Wendy Myers, Head of Securities, PSG Wealth

As a 25-year-old professional starting out in my career, investing in shares felt unfamiliar and intimidating. I considered it a market for the wealthy, and certainly not a place that I could leverage for my own personal and professional benefit. I had a savings mindset, not an investing mindset, so any surplus cash was invested in a bank account earning interest. What I didn’t realise at the time was the power of compounding and ‘time in the market’, together with the importance of investing in assets that deliver inflation-beating returns over the long term.

1. Starting your investment journey to capitalise on growth over the long term

When I started my investment journey, the first share I purchased was FirstRand – the bank my employer deposited my salary into. My logic was that if I trust them to look after my salary, I should consider benefiting from their growth strategy by being a shareholder. This investment served me well, and I still own FirstRand today. That said, there are some guidelines I would recommend following when choosing your first listed instrument:

Understand the type of listed instrument you want to invest in. This could be direct exposure to a single share or an exchange-traded fund (ETF) that tracks an index (such as the JSE Top 40), or a specific sector (if you aren’t comfortable choosing a single share).

Do your research by checking the basics:

• Is the company growing revenue and is it profitable? Focus on businesses with strong balance sheets, low debt-to-equity ratios, and healthy cash reserves. Blue-chip shares are typically large, well-established companies with a track record of financial stability and consistent performance. They often pay regular dividends, supported by a stable payout ratio, providing a potential income stream even when share prices fluctuate.
• Does the company have a competitive advantage or moat?
• Assess the quality of the company’s management and track record.
• Finally, consider key valuation metrics like the price-to-earnings ratio to assess whether a stock is overvalued or undervalued.

2. The power of passive income

Many investors overlook the power of dividends in generating long-term passive income. Once you are invested, it’s important to understand the different forms of passive income provided by listed instruments.

Depending on whether you invest in an ETF or a single share, you will earn either a distribution or a dividend. ETFs pay distributions, which represent a collection of different types of income such as dividends, interest and capital gains – generated by the underlying holdings of the fund. An investment in a share is different in this regard, in that it delivers dividend income, which is a direct profit payout from a single company.

There are different tax implications associated with ETF distributions and dividends, but both represent regular income in your investment portfolio and complement capital growth. Unlike capital gains, which remain unrealised until an asset is sold, dividends represent cash in hand, offering stability, income and the power of compounding – especially if dividends are reinvested into the market.

3. How to leverage volatility

When the markets experience downturns, the inexperienced investor can easily panic as they watch their share returns deplete. My first experience of significant price volatility was the Global Financial Crisis of 2008. My share portfolio went into the red almost overnight and it was very difficult not to react emotionally by panic selling. When markets experience these types of pullbacks, it’s the perfect time to apply a deliberate strategy to set your portfolio up for the long term. Below are a few ways I’ve learnt to leverage volatility.

• Rand cost averaging: This is a deliberate strategy to consistently invest money into the market, regardless of share prices. This ensures you buy more shares when prices are low.
• Rebalancing your portfolio: When volatility drives certain assets down, use cash to buy more of these shares. If you don’t have funds available to invest, consider rebalancing your portfolio by selling high-performing assets and reallocating capital to underperforming ones to align your portfolio construction with your target allocation.
• Tax-loss harvesting: There is absolutely nothing wrong with selling a losing investment during a downturn to realise a capital loss, as this can be used to offset future capital gains tax. This, in turn, can help improve after-tax returns and support stronger long-term portfolio performance.

4. Diversification – the unsung hero of investing for the long term

Diversification smooths returns as it reduces volatility, leading to less dramatic ups and downs over time. As a young investor with enough time ahead of you to recover from any market shock, you might structure your portfolio as a higher-risk portfolio. However, diversification remains a necessary strategy to ensure capital preservation. While growth-oriented assets build wealth, diversifying to ensure you are invested in a balanced portfolio of shares helps you avoid emotional, reactionary decisions, allowing for disciplined, long-term growth.

Diversification across sectors as well as geographies is a necessary step to achieve long-term portfolio returns. Young investors starting an offshore portfolio should have the primary goal of leveraging time to build long-term wealth, hedge against currency volatility, and gain exposure to industries not prevalent in our smaller, local market.

5. Common mistakes and how to avoid them

If I could tell my 25-year-old self-something about investing, it would be to avoid the following mistakes:

• Not having a long-term investment mindset from the outset.
• Not having sufficient exposure to high-quality companies with strong balance sheets and consistent dividend payouts.

• Not having adequate portfolio diversification to ensure a balanced return, leading to heightened volatility and a greater risk of panic selling.

To avoid these pitfalls, ensure that you define your risk profile upfront, understand and accept a certain level of volatility, invest consistently, conduct thorough research, and diversify across sectors and geographies.

Mellody Hobson, CEO of a US asset manager, is quoted as saying: “The biggest risk of all is not taking one”. This highlights that avoiding risks entirely by only holding low-risk assets can lead to returns that fail to outpace inflation and grow capital over time.

ENDS