Navigating the investment landscape as a beginner

There are three types of investors: the uninformed, the beginner and the sophisticated. Examples are my grandmother, myself and my employer respectively.

Uninformed investors do not know the difference between saving and investing. As a result, they think they are investing – putting away money with the intention of growing their wealth in the longer term – when they are actually saving, or putting away money with the intention of spending it in the short or medium term. 

In the South African landscape, the majority of the population consists of low-income earners who happen to be uninformed investors, or savers. It is reported that there are currently 820 000 stokvels in South Africa with a combined membership of 11.2m.

This segment of the population is comfortable with saving money through a stokvel, not because they are oblivious to savings or investment products, but because they are comfortable with pooling money in a stokvel. 

My 77-year-old grandmother, Lucky, has been part of stokvels for over 35 years. She is a member of three stokvels that serve different purposes – groceries (used to go shopping in December), burial (to use when there is a death in the family), and chicken braai pack (used to buy chicken pieces for a family funeral, which are often attended by a large number of people who must be fed).

My grandmother also borrows from Sis’ Joyce’s stokvel, even if it charges higher rates than a bank loan, as the money is readily available. All she has to do is call Sis’ Joyce and her money is sent to her within a day.

I am a beginner investor. Unlike my grandmother, I know the power of compound interest, hence I have a savings account that I don’t withdraw from every December. I understand risk diversification, hence I invest in a balanced-fund unit trust.

Unlike my grandmother, I have only one funeral policy. Although I do not know how the total expense ratio (TER) is calculated or how to pick the best-performing equity fund, I certainly know the importance of having a financial planner to help me.

I also know the importance of starting to save as early as possible. I prefer low-cost investments over high-cost offerings. If I cannot explain it to my grandmother, then I do not invest in it.

As a result, I still have not invested in bitcoin even after attending countless seminars on the cryptocurrency. My investment decisions are based on common sense – not on the interest Sis’ Joyce from my granny’s stokvel gets from the latest Ponzi scheme.

The fact that the market is inundated with investment options makes it tricky for beginner investors to make a selection. There are currently more than 70 exchange-traded funds (ETFs) listed on the JSE, for example.

Although the choice for investors has widened, the downside is that beginners may shy away from investing in these products as they do not know which one to pick. It is for this very reason that beginner investors would rather save their money in savings accounts.

My boss, an executive, is what I would call a sophisticated investor. He doesn’t belong to a stokvel, but owns a portfolio of shares in every asset class you can think of.

Unlike the beginner investor, he is not a big fan of passive investment products like ETFs that track an index.

His investment decisions are influenced by who is in control of his money, more than anything else. It is for this reason that he has an online trading account that he actively uses to trade. 

For laypeople like me and my grandmother, investment choice is driven by ease of access and word of mouth. We put our money into short-term savings accounts, stokvels and that Top40 ETF that everyone talks about.

While my grandmother is probably more likely than I to fall for a Ponzi scheme, I have to admit that the bitcoin bug almost bit me. 

The fact is that we are desperately trying to get to the “sophisticated investor” stage. Tax-free savings accounts, which were introducted in 2015, have proven to be very popular, with more than 461 000 accounts opened to date, nearly half as savings accounts at banks. 

This is certainly a step in the right direction, but in a country like South Africa, we need many more investment products that are tailored for low-income earners. How about an ETF that is linked to shisa nyamas?

Lerato Mahlangu is the founder of Powermani, which focuses on financial education.