Investment

How securities can help you realise your goal of financial freedom

Wendy Myers, Head of Securities at PSG Wealth.

What does financial freedom mean to you? This is a deeply personal question, but an important one to be answered. Attaining financial freedom requires discipline and conscious effort, so understanding what is driving you will help keep you on track to achieve your goal. Without this clarity, we are at the mercy of our whims. Once you know what it means to you, then it is time to understand how to accomplish it.

A.     How shares can be used to boost your investment plan

There are a myriad of investment options available to you as an investor. However, in this article, I’m going to focus on how shares can boost your investment plan. When considering investing in shares, it is important to determine whether you are a growth or value investor. Your risk appetite and time horizon will influence this decision. The question of whether a growth or a value stock investment strategy is better for you should be evaluated in the context of your time horizon and the amount of volatility (and thus risk) you are prepared to endure. 

The difference between value and growth investors:

  • MP Cussen from Investopedia, stated that, growth investors tend to seek out stocks with high capital growth potential, and they value this growth more than dividend income. These stocks tend to come with increased price volatility.
  • Value investors seek out stocks considered to have a lower level of risk and volatility associated with them because they are usually larger, more established companies. They offer capital growth and often pay dividends.

B.     How trading can help build your legacy of financial freedom 

Once you have determined whether you are a growth or a value investor, you need to consider whether you want to trade in your own capacity or make use of the services of a financial adviser. Trading in your own capacity ensures you can define the stock entry level. If you feel a particular share has reached its growth potential, you can capitalise on selling out of your position. Stock markets are emotive, and shares move based on the performance of the underlying company as well as macroeconomic factors. Active trading in stocks allows you to capitalise on these share price movements. In this way you can actively build your legacy of financial freedom.

Using the services of a qualified financial adviser takes the stress of trading off your shoulders, and comes with a number of additional benefits. Your financial adviser will not only match your risk profile to the most appropriate basket of stocks, but will also recommend the type of vehicle to be used to facilitate such investment. Annual reviews of your portfolio’s performance with your adviser provides you with a means to annually assess your progress towards your financial goals.

C.    Factors to consider when selecting an appropriate vehicle – different benefits depend on individual needs 

New investors frequently don’t understand the difference between asset classes and investment vehicles that are available. These are laid out in Table 1 below. 

Table 1: Asset classes versus investment vehicles

Asset classesInvestment vehicles
1.     Equities/stocks 1.     Investing in listed shares
2.     Bonds2.     Unit trusts  funds/ETFs
3.     Real Estate3.     Hedge funds
4.     Cash4.     Funds of funds
 5.     Managed accounts
6.     Investment tax wrappers

Investment vehicles are assets offered by the investment industry to help investors move money from the present to the future in the hope of increasing the value of their money. Investment vehicles are entities that own other investment vehicles – for example, an equity unit trust is an investment vehicle that owns shares. Point 1 below is an example of direct investments into listed securities, whilst points 2 – 6 are examples of indirect investments.

Investment vehicles unpacked by the CFA Institute :

1.     Investing directly in shares: This allows the investor more control over direct investments than indirect investment vehicles. Investors who choose to invest directly in listed shares can determine stock entry levels and are in full control of investment decisions as highlighted in section A above.

2.     Investing in unit trusts/ETFs: These are pooled investment vehicles that can be passively or actively managed to track a particular index or sector. They are managed by investment professionals who provide investment, managerial and administrative services. These investment vehicles benefit investors who prefer not to be actively involved in investment decisions.

3.     Hedge funds: These are unlisted pooled investment vehicles, the nature of which is beyond the scope of this article.

4.     Funds of funds: These are investment vehicles that invest in other funds. They can be actively or passively managed and offer the investor the ability to invest across fund managers who they believe will outperform the market. This provides the investor with the benefit of diversification of investment managers. 

5.     Managed accounts: Many investors contract with investment professionals/financial advisers to help manage their investments. These financial advisers will make sure that they understand the investor’s investment horizon, risk and goals, ensuring a suitable investment strategy match to deliver on the client’s investment objectives. 

6.     Investment tax wrappers: Investors who want to provide for retirement can make use of tax wrappers. Examples of tax wrappers are retirement annuities and endowment policies. These are provided both locally and offshore through financial service providers. 

Conclusion

A wide variety of investment vehicles and asset classes are available that can be structured in various ways to help meet the investment goals of different individuals. Speak to a qualified financial adviser to structure a financial plan and portfolio which can help you meet your investment needs and realise your financial freedom.







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