Investing your own money is important if you want to build your wealth. Investing enables you to generate future returns which can help you save for retirement or meet long-term goals. Of course, you have the potential to lose your money in investments but if you invest wisely, the potential to gain money is higher than if you don’t invest at all.
What is DIY investing?
Do-it-yourself (DIY) investing is a method in which individual investors, like you and me, choose to build and manage their own portfolios. Individuals will open an investment account in their name as opposed to opening an account with an asset/fund manager who invests money on your behalf.
Over the last few years this has become easier to do. There are a wide range of platforms in South Africa which allow an individual to invest directly in both local and foreign companies. Some will even allow you to invest in previously difficult-to-access products like forex (currencies), commodities (like gold and silver) or derivatives (financial instruments which derive their value from some underlying asset).
A word of warning
DIY investing isn’t for everyone. It isn’t easy and does require time and research but can be highly rewarding. It gives you a sense of control and enables full discretion over where your money is invested.
However, in the complex world of finance and investments, it’s easy to feel lost and more difficult to keep your emotions in check. When choosing to pursue DIY investing, you must remember that you are choosing against putting your money in a unit trust controlled by investment professionals.
They aren’t always correct and do charge fees but what they do have is a large amount of research, resources, experience and an educational background in investment. On average, inexperienced retail (individual) investors have underperformed in contrast to institutional, professionally managed funds when it comes to measuring returns.
Everyone should have the opportunity to participate in the financial markets. You should invest to secure your financial future in the way you see fit – after all, it’s your money. However, to consistently perform better than the professionals is difficult.
If you play tennis once a week you, won’t beat Serena Williams in a 5-set match. Keep in mind that the person you’re buying a share from or selling it to could be a highly skilled professional whose opinion of where the share price is going could be much better justified than yours.
Invest in yourself first
A good start to your investing journey would be to learn the rules of the game. There’s plenty of research online, company reports, podcasts and books written by the investment world’s top money managers. Not understanding what you are doing is your biggest threat.
Once you understand the fundamentals and how the stock market works, you need to focus on building the correct mental state for investing. Volatile times are emotionally testing but can provide opportunities. But the famous saying of “buy low and sell high” is easier said than done. We also suffer from biases like investing in Sasol because it’s been in the news headlines recently just like we think swimming at the beach is riskier after watching Jaws or a shark documentary.
It shouldn’t be thrilling and exciting
If you’re going to try to invest in shares or time investments as an inexperienced investor, it will be exciting and you’ll have some great stories to tell around the dining room table. You might make a huge return over a short term – or lose everything.
For some, the stock market is a substitute for a lotto machine. You probably have better odds than at the casino, but you aren’t going to generate stable and consistent returns over the long term.
Exchange traded funds
An exchange-traded fund (ETF) is a basket of securities (shares, bonds, commodities or a mix of these) that offers diversification benefits and are easy to trade. For most inexperienced individual investors buying a variety of ETFs would be a more rational decision than buying many individual shares.
Less research is required and you don’t need to understand the business model of all of the companies. They are inherently less volatile than single share which protects you from the mental anguish of large drops in value. There is a huge number of ETFs available, some of can be bought in a tax-free savings account (less tax means you receive more of the gains and dividends).
If you have a solid background in investment, have time to research companies, understand their business models and keep your emotions in check when the market is irrational and volatile, then investing directly in shares in your personal capacity can be highly rewarding.
If not, maybe look at starting your investing journey with a unit trust fund or designing your own portfolio using ETFs. While your money grows, you can learn, read, speak to professionals and, hopefully, in the future feel confident about self-directing all of your investments.