Episode 001 - UNIT TRUSTS: Time to learn a little

I have a question for you. Are you currently owning any form of an investment? Yeh yeh I know a lot of people are always talking about "property". But I'm referring to other forms of investment, like Unit Trusts, ETFs, etc?

Strictly speaking, in my world my property is not exactly an investment just as long as I'm staying in it. I'll only consider it as investment when there's actual cash flows coming from it and its yield can surpass the bond monthly premium. Oh also add to that premium those ever increasing levies, don't forget "special levies" which pop out of nowhere when there's stuff that need fixing in your complex, and since the rate on that bond is "floating", then its quite possible that my premium might go up - unless the Honorable Kganyago at SARB sees otherwise.

Anyway, I'm not bashing down property - its just that I get bored when every investment conversation I have with my black compatriots we always go for property. It's never a given thing. If property management was easy then everyone would do it.

The reason why I started the blog that way was to make sure you snap out of it and start asking yourself if there's anything else out there to consider. By law I cannot advise or recommend anything to you lets just get that clear, so anything I say here is just giving you knowledge. Don't say "Siya said" when the stock market plummets etc, please. If you get rich, I wouldn't mind a shout out. Jokes.

The following text is for people who had no clue that such stuff existed - it's like one of those "for dummies" books, which I love by the way. And yes, I'm always the one in a meeting/conversation going "Ok sorry guys, dumb question... can you please explain this and that". Goes a long way trust me.

If you got to this point, then I'm really glad you wanna know a bit about investing. Building your wealth from a young age is the way to go. There's books and books on investments but I'll try summarise it as much as possible.

1. Lets start with the most basic of saving. Keeping your money under the mattress. We both know this doesn't work well because frankly if your house burns down your money is gone. On a serious note if you have R10 today and can buy a loaf of bread, that same R10 won't buy you the same loaf of bread next year, thanks to a little thing called "Inflation". So if you had kept your R10 under the mattress you would look like a fool next year when you go buy bread; it is up! This means you need some form of platform to grow your cash. So as you would have guessed it forget this mattress business!

2. Next up is the Bank. This one is much safer and in terms risk this is the most "safest" as you will get your money back plus some interest. Now the interest is not that appetising. For example at a bank you'll put up your money and get about 5% interest on it per year let's say, i.e if you give them R100 today.. next year you will have R105. The catch here is the inflation again. If the inflation is at 6% then you're in trouble because whatever was costing R100 today will be R106 next year and even though you saved your money at the bank your R105 won't cut it as you're still short R1. Actually not forgetting bank costs, you probably even more short.

I look at bank deposits for short term. Looking at long term, well let's get with the more interesting part which I'm sure you're keen on.

3. This is when you are keen to put your money away for a long time probably over 5 years and you also keen to put up monthly payments in your investments or you have a once off lumpsum. As a first warning these are riskier than putting your money in the bank and by Risk I mean there's a slight chance you might lose a bit of money.

I'm pretty certain you've heard of this term, yes; UNIT TRUSTS. Yup, that's what they mean when they say "Oh yah he/she is a trust fund baby" with all the hate in the world. Just joking.

You basically come and buy into a unit trust(UT) at a certain price (published on newspapers and fund managers sites) and then you continue putting in money as you want if you choose the monthly payment option or you just buy once using your lumpsum. Now this is where I lose most people, "a lumpsum??", "a monthly premium?". They ask with their eyes wide open because they've got it in their minds that such things are for rich people so those amounts must be huge. Newsflash: YOU ARE WRONG! There are fund managers that ask for a lumpsum of R2500. And there are fund managers that ask for a monthly investment of R300. I'm hoping your eyes are now wide open for the right reasons!

So over the long term your investments should look way more interesting than the annual 5% from the bank. The riskiest of these unit trusts are ones which invest in Equity/Shares and Foreign assets. These ones take your money and go buy stocks/shares like Sasol, Vodacom, MTN, Naspers etc, and then you become a shareholder of the company (can you believe it?) The stocks are selected by professionals and they have a way of identifying which ones will grow your money over the LONG TERM. Same applies to buying stocks like Apple, Amazon, Facebook - the difference here is your earnings will be in dollars and will be converted back to Rands in your portfolio, so there is some currency risk introduced. These UTs can fetch returns of between 8% to 30% per year on your investment, depending on how the markets are. Remember one important thing here, past performance does not guarantee any future performance! Most importantly is that you can also have negative returns, which is why I only mention these with long term investments.

Now you gotta admit those returns look better! But remember where there are big returns there are big risks.

Now there are more than a 1000 strategies to choose from in South Africa regarding which UT to choose. Examples of houses which provide unit trusts are Allan Gray, Coronation, Sanlam, Nedgroup, Sygnia etc, there's a lot to choose from. Most of these have been in the industry for years and years and they have very good track records so its quite easy to look them up online and see what they do. Check their funds and look for things called "Factsheets" on their sites. These provide a summary of what each unit trust is about what stocks they hold how long they have had it running, who the managers of the fund are, how much you put in and what fees they charge.

Lastly there are other unit trusts which are less riskier than the ones I've mentioned. These are called Absolute Return Funds and others are called Balanced Funds. These provide a mixture of assets which diversify your risk and they also have good returns.

The word "diversification" by the way is one word you'll never use if you're always investing in property. Don't put all your eggs in one basket.

Also its very easy to open accounts and start with your investments. Most of the websites have guidelines where you just fill in your details and deposit your money in the unit trust you want and then you are done.

I hope this helps and I know its a lot but I'm sure you know better now than putting your money under your mattress. Send me Qs whenever wherever.