Investment principles for beginners

Investing is a great way to grow your wealth and save for specific short-, medium- or long-term goals. But it might be a bit intimidating when you first start out and you will need some help to decide how you want to invest and why.

Whether you do it yourself or with the help of a financial planner, investing is an important part of your wealth journey. But before you get started you need to understand some basic investment terminology and principles to help you on your way to becoming an investment genius.

For the best experience, we recommend that you work with a financial advisor to help you understand the process and make the right decisions − but you can do it yourself.

Your return on investment will depend on various factors. Here’s what you need to know.

Investment risk vs return

One of the key components of investment is risk. When you start investing you’ll need to determine the risk vs the possible returns on the investment. Most investments are subject to the performance of the market, as most investments are linked to the market in some or other way.

The way you set up your investment portfolio will take into consideration the risk you’ll be taking on and whether you’ll make a profit from your initial investment amount. Most often higher risk could translate into a higher return, but it’s not a given.

When you start investing you’ll need to do a risk assessment or have a financial advisor draw up one for you. This will give you an idea of the possible returns on your investment and clarity on what the risk factors are.

Before you start investing, you’ll need to take the following into consideration:

  • Risk is generally a subjective assessment and depending on your situation and type of investment, your risk will differ from other risk.
  • Higher risk doesn’t necessarily give more growth. As investment comes with risk; it’s a bit like rolling a dice, but with a proper risk assessment and cautious investment you can increase the probability of higher returns or growth.
  • It is not only the income that can be at risk, the initial investment amount can also be at risk. The initial amount is not guaranteed with all investment types and could reduce or be lost over time.

Your investment horizon

Your investment horizon refers to the period for which you plan to invest your money. This affects the growth on your investment. Long-term investments tend to give you more reward. It should be one of your first considerations when evaluating your investment risk. The longer you invest in the share market, for example, the smaller volatility's influence may be, whereas shorter investments tend to have a higher risk compared to longer-term investments.

Risk assessment plan

Every type of investment comes with some form of risk, which makes it very important that you do a risk analysis to determine whether the investment is worth the risk or is something you can afford.

A risk assessment plan should include the following:

  • Type of investment.
  • Investment amount.
  • The duration of the investment or investment period.
  • The possibilities for loss and gain.
  • How you can mitigate risk.
  • The cost of the risk vs the possible returns.

Investment strategy

As part of your risk assessment plan, you need to have a solid investment strategy in place. This will help you gauge what type of investor you are, what your goals are, the kind of investments that you want to put your money into and how much of a risk-taker you are.

This will help you make the right investment decisions and choose the right investment vehicle to achieve your investment goals.

A financial advisor can help you with this when you start looking at investment solutions.

Interest and compound interest

The main idea of most investment types is to earn interest. There are two types of interest: simple and compound interest. Simple interest is the interest that you earn on your investments. This can be paid out to you, or if you would like to reinvest it, you can add it to the investment. Compound interest is when you reinvest interest, which means you earn interest on interest. This cycle can boost your investment profit and your investment will grow much faster. Here the investment horizon also plays an important role – the longer you invest and reinvest for, the higher your growth will be in the end. It is also a helpful tool for short-term investments, as earning interest on interest will significantly increase your original investment.

Investment types

There are various investment vehicles available and choosing the right one will depend on your investment needs and goals.

Here are some of the investment types available to you:

Investment typeInterestDividendsIncomeCapital gainsInvestment horizon
Savings accountXN/A
Deposits (call, notice or fixed-term)X0-5 years
BondsXFrom 1 month
Unit trustsXMedium/Long term
Retirement annuitiesXXXLong term
Exchange-traded fundsXXMedium/Long term
Shares and derivativesXXXXMedium/Long term
Gold coins (like Krugerrands)XMedium/Long term
Physical propertyXXMedium/Long term
This information is for general information purposes only and is not legal advice.