Investments
Investments are a long-term strategy for building wealth. Learn how investing in South Africa and internationally can help unlock the door to financial success.
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Investments play a crucial role in building wealth and creating a secure financial future.
Understanding the landscape in South Africa is crucial whether you're a seasoned investor or just starting.
This article will guide you through the essential aspects of investments. We will cover the types of investments available, strategies for success and the key considerations for investing in South Africa.
How do investments work?
When you invest, you put money into assets with the aim of generating a return over time.
The basic goal is to buy an asset at a lower price, hold it, and sell it later at a higher price or earn income. Assets can include stocks, bonds, real estate or funds. Income is usually in the form of interest, dividends or rental income if you decide to invest in property.
Return on investment (ROI) is the metric used to measure the success of an investment expressed as a percentage. ROI is calculated as follows:
(Current value - cost of investment/cost of investment = ROI%)
When you invest, your money is not locked away. Unlike certain savings accounts, you can access the funds if needed. Still, investments are a long-term strategy for building wealth. But how long should you hold onto them?
According to data from eToro, people are now more keen to sell than ever before. In the 1970s, the average holding period for US equity was five years. Today, it is just 10 months.
Regardless, industry experts still typically suggest at least five years for investors to see the best growth. However, it all depends on the type of investment.
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The different types of investments explained
One of the first steps in investing in South Africa is understanding the different types of investments available. Each offers varying levels of risk and return potential. This allows investors to build a portfolio that matches their financial goals.
Some of the common types of investments include:
Equities
Equities are stocks and shares in a company that you buy and sell on a stock market. This could be the Johannesburg Stock Exchange (JSE) or one of the many international exchanges around the world. When you purchase equities, you are buying a portion of that company.
Equities generally offer higher returns over the long term but can be volatile in the short term. For those willing to take on more risk, equities provide a strong opportunity for capital growth.
Funds
Funds are a read-made basket of investments that pools funds from multiple investors. This allows them to invest in a wide variety of assets at once and spread the risk.
With a fund, the money is pooled from multiple investors, allowing you to invest in a wide variety of assets at once and spread the risk.
The two most popular types of funds are mutual funds and exchange-traded funds (ETFs)
Retirement funds
South Africans also have access to various retirement funds, including pension and provident funds.
Pensions are long-term investment vehicles essential for building a secure financial future when you stop working. They also benefit from tax advantages, making them a smart choice for many investors.
Real estate
Investing in property is another popular choice in South Africa. Real estate can provide income through rental yields and capital appreciation over time.
However, property investments require careful consideration. Some of the points that you must consider are:
- Location
- Current market trends
- Costs (taxes, maintenance, etc.)
Another option is a real estate investment trust (REIT). A REIT is a company that owns real estate and sells shares to investors. Like stocks, REITs are publicly traded and offer greater liquidity than a traditional property investment.
Fixed income investments
These are commonly known as bonds and might be a good option if you're looking for more stability.
Bonds typically fall into one of two categories; corporate and government bonds. They are essentially loans to a business or a government, which they promise to repay with interest. You may also hear the term 'gilts'. Gilts is the name given to UK government bonds.
These investments typically offer lower risk and steady returns, making them suitable for conservative investors or those nearing retirement.
Key investment strategies in South Africa
Now we have covered the investment options, the next step is to consider strategies to help you achieve your financial goals.
Consider risk tolerance
You should be aware that there is no such thing as a risk-free investment.
Before you even start investing, you need to make sure your strategy aligns with your risk tolerance. In other words, the amount of risk you are willing to take.
Investors with a higher risk tolerance may favour equities and growth-oriented assets. On the other hand, those with lower risk tolerance may prefer bonds or fixed-income investments.
If you are unsure, speak to a financial adviser. They will help you understand the options that align with the level of risk you are comfortable taking and your goals.
Building a diverse portfolio
Building a diverse portfolio across different asset classes is one of the most effective ways to reduce risk. Data shows that it can also help improve performance.
In fact, diverse portfolios have outperformed their concentrated counterparts more than half the time annually since 1926.
The way it works is simple. By spreading your investments across equities, bonds, real estate, and other assets, you can protect yourself from losses if one market sector underperforms.
Value vs growth
Two common approaches to investing are value and growth investing.
Value investors seek out undervalued companies with solid fundamentals. Meanwhile, growth investors focus on companies expected to grow at an above-average rate. Both strategies have pros and cons, depending on market conditions and personal preferences.
Income vs capital growth
When selecting investments, consider your primary goal. Is it to generate regular income or to achieve capital growth?
Income-generating assets like bonds and dividend-paying stocks can provide a steady cash flow. Meanwhile, equities and property investments may offer greater potential for capital appreciation over time.
Local vs. global investments
When it comes to investing, home bias is a reality. One study found that people often over-invest in domestic stocks. While it can be tempting to focus on local investments, adding global assets to your portfolio can provide several benefits.
For example, it can aid in reducing risk. Owning local and international investments can help balance out volatility. It also opens the door to more options.
Adding unit trusts and funds to your investment portfolio is one way to increase exposure in foreign markets. The other is through offshore investing.
What are offshore investments?
One key consideration when investing in South Africa is how to diversify your portfolio.
Investing offshore offers exposure to more stable currencies and access to global markets. This helps reduce the risk associated with investing in one market or currency.
However, offshore investments come with their own set of rules. South Africa's residence-based tax system means citizens are taxed on worldwide income. Understanding tax rules, such as double taxation agreements (DTAs), is crucial.
South African taxpayers can invest up to R10 million per calendar year in locations outside the Common Monetary Area (CMA). To do so, they must be over the age of 18 and be in good standing.
Speak to one of our financial advisers to learn more about offshore investing. They will provide personalised advice based on your situation.
Why choose Holborn Assets?
By understanding the types of investments and having the right strategy, you can set yourself up for long-term financial success. If you are unsure where to start, speak to an expert.
Since 1998, Holborn Assets has been committed to providing transparent, client-focused financial advice.
Our services help you navigate the complexities of investing across borders, managing currency risks and understanding different tax regimes.
We are a global financial advisory firm. That means we have the local knowledge and international expertise to help you reach your goals.
Start your investment journey today. Book a free, no-obligation meeting to learn how we can help you.
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Frequently Asked Questions
Risk tolerance refers to how much risk you're willing to take on in your investments. It's determined by factors such as your financial goals, time horizon and emotional comfort with market volatility.
