There are some unique features to owning shares directly, in your own share portfolio, that set these investments apart from the rest. If you are new to share investments, here are a few notable features and guidelines to be aware of.
The ups and the downs of the market may be more pronounced
Everyone knows that ‘shares are volatile’, but investors often don’t understand the implications until it is too late. It is true that shares move up and down from day to day based on both sentiment and fundamental economic data. Most investors understand there are sometimes ‘better’ and ‘worse’ days on the market. But while we understand this ‘aggregate’ statement, investors sometimes fail to understand the specifics hidden by the aggregate.
Just because the market moves up in general over time, does not necessarily mean your portfolio will behave in the same way. When you buy individual shares, there is no guarantee you will achieve the average market return. In fact, that is part of the appeal – if you construct your portfolio correctly, there is the potential to do better than the market.
This general statement is made tangible in the performance of Naspers over the past five years. For much of this time, the JSE All Share Index’s return was driven by a handful of large market capitalisation shares, and Naspers made up the bulk of this return. If you didn’t own Naspers (perhaps for the simple reason that the share is pricey) you would have lost out on the bulk of the market’s return. Share portfolios are by definition concentrated. There are more than 100 shares that make up the JSE All Share Index – and it is unlikely that you will hold all of these shares in your portfolio. Moreover, share investments are not typically cushioned from the impact of this volatility by large cash holdings.
Building a diversified portfolio can be costly and takes skill
While investing in retail products is a relatively easy way to build a diversified portfolio, quality shares are often costly. Blue chips can cost many hundreds of rands each (e.g. Anglo American plc was trading at R351.54 as at 17 September 2019). Although expensive, these shares offer access to quality companies and top management. This means that you need a clear plan on how to ensure your portfolio is diversified enough to cushion you against market movements, and yet concentrated enough to maximise the potential of outperformance of any one share. If you hold too many different shares, you dilute the performance of your portfolio. If you hold too few, your portfolio may hold more risk than anticipated. Ensure you have a sizable pool of money available before you start building your portfolio. If you want to take a staggered approach, make sure you plan before you start, and then accumulate shares in a disciplined and systematic manner. Be sure to weigh the costs of waiting a bit longer to trade (and bulking trades together) with the importance of getting to market quickly.
Be prepared to take action
When you invest in shares indirectly via a unit trust or a retirement fund portfolio, for example, the fund manager or trustees will take care of any corporate and other actions on your behalf. You will be notified of annual general meetings, be asked to vote on director appointments and other resolutions, and make choices if the company is unbundled or new shares are offered to existing investors. As a direct shareholder, you’ll need to elect your own options – and instruct your broker how to vote on your behalf. As such, you need to ensure you also understand the consequences of those choices. The recent Naspers unbundling example demonstrates that these choices can sometimes be complex and have tax consequences investors may not always be aware of. If you invest in shares directly, take the time to read the notices your broker sends to you or, alternatively, invest in a managed portfolio and ask your broker to make elections on your behalf.
The importance of a framework, a philosophy and discipline
Any investment should be underpinned by clarity about objectives, time horizons, and the criteria for success or failure (i.e. a view on benchmarks and metrics). The factors considered in this article highlight that share portfolios are no exception, and yet many investors start investing in shares without putting in the necessary groundwork first. This may result in the investment failing to perform as expected and the disillusioned investor abandoning their plan. Partnering with a trusted and skilled portfolio manager can help you to construct a robust share portfolio that is positioned to ultimately help you achieve your goals and objectives.