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FREE COPY OF THE INVESTMENT PROPERTY TOOLKIT TO EARLY RETIREMENT (YOUR EMAIL ADDRESS IS STRICTLY CONFIDENTIAL. I HATE ADS AS MUCH AS THE NEXT PERSON.)

 

INTRODUCTION TO SHARES AND EXCHANGE TRADED FUNDS ("ETF'S")

 

These are also called paper assets. You do not own/control the business that you bought into. It is intangible. You are effectively sharing the rights to the company dividends and equity growth. Dividends are passive income. More passive than property. You can buy shares using your own money or use debt (leverage offered by CFD's - Cash For Differences). A CFD allows you to trade on the margin, eg. 5% deposit lets you trade on the full 100% value of a share. This is how day trading is possible. I will not coach you on day trading (Pips, longs, shorts and candlesticks) or even refer you to the courses and ebooks on this. I lost way too much money on day trading. Save yourself the heart ache. Long term share investing can be good if done right. A share can be bought individually or as a basket of shares (unit trusts, ETF's, etc.). I love ETF's and will discuss this later. A traditional portfolio of investments which a broker will sell to you would include a mix of:

 

-          Local and foreign shares/Unit trusts/ETF’s/REITS

-          Listed property

-          Bonds

-          Commodities

-          Cash

 

Endowment policies (swear word) are instruments sold by insurance companies are the main reason so many retirees are in the hole today. Basically, the fat cat insurance broker lives off a higher return than the actual investee. I know people who "invested" R50,000 and withdrew R35,000 from their policies after 10 years. Buy endowment policies from an insurance broker at your own peril. Best you watch "Wolf of Wall Street". You must become a complex investor. Endowment policies are for simple people (sheep to the slaughter) who do not want to learn how to invest. 

 

 

SHARES

 

A share is an instrument to represent ownership in a company that issued the shares. Shares are sometimes called Stocks. It is not like you will receive a stack of certificates as proof that you are a shareholder. Those were the old days. Now, you must trust that the online transaction worked out and registered you as a holder of the shares. Anyone can buy shares and there are many ways to buy and monitor the shares. I used to use FNB’s Share Investor feature via FNB online banking. The monthly cost was R45. Standard Bank also offers a similar trading platform. I stopped investing directly on the JSE and I now use the ETF route (explained below). For daily share trading I used IG Markets. Like I explained above. Save yourself heartache and stay away from trading. 

  

Here are some tips for investing in shares:

-           Be a dividend investor. It is all about the income if you want an early retirement. Capital growth will follow a consistent dividend paying share in any case. This means that you should buy the most consistent dividend paying shares (not necessarily the highest paying dividend share – there are some that pay high in one year and then none in the next year) and you should opt for a re-investment scheme. Never take your dividend in cash. By retirement age you will not only have a huge stake in a high paying dividend share but you will have a lot more than you would have had, had you taken the dividend in cash. When buying high dividend paying shares, hold out for the long term. You can assess which shares pay consistent dividends by visiting sites like www.moneyweb.co.za and www.sharenet.co.za

 

-          Be aware of the timing of the dividend. It is important. Dividends twice a year is better than once a year because these shares generally have 2 points in the year when the share price will be on the up (demand for the dividend runs the price up). This allows you at least 2 points in the year when you can get out at usually higher prices.

 

-          Be aware of the dividend payout ratio and P/E ratio. If you need the income, you rather invest in a share that does not promise extra-ordinary growth but has paid consistent high dividends. You find these in listed property shares. No fireworks but quite high dividend payouts (by high I mean 5%).

 

-          Buy larger values of shares instead of going for lower levels of capital outlay at a time. Why? Because of the costs involved. Expect to pay minimum R120 for a share purchase. If you spend R3 000, your cost is 6%. The share must grow by 6% before you see any capital gain. If you spend R10 000, your cost is 1.2%. The share just needs to grow in value by 1.2% to be in the green. The biggest eater of wealth when investing in shares and funds is the commissions paid to brokers. I suggest you read "The Little Book of Common Sense Investing" by John C. Bogle.

 

-          When starting out you will be tempted to buy shares that are priced at 50 cent and R1. They have a name for these shares – Penny Shares. Most people start with these shares. Avoid these shares until you have some experience. Start with the top 40 shares and work your way into the riskier shares once you get the hang of it.

 

-          Fear and greed drives the stock market. I always bought when the share was on the down. I always sold when the share was on the up. Never spend money that you need on share investing. You will not sleep at night.

 

 

-          Unless you are buying a share to keep for life (due to its exceptional dividend payout) you should have target prices set for sell strategy.

 

-          Never invest in a share because of hype or because of a great article you read. Most of the time it is the large shareholders driving a demand for the share that he is trying to offload. So he gets some fancy analysts to make great punts on the share on CNBC. Even some popular financial websites run articles to assist them in driving share prices up. 2 Months after the hype these once sensational shares show themselves for what they truly are.

 

-          A bull market is when shares are doing well and prices are soaring. There is a lot of optimism.

 

-          A bear market is when shares are doing not-so-well and prices are dropping. There is pessimism in the market.

 

-          On channel 410 (DSTV) you can catch many programs where companies and industries are discussed. CEO’s are interviewed. Critics are interviewed. But at the end of the day, investing in shares should be as simple as: Buy the share that has proven itself over time and it’s product is being used by the everyone every day.

       

 

What is the JSE?

The simplified answer - The Johannesburg Stock Exchange (“JSE”) is basically a store where buyers meet sellers. To assist buyers in meeting sellers, brokers are appointed to facilitate the transactions. They charge a fee for each transaction.

What exactly is being sold?

The product being sold is an equity stake (shares) in a company. Buyers buy because they hope that their product will increase in value enabling them to sell at a profit in future. They also hope to earn regular dividends.

What is a dividend?

The profit (per financial statements) that a company makes at the end of the year may or may not get distributed to the shareholders depending on the decision made by the company directors. Usually it is just a portion of the profit that gets distributed (the dividend). You will receive dividends according to your shareholding. Eg. Company A has R1000 profit at the end of the financial year. The company dividend policy is 20% distribution. This results in R200 being declared as a dividend. If there are 20 shares issued and you own 5 shares, you will receive R 50 (R200/20*5). This is cash in the bank for you.

What drives the share price?

There are too many answers to this question. Here are the significant drivers:

  1. Company performance over the past year (increased net profit) – results in increased share prices because of the expected increase in dividend.
  2. Expected increase in future profits (ie. New product launched that are performing well, new customer contracts, new branches opened, etc. etc.)
  3. Market sentiment (what people think will happen next).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXCHANGE TRADED FUNDS (“ETF’s”)

 

ETF’s are basically baskets of shares sold as 1 unit to allow for diversification. For example: If I take 1 share each from company A,B and C, this gives me 3 shares. I will call these 3 shares 1 unit of SATRIX ABC. People looking for diversity will rather come to me and buy 1 unit of SATRIX ABC instead of just buying shares in A, B and C individually. Not only is the units broken down to be cost effective to buy a unit but it allows for diversification.

 

This is a relatively new investment platform in South Africa. ETF’s have received a lot of hype over the past 3 years because of equal/better performance than actively managed funds like Unit Trusts. Most ETF’s run on an allocation model. For example, SATRIX 40 is a basket of the top 40 shares on the JSE. This basket will always have shares in which ever companies make up the top 40. Proptrax 10 is a basket of the top 10 Listed Property shares. Please visit www.etfsa.co.za for more details on what type of ETF’s are available. ETF SA has detailed fact sheets for each ETF so you can review historical performance and dividend payouts. There are ETF’s for Gold, Mining Industry, High paying dividend companies, Preference shares etc.

 

It is easy to sign a few FICA forms and open up an account and you will have “online banking” like it was any other bank. You can opt for debit orders each month so that your saving is automated or you can opt for lump sum deposits as and when you get money. The benefit with debit orders is “dollar/cost” averaging. This means that you are buying less shares when prices are up and more shares when prices are down (Simple logic – You opt for R500 debit order. If the share is R100 each in month 1 you will buy 5 shares. If the price is R200 each in month 2 you will buy 2 shares). ETF SA has very cheap transactional costs and annual costs as compared to having a broker or even using one of the banks investor platforms.

 

Financial advisors/brokers are not promoting ETF products (Even though they know very well about it) because there is nothing in it for them. Next time you have a financial advisor trying to sell you a unit trust or actively managed fund (eg. Allan Gray Balanced Fund), ask them why. Tell them that ETF’s are cheaper and performing better. They will look at you with new-found respect! They earn commission on Unit Trust sales, but not on ETFs. The only real difference between a Unit Trust and an ETF is that a Unit Trust is actively management by financial analysts. They make decisions on what to buy for that particular basket. An ETF is on auto-pilot as the allocation is driven by the ETF mandate as explained above. This results in huge cost savings. ETF’s have outperformed most actively managed funds for a long time now, all the more evidence we need that brokers are just predators for the clueless investors.

 

There is no rocket science to ETF investing. Get the application form and become an investor. Link: http://www.etfsa.co.za/login.htm. My advice is click on the dividend re-invest scheme when buying the ETF. This allows for dividends received to be used to buy more shares instead of being paid to your bank account. This allows for compound growth.

 

 

INVESTMENT PROPERTY remains the most fail-safe method to earning a significant passive income and ensuring an early retirement!

 

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