Investing 101

Without the right guidance and information, investing may seem daunting. For a new investor, the thought of putting your hard-earned money at risk, for the prospects of returns, is a difficult proposition to grasp. At Sentinel Capital (SENCAP) we aim to demystify the industry, making sure your path to investing is informed, transparent and personalised.

Through tailor-made recommendations and comprehensive advice, we ensure your budget, goals and objectives are considered at every juncture. You are the key decision maker, and we are here to guide and support you in that process. Here we provide some of the fundamentals, which we refer to as Investing 101, for those that are just starting to venture out in the investing world.

Find Out What Type Of Investor You Are

There are so many investment opportunities in the market that it can often become overwhelming when trying to navigate them on your own. To make the process more manageable for clients, at SENCAP we use a Suitability Assessment Questionnaire to guide our clients in choosing the investment products that are right for them.

We work with you to assess your risk tolerance, financial profile, investment growth preferences, and investment horizon, among other things; all in an effort to determine your investment goals and objectives. In this process we will learn about you, but also, you will learn about yourself and what type of investor you are.

Define your investment budget

You may find yourself in the position of having some excess money, perhaps from saving, getting a bonus at work or being the recipient of inheritance. Just as you budget for other life expenditures, the practice can also be used for your investment funds. The exercise of budgeting encourages you to be strategic in your investing.

It takes into consideration factors that are unique to you, for example how much of your excess money you are comfortable investing vs setting aside funds for unknowns. It ensures you to think about, and assess, your financial profile, at present and the future.

Budgeting will help reduce any concerns with investment decisions especially if a particular investment does not reach the expected result by helping manage any unexpected disappointment. In turn, when an investment decision meets or exceeds your expected results, you are able enjoy greater satisfaction and confidence of your strategic approach. Budgeting allows you to be a better investor; a more thoughtful, proactive, and strategic investor.

Consider Your Investment Timeline/Horizon

Now that you’ve decided on an investment budget, it will be useful to determine the time frame by which you expect your investment returns and an exit from your investments; otherwise referred to as your investment horizon.

Are you a short- or long-term investor? Your preferred investment horizon is likely to evolve along the way and it will always depend on your personal financial situation at any given time. If you are more short term oriented, you should select investment opportunities that are more “liquid”, meaning more readily able to turn into cash. Investments in listed equities (i.e., shares of public companies listed on a stock exchange), provide you with the opportunity to sell your invested position relatively quickly.

Another example would be to invest in bonds with shorter maturity dates that are aligned with your timeline preference. Also, if you need access to cash on a relatively shorter period of time, or need cash on a regular basis, you may choose investment opportunities that have an element of “income”; for example, equities that regularly pay a dividend, or a bond which pays interest on a regular interval. Longer term investments, generally, are more “growth” oriented; they may not provide regular income, but they have potential to increase in value over time.

An example of longer-term investment is an unlisted equity, likely of a private company in an emerging sector, whereby the opportunity for dividends is very low (or non-existent) but the potential for a significant increase in valuation of the company is higher. However, for some investments such as real estate, there is always the opportunity for income because the property may be rented during your ownership of the investment.

Know the Risks

The most important element of any investment decision is understanding the risks. All investments carry risk, without which there would normally be no return. Knowing your personal risk profile is key in determining which types of investment products, in terms of their level of risk, you would be comfortable to invest in. The rule of thumb on risk is: The higher the risk, the more potential for greater returns; thus, there tends to be a positive correlation between risk and investment returns. But risk is personal.

Appetite for taking on risk generally increases by such factors as: (a) increase in level of investment experience, (b) increase in the amount of excess resources available for investing, and (c) increase in investment horizon. But this is not an exhaustive list and risk appetite is always going to be your psychology towards risk which is personal to you as an investor over and above any “technical” factor. The key is to know your risk appetite and then select investment opportunities that are aligned with this. To assess the riskiness of an investment opportunity, you need to learn about the opportunity and do some due diligence. Factors that reduce the riskiness of an investment are wide and varied, but typically risk is reduced where there is higher liquidity, where there are assets secured against a debt, where the investment provider has a positive (and longer term) track record (operationally and financially), where there are qualified independent third parties managing or supervising the investment, where the investment is in a viable and active market, etc. Assessing risk may seem daunting but you don’t have to go through the process alone.