This article first appeared in Personal Finance Magazine, 3rd quarter 2017
Let’s look at the different asset classes available for investment: cash deposits, treasury bonds, shares (equities) and direct property.
With cash deposits you are guaranteed to lose money after tax and inflation have been taken into account. If you look at any long-term analysis of the returns of the different asset classes, you’ll see that cash is by far the worst long-term asset class.
With regard to bonds, it’s quite difficult to trade in government bonds in denominations of less than R1 million, so this asset class is out of reach for most of us.
What about direct property? Listed property shares are included under equities. Physical property as an asset class has at times outperformed equities, but not very often and not for long periods. However, property requires a large capital investment – not everyone can afford a 10% or 20% deposit plus transfer
duties and other costs. It’s also not very liquid, and you might find it difficult to sell if the property market is in a downturn. There are also other factors to consider, such as securing tenants, maintaining the property and ensuring that your tenants pay the rent diligently. Investing in property is therefore definitely not for sissies.
Now let’s look at equities as an asset class (including property shares). Over most terms, and particularly over any 10-year term, equities have outperformed the other asset classes by some margin. One reason for this outperformance is the reinvestment of dividends paid.
In an article in the Financial Times titled “The unique advantage of equity investment”, Terry Smith, the chief executive of Fundsmith, said: “Equities can compound in value in a way that investments in other asset classes, such as bonds and real estate, cannot. The reason for this is quite simple: companies retain a portion of the profits they generate to reinvest in the business. Dividends that are reinvested have to be used to purchase shares at market value, at three times book value currently in the S&P, whereas each $1 of retained earnings is reinvested at book value. It is the reinvestment of retained earnings, not dividends, which provides the majority of the growth in the value of equities.” (For a full explanation, read the blog with the same title on http://isayitradeblog.co.za/)
Now that we’ve seen that equities outperform as an investment, let’s turn to online trading and see if it really is for sissies. One thing is certain: it’s not for lazy sissies. To be a successful investor, you need to do the hard yards, which means educating yourself and reading a lot. There are many websites with free online education. To name a few: JustOneLap provides numerous free educational webinars, Sanlam iTrade offers a free course called Shares Made Simple on its website, and the International Markets Trading Institute provides face-to-face educational courses at a very reasonable cost that includes a six-month mentorship.
Beware of the tips you hear around the braai or at the hairdresser. Many an investor has burnt his or her fingers acting on that “advice”.
It’s very easy for sissies to get good, timeous information these days. Reading Business Report and following the publication on Twitter is a good start. News usually breaks first on Twitter, because reporters tweet from press conferences. Follow journalists and brokers such as @BusRep and @iSayiTrade and see who they follow to get news first. Business Report has just announced that it will be providing readers with access to comprehensive share and unit trust data, at no cost.
If you register as a client with an online broker, you will, in some cases, receive free in-depth equity research and market commentaries. All sensitive company announcements such as financial results must be
released on the JSE’s SENS news service first. As a trading client of an online broker, you will often also receive live JSE SENS news. This means that online trading clients will get the news at exactly the same time as stockbrokers. By the time a stockbroker has placed orders for his or her biggest client or two, thousands of our clients have already entered their orders – so this is a big advantage. Investing without live SENS news is not for sissies.
The best way for sissies to start is to do some virtual trading before committing your hard-earned capital.
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Some brokers, such as Sanlam iTrade, offer potential clients access to a virtual trading platform, and for Personal Finance readers there will be no cost for six months if you email Sanlam iTrade after registering as an iView client. This is the best way to learn how the JSE is affected by profit announcements, resignations of directors, economic data such as GDP and inflation, as well as political developments. Starting to invest without first getting this experience is surely not for sissies. You’ll make many costly mistakes, which could have been learnt in a zero-risk environment.
Now let’s look at costs. Online trading is nearly always cheaper than trading on the telephone with a broker. Costs vary among online brokers, but you’ll pay about R50 plus VAT a month for online information, research and the maintenance of your account. Transaction costs are roughly 0.5%, with some minimums for smaller trades.
There are also statutory JSE fees and taxes, but these are insignificant. If you trade on the telephone with your broker, transaction costs can be higher than 1% of the value of the trade. Trading online is much faster than phoning or even emailing your broker. Also, if you go the online route, you won’t miss out on all the online information, research and SENS announcements. Trading old-style over the phone is not
So, is online trading for sissies? Visit the websites and blog mentioned, play around with the free demo accounts, and see for yourself.
Gerhard Lampen designed and created Sanlam iTrade in 2006 and is still managing the online broker.
- PERSONAL FINANCE ONLINE