Share trading advice for the novice investor

A Fin24 user is exploring other investment options for the first time after disappointing returns on a 32-day notice deposit. He writes:

I'd like your opinion on where to start as a first time investor looking at investing in the stock market? I have a 32-day notice but the interest is so disappointing. I heard about Satrix, how does it work and where can a beginner like me start? Let's say with a once-off investment of R3 000?

Matthew Chapman of NFB Financial Services Group responds:

As always with these queries it would not be prudent to give any definitive advice without full insight into a number of other factors which would form your holistic financial profile.

However as your question is quite direct I will happily assist. My first point is that you make mention of investing in the stock market (equities) while you are comparing returns to a 32-day notice deposit, which can be considered a cash investment.

READ: Investing in Satrix 40 vs bank savings account

The difference between these two asset classes represents a complete shift in terms of risk and expected return. The below graph represents the efficient frontier which represents how various asset classes are classified in terms of risk and return.  


As you will see cash sits in the bottom left-hand corner where both risk and return are expected to be low. The interest rate you would be looking at on a 32-day deposit would be sub 4% which is below long term inflation.

Equities, or stock market exposure, on the other hand sits at the top right-hand corner where increased risk is compensated with higher returns.

In order to realize these added returns in equities one would have to take a five to seven year view to be able to handle the short term volatility associated with investing in the ‘market’.

In terms of your question about investing in Satrix and how to start it would be in your best interest to contact Satrix directly in order to obtain operational information.

Satrix as an investment proposition falls into what we call passive investing. Passive funds aim to track an underlying index by purchasing the securities that constitute the index in the same weightings. Active managers on the other hand aim to outperform the market by under or over weighting certain counters in order to produce alpha or the value add of active management.

Active managers will charge a premium over a passive management fee for the skill and research involved in these decisions.

The debate around the two management styles is outside of the scope of this discussion but what you should be considering is whether equity investments are in line with your risk profile and financial circumstances.

As this cannot be construed as formal financial advice, it would be in your interests to contact a certified independent financial adviser, who will be able to conduct a full analysis on your financial position and goals and provide professional guidance with regards to your entire financial plan and risk profile.

ALSO READ: Looking for better returns elsewhere

*Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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