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A beginner's guide to investing

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Investment – the word conjures up grey-shaded images of everything you never wanted to be: strait-laced and sensible. But the truth is that investment doesn’t have to be boring – in fact it is the only route available to financial independence for those of us who aren’t “trust fund kids” or recent lottery winners.

 

This guide, as well as a series of other articles, will give you an introduction to the stock market. When you’re ready to take charge of your financial future and start investing for yourself, we’ll give you the education and tools you need to make investment decisions that could change your life.

 

Why invest?

 

To attain that elusive financial nirvana means harnessing the financial equivalent of nuclear fission – compound interest – to produce wealth. “The miracle of compound interest” means, simply, that your money works for you, rather than you working for our money. It occurs because you earn interest on interest on interest over a number of years.

 

For example, if you had invested R5 000 in a fixed deposit after 20 years it would be worth just over R40 000 today. That same R5 000 invested in the stock market earning an average of 18.3% p.a. would now be worth over R140 000. This is one of the reasons why you should consider investing in the stock market. As the graph below shows, shares have shown the highest returns in the long-term, outstripping other assets such as bank deposits and even property.

 

With a little time and knowledge, anyone can invest in shares today and reap the benefit of future financial security.

 

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Setting financial and investment goals

If you’re ready and willing to invest your hard-earned cash today for a better future tomorrow, you will need a blueprint for doing so.

The first step is to set the financial goals that your investment will meet: whether it’s saving for that once-in-a-lifetime holiday or working towards a financially secure retirement. Your next step is to make sure that you have the cash available for investment – and how to free it up if you don’t.

Write up a personal balance sheet that calculates your net worth: your assets less your  liabilities. This will show you if there is spare cash available that can be directed to other, higher-yielding investments. For example, you could take money out of a low-yielding savings account and put it into a money market account, if you need the cash, or into shares. It is not wise to invest with borrowed money – so pay off all your short-term debt before you start investing.

Lastly, look at your monthly cash flow and see if there is an excess that can be invested each month. If not, see if you can cut your expenses or increase your income.

 

The golden rules of share investing

 

The secret to successful investing is discipline, not luck. There are some basic trading rules that everyone – from novice to guru – can use to minimise losses and maximise investment gains. There are five possible outcomes from buying shares: a big

profit, a big loss, a small profit, a small loss and breakeven. Successful investing means avoiding those big losses.

 

Here are some pointers to help you do that:

  • Never borrow money to invest, nor should you put money into the market that you can’t afford to lose.
  • Always use stop-losses for capital maintenance and never be afraid to take a loss. However, as much as it goes against the grain, never cut your winning shares before your losing shares.
  • Investors should always feel comfortable with their investments. If you don’t – sell. Do all your own homework
  • before you commit your money to an investment and only take advice from investment professionals.
  • Set realistic expectations. Although there will be years in which the market booms, these are exceptions rather than the norm. Over time, investing in shares will provide real returns that outstrip the inflation rate.
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