investec or Allan Gray, but the minimum contribution is usually R500 per unit trust per month. However, Investec, for example, has a linked product where the minimum of R1000 per month buys you into five or eight unit trusts (thereby bypassing the general minimum of R500 per month per individual unit trust fund). Hypothetically, you could spend R1000 per month in Allan Gray Equity, Nedbank Rainmaker, Coronation Capital Plus, and Old Mutual.
If this is too expensive, Metropolitan Odyssey offers products for both savings and retirement, using unit trusts. Their minimum contribution is R350. If you choose a savings plan via Metropolitan Odyssey, you must ensure that you only select a five-year term, as you can always renew and extend if you need it. This product allows access to five different unit trusts; and switching funds is also inexpensive.
It is always essential to employ the services of a reputable financial advisor who will provide all the information relating to the unit trust, including costs, fees and risk factors (some unit trusts are more risky than others). A good advisor will also continue to advise you and build a long-term relationship with you.
Comments