What are ‘equities’ anyway? 📈

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You might have a friend who thinks they’re super savvy when it comes to money. It’s all equities this, equities that. What on earth are they talking about?

‘Publicly traded equities’ is basically a fancy way of saying listed shares or stocks. You can buy shares in any company listed on a stock exchange, and your investment will rise and fall with the wins and losses of that company.

So, is it good to invest in equities? As with any investment question, the answer is not always straightforward…

Equities generally make for good long-term investments because the market is volatile and share prices fluctuate. If you sell your shares during a market downturn you’ll lose out, but if you ride the wave then the market will almost always recover and grow, and your investment will grow, too. Obviously, this advice pertains to a diversified portfolio of shares. If you have a lot of money invested in a single company, then you’re in dangerous waters. (Steinhoff, anybody?)

Give me an example…

Take six investors. They each invested R100,000 in the JSE All Share index — a diversified basket of South African shares — but each investor started at a different time.

Mr. Green invested three years ago. We can see the market downturn in early 2020 thanks to the Covid pandemic, and then the subsequent recovery.
Miss Orange invested two years ago. She experienced a lengthy period of gains as the market recovered after Covid.
Mr. Grey invested a year ago. He’s in positive territory today, but the gain is marginal.
Mrs. Blue invested three months ago. The timing of her investment coincided with a market downturn and she’s sitting with a paper loss. But the last thing she should do is sell because that will lock in her loss! She should rather remain invested and wait for the market to recover, as Mr. Green did.

As useful as this example is, remember that three years is actually not considered ‘long-term’. A proper long-term investment is five years or more. With that in mind, have a look at the JSE All Share index over the last 20 years….

Mr. Blue started off with R100,000 on 1 October 2002 and his investment has grown to more than R1,2 million over the period. Mrs. Orange, Mr. Grey, and Mrs. Yellow all invested later and they all sit with gains today, but just look at what the extra time in the market can do for your investment!

What’s the moral of the story?

Stay the course! Equities are good long-term investments thanks to the power of compounding. During the past 20 years, there have been multiple market crashes and recessions, which have lasted many months at times. But the investors who avoided selling when times were tough were all rewarded. (It’s also worth noting that each of the investors in our examples earned a return that beat inflation.)

You can invest in equities in many ways — directly, or via funds like ETFs or unit trusts. It’s best to speak to a financial planner who will advise you on the best route to take considering the money you have to invest and your long-term financial goals.

Now you can also speak equities, ne?