In the words of author Robert G Allen: “How many millionaires do you know who have become wealthy by investing in savings accounts?”
Robert Allen has been teaching ordinary people how to achieve extraordinary success and financial freedom for over 30 years by using Multiple Streams of Income. He is a serial entrepreneur and is the author or co-author of some of the most influential financial books of all time, including the New York Times bestsellers Creating Wealth, Nothing Down, Multiple Streams of Income, The One Minute Millionaire, and his latest title, Cash In A Flash.
Basically, he is one of the most influential investment advisors of all time. However, despite this, it is important to break down what he means, and to do that we have to look at both the benefits and the drawbacks of investing in the equity market, as well as the power of making well informed decisions when it comes to investing.
Benefits of Investing in the Equity Market
Capital Appreciation: One of the primary benefits of investing in equities is the potential for capital appreciation. Over the long term, equities have historically outperformed most other asset classes, such as bonds or fixed-income investments.
Dividend Income: Many companies distribute a portion of their profits to shareholders in the form of dividends. This can provide a steady income stream in addition to the potential for capital appreciation. At InvestLife we believe that having dividend paying stocks in a portfolio is vital in preserving capital.
Liquidity: Stock markets, especially in developed countries, tend to be highly liquid. This means that investors can easily buy and sell shares whenever they wish, allowing for flexibility.
Ownership and Voting Rights: Buying shares means buying a piece of the company. Shareholders often have voting rights and can influence corporate decisions. By extension, most of you (the readers) and myself do not directly benefit from this aspect of equity investing as we invest in mutual funds, who themselves invest directly in companies. So, by extension, we technically get this benefit, but at the end of the day it is up to the Fund Managers, like Clyde Rossouw who exert their voting rights to ultimately ensure that the company remains profitable, and thus give us the desired capital appreciation that we are targeting.
Diversification: With the vast number of publicly traded companies across various sectors and regions, the equity market allows investors to diversify their portfolios, reducing the risk associated with any single investment. This concept also applies to the mutual funds that own these direct share investments. At InvestLife we aim to build out portfolios that have Mutual Funds and ETFs that complement each other, with minimal correlation between the holdings within them, as we try to minimise the risk of being over invested in one holding (company).
Drawbacks of Investing in the Equity Market
Volatility: Equities can be highly volatile. This means that the value of investments can fluctuate significantly in short periods, leading to potential losses. There’s no guarantee that any given stock will increase in value, and some companies can even go bankrupt.
Requires Knowledge and Research: To make informed decisions in the equity market, one needs to conduct thorough research and stay updated with market trends and company news. This is time-consuming, but this is the Fund Managers bread and butter. Through their extensive analysis and screening of companies, mutual fund managers will discern which company/s will give them their targeted and sustainable long-term growth, by making unemotional decisions whilst at the same time managing risk factors. At InvestLife we access these fund manager reports and couple it with our own research to ensure that the strategy of these fund managers matches our views and strategy on where capital appreciation can be achieved.
In summary, investing in the equity market has long been considered a path to significant wealth creation for many investors. This we wholehearted agree with at InvestLife Advisory, but we are very cognizant of the fact that not all investors have the stomach to invest purely in the equity markets. That is why we leave that management to the professionals at Ninety One, Lindsell Train, Contrarius, and Baillie Gifford, as well as diversify away from having pure equity in our clients’ portfolios to ensure that we can get capital preservation and capital appreciation. It’s clear that while there’s potential for great reward in the equity market, it doesn’t come without risks. Investors who approach the market with a well-informed and long-term perspective, equities can indeed be a path to substantial wealth creation, but the key is to be informed, diversified, and disciplined in one’s investment strategy.
We hope that this article has given you some insights into equity markets, and how you as the investor need to make well informed decisions to preserve and grow capital over the long term.
