Wealth through conventional investment principles

Why invest in shares

Your interest probably stems from a desire for financial freedom and a search for investment asset classes which will outperform inflation by far.

Financial freedom starts with a personal financial plan and every person and family should have one. The plan will typically take into account one’s short, medium and long-term cash flow needs. Short and long-term insurance requirements, medical aid, pension, etc. are also integral to a comprehensive personal financial plan.  Depending on your life-stage and financial needs, the plan has to cater for capital growth or a regular income or both.

The challenge, and this is an absolute must, is that your investments should grow at a rate much higher than inflation. Inflation is gradually and systematically eroding the buying power of your money over time. Persons still earning an income and building a nest egg and their investments not beating inflation, will discover that they are not financially getting ahead. Persons who have retired and are living off income from their investments, will discover when it is too late that their investments have been eroded to the point where their capital is no longer able to sustain their lifestyle.

Your financial plan will consider the spreading / diversification of your investments over a range of asset classes like cash, property, shares, etc. each with its own unique historical growth track record.

The typical performance over long periods of time of some of the more common / well known asset classes are indicated below. The indicated percentages are the growth figures by which these investment classes have performed better than the inflation rate. The percentages reflect the real return rate (the growth rate after being adjusted for inflation):

 

Investment classGrowth
Share market7.5%
Listed property6.4%
Bonds2.0%
Residential property1.9%
Cash1.0%

 

Note: 

The percentages are indicative only and very good for planning and decision making purposes. Slight variations to these figures are found in different information sources which are explained by the period over which the study was undertaken and the duration of the study i.e. 30 years or 100 years.

Shares and listed property offer the greatest inflation protection and, given a long enough investment horizon, outperforms other traditional asset classes. Investment professionals consider shares the best performing asset class in terms of capital growth and growth of 15% per year (dividend income excluded and not adjusted to factor out inflation) is commonly quoted. Below is the price graph of the JSE TOP 40 Index for the past 20 years.

JSE TOP 40_20 Years

 

The index stood at 5179.9 points on 1995-09-27 and was at 44963 points on 2015-09-27.  Readers can easily calculate the annually compounded growth for themselves.

Below are few very good reasons why you should consider investing in shares;

  • The only way to beat inflation is to invest in growth assets and every person should have some investments in shares.
  • The dividend income from a share is also much more tax efficient in the sense that dividend tax is lower than income tax.
  • Shares is a very liquid asset and can be converted to cash very quickly and easily.
  • Investments can be made in small amounts – a large capital outlay is therefore not necessary.
  • It is very easy to diversify a portfolio of shares.

An investment in shares must be seen in the context of one’s overall financial plan and the percentage of your investments allocated to “shares” will be derived from your well-considered financial plan i.e. not all your capital should be invested in shares. Shares are extremely suitable for long term investments where the capital will only be needed after say five years.

Most people will at some or other time in their life need assistance from a professional financial planner with their overall financial plan and with some elements of the plan. They can therefore argue that it may be safer and better to leave the investments in shares also over to investment professionals.

Readers are however encouraged to rather take more responsibility for their own financial wellbeing and even consider doing your investments in shares yourself. It will take time and effort to gain the necessary knowledge and experience. It is also advisable to seek assistance from an experienced investor in the beginning. It is certainly not difficult and there are investment products like Exchange Traded Funds (ETFs) which can initially effectively be used by beginners (also used by professionals) while they are still learning. ETFs are discussed in more detail elsewhere on this site.  Provided that you are prepared to study and learn, have the patience and self-discipline, you can and will soon become a very successful investor.

The knowledge that you will gain in the process will be invaluable and will equip you with information that will put you in a position to take more responsibility and control of you financial destiny.

This web-site is all about investing in shares and gives the would-be share investor access to valuable information to kick-start his / her career in shares.

The focus of Phoenixcub is investing in shares, following proven conventional investment strategies with the aim to build wealth over the long term.

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