Now that you can invest globally through 22seven, we thought we’d share a story that was told to us, which explained nicely why it’s so worthwhile…
A couple of years ago, my brother and I chatted about investing … except we didn’t realise it at the time.
Because I’ve always had a thing for lime juice, my brother and I were discussing how expensive limes had become. Being the problem solver he is, my brother suggested that I buy a lime tree, put it in a pot in a sunny spot on my balcony, and water it every other week. With time, the tree would bear fruit and I would have safeguarded my future supply of limes. My neighbour used to give me a basket of lemons every season until his tree was struck by lightning, and so I asked my brother how sure we could be that the tree would bear fruit. After all, the lime tree might get too much sun, too little water, or be too restricted in a pot. He was sure that as long as I added a fertiliser mix from time to time, I could expect the tree to bear fruit. But, to increase my chance of a supply of limes, I also convinced my brother, sister and parents to each plant a lime tree in their gardens, and committed to share the fruit from our respective trees.
Fast forward 2 years and we each had our own lime trees as planned. Ironically, my tree is yet to bear fruit due to rainfall levels in the area. Nonetheless, I still get to enjoy the fruit from my family’s ‘forest’. I safeguarded my future supply of limes by backing four lime trees growing in different locations and conditions, instead of backing only the one on my doorstep. It’s around this time of the year that I look forward to receiving a basket of delicious limes from my sister.
Thinking through it now, the story might instead have gone something like this:
Because I’ve always had a thing for being financially independent, my brother and I were discussing how expensive things had become. Being the problem solver he is, my brother suggested that I buy an investment like a local unit trust (such as a Top 40 index fund, which means I own a share in the 40 biggest companies on the South African JSE stock exchange). With time, my investment would grow and I would have safeguarded my future ability to buy the things I want.
My neighbour used to gloat to me about his investment until the local economy began to struggle, and so I asked my brother how sure we could be that a local investment would grow consistently. After all, it might be affected by government’s changing policies, or currency fluctuations, or a drought. He was sure that as long as I added to my investment from time to time, I could expect it to grow. But, to increase my chance of growth, I also bought an investment that included some of the leading companies from around the world (such as a world index fund, which means I own a share in leading global companies like Apple in the USA, Nestlé in Switzerland and Toyota in Japan), and committed to add to both my respective investments regularly.
I followed through on my plan to invest in different locations, and even though a drop in commodity prices has meant that my local investment has not grown after two years, I still get to enjoy the growth from my other investments. I safeguarded my future financial independence by backing investments in different locations and conditions, instead of backing only the one on my doorstep.
I’ve realised that global investments behave quite differently to local ones. For example, when a mining company in South Africa is negatively affected by a drop in commodity prices, it doesn’t affect a pharmaceutical company in Germany or a retailer in Spain. Given that more than 99% of the world’s economic activity lies outside of South Africa, global investments have at least as much potential, and probably more, than local investments.
In other words, I’m not dependent on the success of just one lime tree, I’ve planted a forest.