Investing in the stock market - not just for pros

There are three common myths about investing in the stock market: You need a lot of money to do it, it’s a quick way to make a lot of money and you need significant technical knowledge.

These are all wrong. You don’t need a lot of money to get into the stock market, it’s not a route to overnight millions and, while there are technical aspects to investing in stocks, it’s possible to outsource enough of that to make investing in the stock market achievable for the layman.

You’ll find jargon, but with the help of Google, it does not need to pose a problem. But before we think about investing, there are three questions each of us should ask ourselves:

Why should I invest?

Investments are a form of saving. Most of us are motivated to save because we have a specific goal. If that goal is close by – for instance, paying for an upgraded end-of-year holiday – we’ll save up for it; but if we’re looking to a further horizon, investments become the order of the day.

For some, that further horizon might be the education of our children, or the long-term target of knowing we’ll be able to sustain our standards of living post-retirement. For others, the goal might be something tangible – a luxury car, for instance.

What is your reason for saving? Give yourself some time to contemplate this; and when you have your answer, the next question to ask is this:

How am I going to achieve that target?

Let’s say your goal is a car that currently costs R500?000; and you’ve given yourself 10 years to get into that driving seat. By process of elimination, you’ll be able to work out the best route to achieving that goal.

For instance, let’s say you are able to save R5 000 a month. If you put your money into a bank, these would be the sums:

R5 000 x 120 months = R600 000 + 6% to 7% interest compounded, minus costs

Looks good, right?

Yes, but where do you think the R500 000 price tag is going to be pitched 10 years from now? It’s fairly certain that a savings mechanism that offers finite growth, and where costs erode that growth over the period of the investment, is going to leave you perpetually on the back foot.

Our thinking, therefore, needs to focus on two things: potential growth, and costs. So the next question to ask is:

What are the costs as a percentage of the investment?

Let’s say your monthly costs on your R5 000 investment total an average R100, or 2%. The first 2% your investment grows is swallowed by costs; and you therefore have to make more than R100 a month to see any growth.

To make your money work, you need to see as wide a gap as possible between costs and the time the investment stays in the market – and that means looking for low costs, and being patient.

It’s for this reason that investing in stocks looks attractive; but there’s a golden rule to observe before you go there: understand the stock market. Most of us don’t. Most of us have no idea, for instance, what the underlying investments are for our retirement funds.

Getting to understand the stock market takes a little effort. But there are plenty of tools aimed at helping the layman understand the basics, and develop confidence.

The most important thing is to forget the Wolf of Wall Street hype. Don’t come thinking you’re going to make a quick million. Establish a foundation with a long-term portfolio.

Exchange-traded funds (ETFs), for example, are a cost-effective, highly accessible way of getting into the blue-chip market. A number of ETFs for example track the FTSE/JSE Top40 index, giving investors broad market access to top-performing shares.

And reinvest your earnings. In the fund above, dividends are automatically reinvested each quarter to provide a total return. There's an encouraging example from the JSE to make an argument for thinking long term and reinvesting: if you'd bought R100 000 worth of Naspers* shares in 1996, they'd be worth R26m today.

Ridwaan Moolla is head of digital education at Absa Stockbrokers.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 25 August edition of finweek. Buy and download the magazine here.

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