What happens when you’ve maximised the limit of your Tax Free Investments… Where should you invest? When it comes to investing in the stock market, there are two broad ways to invest - you can buy a single share, or a group of them, called a fund. But which one is right for you? Funds or shares?

Whilst WHERE you invest your money is entirely dependent on you, there are four elements of a good investment. In today’s episode I talk about those four elements and how they can help guide you to an investment decision.

At the end of the day, the most important thing is to invest regularly each month, and to add top ups as and when you can.

Show Notes

• [03.00] Is this a good investment?

• [06.48] Which takes us back to Funds or Shares…

• [10.39]  Why I think you should invest in funds over shares
  

Related posts and episodes
How much is enough?

Investing Tax free!

Optimising tax on your investments

The decision tree you need to choose your investment

The four foundations of investing

Four things you need to know about your home(financially)

Why you should invest offshore

Why your home is NOT an investment

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Quotes

“ It doesn’t matter who you are, putting everything into one investment is never a good strategy.” - Lisa Linfield

“The money you make on your investments  really only depends on two days - the day you buy and the day you sell.” - Lisa Linfield

“I’m going to put a stake in the ground – I’m NOT a fan of share investing.” - Lisa Linfield

Script:

179 - Should I invest in a fund or shares?

Hello everyone and welcome to today’s episode of Working Women’s Wealth.  I’m Lisa Linfield and I’m building a community of Women who are committed to the journey of living Financially Free lives – whether they’re just beginning, or nearly there, we support each other through our lessons learnt, good and bad, so ALL may benefit.

Over the last 15 episodes we’ve taken a journey from debt to investing.  In episode 166, 167 and 169 we looked at Debt – and how you get out of debt – rounding off with episode 170 and Donna McCallum looking at the thinking that gets you in debt.

In Episode 171 and 172 we looked at how you manage your everyday money to make sure you not only have enough to start investing, but also build up a money system that protects you from life’s knocks and prepares you for wealth by making sure you automate your monthly savings and investing.

In Episode 174 we then looked at how much money you needed to stop working and for most of us, over the age of 35 who haven’t saved enough, we will need to save at least 25% of our income every month.  And the only way we do it is to drop our spending and increase our income.  At the heart of being able to do that, is the fact that in the end, we need to choose.  Choose financial freedom.  And we discussed more about that choice in last week’s episode. 

Finally, in Episode 173, we started to look at the first place you should invest – in Tax Free Investment Accounts.  In the UK, they’re called ISA’s, In the US they’re called Roth IRA’s and in South Africa they’re called Tax Free Investment Accounts or Tax Free Savings Accounts.  We discussed that within these tax free investment vehicles, if it suits your investment strategy, you should invest in passive trackers – preferably of world-wide indexes.

Today we’re going to talk about your next step – what happens when you’ve maximised the limit of your Tax Free Investments…. Where should you invest?

Is this a good investment?

So often I get asked… Is this a good investment?  Is property a good investment?  Is Art a good investment?  Is this share a good investment?  Is Bitcoin a good investment?

The answer always is the same.  It depends on you.

There are four elements of a good investment:

1.       Knowledge - You know a lot about and understand deeply what you’re investing in (or you hire someone who does)

2.       Diversification – this is all about having ‘all your eggs in one basket’.  It doesn’t matter who you are, putting everything into one investment is never a good strategy.  If the Pandemic has taught us anything, it’s that you can’t rely on any one thing all the time.  Yes, if we absolutely had control of everything, AND had in depth knowledge and could predict the future, it would be best to bet on one thing.  But, none of us do, and especially not those of us with families, day jobs, side hustles and a life.  And in fact, like Corona showed us, no one could predict a virus from China would go on to reshape the world.

3.       Investment Risk - The investment’s risk profile matches yours.  Every single thing you invest in has a different risk level for the return or money it makes you.  Some, like bitcoin, can be up 50% one day and down 100% the next.  That may give you a heart attack.  Others, like a savings account may give you almost no interest, but you stand no chance of losing it.

4.       Time invested – The money you make on value of the share really only depends on two days… the day you buy and the day you sell.  In between, the price can bounce around as much as you want – but it truly doesn’t matter unless you are wanting to sell.  Three years ago, my house may have been worth a lot – but if I need to sell my house today, that doesn’t really matter if the housing market is down 40%.  Buying and selling at the right time is a risk you can reduce by holding onto your investment over time and allowing the growth to compound.

Which takes us back to Funds or Shares…

When it comes to investing in the stock market, there are two broad ways to invest.

You can buy a single share or bond… or you can buy a group of them, called a fund.  In the US they are called Mutual Funds; in South Africa they’re called Unit Trusts, and in the UK they’re just called Funds.

Every company that lists itself on the stock market or share market has a number of shares.  You buying one share means you own that little fraction of the company and that little share of the profits.

With a fund, you buy a group of shares.  It can range from a few to, for example the MSCI World Index which has over 2,600.  They can be located in one sector in one market in one currency (like Banks on the South African Stock exchange) or, like the MSCI World Index, can cover multiple currencies and countries and sectors.

So I’m going to put a stake in the ground – I’m NOT a fan of share investing.  Buying a single share your friend recommended to you.  And it comes back to our first three factors of investing.

1.       Knowledge – You need to know deeply what you’re investing in – or pay someone else to do that.  Most of us do not have the time to study every share on the market and choose the one that is going to outperform the rest.  Unless you have insider knowledge that no one else has access to.  And that my friends, is called Insider Trading, which is illegal.  Ask Martha Stuart how illegal that is – she went to jail for it.

2.       Diversification – buying one share is putting your eggs in one basket.  Even buying only 10 or 20 is – in the context of the shares available in the entire world.  The US is roughly 50% of the world share’s and South Africa around half a percent.  And trust me, if you don’t have the knowledge of them all – how can you possibly choose the best one for you?

3.       Investment Risk – a single share is one of the highest risk items you can buy.  A single cryptocurrency may be higher as there isn’t a physical thing or asset behind it… but that’s digressing.  Shares go up and down.  And a share is part of a sector that goes up and down.  And sectors are part of country stock exchanges that go up and down.  And so it goes.  There’s a lot of bouncing up and down of the price (or what’s called volatility).  So buying a single companies share is high risk.

So I don’t believe that those of us that are not experts should have a significant portion of our wealth in one share. 

And, as an aside, for those of you that are employed by a company and have a large portion of your wealth in their shares, I STRONGLY advise against keeping yourself so exposed to that one share.  You need to diversify your investment risk.  I have seen so many people who are passionate about the companies they work in hold onto their share options, only to come near or to retirement with a substantial portion of their wealth in it and be slammed by that companies share price at record lows.  Even if your company is great – there could be a crisis of some form that renders your shares worth less than you thought – and you’re left stuck with a quarter of the wealth you thought you had.

Why I think you should invest in funds over shares

So, if you’re wanting to continue investing over and above your Tax Free Investment, my recommendation is that you invest in funds.

Why?  It comes down to the Investment four:

1.       Knowledge – you need enough knowledge and research to choose which fund to invest in – but that’s a lot easier decision than which share to invest in

2.       Diversification – funds are not single shares – so they will diversify you a lot more.  A fund manager or an index manager selects the shares that will go into the fund, and so your portfolio will be more diversified.  If you get a balanced fund, you will also get further diversification, with different types of investments included – like bonds and shares and property in one fund.

3.       Investment Risk – because there is more than one share, the risk is reduced being in a fund.  Again, if there are also bonds and property included, it may further manage the investment risk best needed for you.

4.       Time -  There are very few people who will ever  be able to consistently time the market… meaning buy at the lowest point and exit at the highest point.  So, in order to avoid that, the best thing to do is to invest regularly, each month.  When you invest in a fund regularly each month, you do what’s known as ‘cost averaging’… over time, you buy some high and some low… but you’re always buying so it works itself out.  The fund manager themselves will have a better idea of when to buy and sell the individual shares, so you don’t have to worry about tracking them and timing it.

The most important thing is to invest regularly each month, and add top ups as and when you can.  And to try as often as possible to increase your debit orders little by little so that over time you’re saving as much as you can.  People often fret about a one percent difference, which I know over time is a lot – but in reality, it’s never going to make as much difference as getting the amount you invest up.  Double the amount you invest, and you can change your world!

Have a great day everyone!