Investments: Where does the money go?

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” ~ William Feather

Recently, a religious organisation discovered their money had been invested in an oil and gas exploration company. Not wishing to support the mining of fossil fuels, they sold their shares in the company concerned. When you sell, of course, someone else is buying – so while the transaction did not necessarily harm the company directly, the organisation hopefully had the satisfaction of placing their money with ventures they felt offered a greater sense of altruism and good influence.

But more intriguing than anything they felt or did, is the fact that they knew exactly where their investment had gone. And most people, unless they’re well-versed independent investors who do their own selecting, have no idea what happens to their money once it is swallowed by a ‘fund’. This includes retirement funding, policies, money markets and all financial investing options across a wide spectrum of choices. In fact, it’s often a question they never ask. They simply expect the value of their investment to naturally, hopefully, grow.

Between you, the money and the market

Generally, your money will be invested in a mutual fund. A mutual fund comprises a pool of money from many investors that is then invested in money market funds, bond funds or stock funds. When you invest you are buying shares in the combined holdings of the mutual fund which is known as its portfolio. Each share you buy represents part ownership in the fund and you stand to benefit from the income it generates.

Mutual funds are popular because:

  • they invest in a range of companies and industries and therefore lower the risks
  • professional fund managers do the work for you, researching, selecting and monitoring performance of share values
  • they are broad-based and more affordable
  • they offer liquidity – which means you are able to redeem your shares at current value at any time
  • Index funds – a type of mutual fund which tracks broad segments of the stock market and is passively-managed over a longer period of time – is suitable for retirement funding.

So where does the pool of money go?

Many people hear the words ‘stocks, shares, units’ and know that means their money fits in somewhere – but where exactly has it gone? There are numbers on a piece of paper but what do those figures represent in terms of something happening elsewhere that is utilizing your investment but about which you know very little. What exactly are you supporting with your investment? And who is benefiting?

Here are some sectors among many that find their way into portfolios. There is the continual rise and fall of stalwarts – but interesting new elements are always coming on board:

Oil & Gas: This is currently a volatile space but still too large to be ignored. Falling share prices may prove useful when they are cheaper relative to their earnings potential.
Solar Energy: Slow growth until 2014 but huge strides have been made in this industry during the last year and there are good prospects that this may well continue.
Manufacturing: This sector is slowing but there is room for innovation and stronger leadership.
Defense: Whether we like it or not, this is a growing sector due to the growth in drone and surveillance technology. The world is a dangerous place and the need for security continues to drive investment.
3D Printing: Now that the hype is over and industry is settling to more effective use of this innovation, growth is set to skyrocket.
Financial Services: The perennial ride between regulation and risk but still set to make gains in the foreseeable future.
Retail: Economic mood is quickly reflected in this industry but it will remain in the top grouping. More personalised approach through social media is seen as a new option that may contribute to growth.
Raw Materials: Always factored in, but could prove a poor investment outside of major commodity bull markets.
Pharmaceuticals: Specialty drugs are set to fuel gains in this industry with good growth expected through to 2016.
Marijuana: Surprise, surprise – here’s a commodity proving increasingly popular and showing strong growth potential with regard to continued claims about its health benefits. Might be a nervous choice for South Africans but there are people everywhere who swear that the oil or the tincture of this plant brings about marked improvement in many ailments.

So you will see from the above – a few basic examples of a vast spectrum of sectors – your money may be invested across a range of possibilities. Each fund has a fact sheet which tells you in which shares the fund is invested, what percentage is invested in each share, and what the returns have been over a period of time. You can ask your Financial Advisor or Fund Manager to see these fact sheets at any time. Custom-designing your portfolio can be possible even if you are investing in mutual funds because you can choose your sectors and track your money if you wish.

Working with the professionals:

If you want to become a more discerning investor, then you need to work with your financial advisor who may be able to help you develop and target your own personalised portfolio in a way that suits you. However, you must remember that mutual funds invest where there is the broadest opportunity for returns and security. Balancing that with strongly philanthropic views may not be easy in the cut and thrust of business and the changing fortunes of the world.

At Foster Wealth we pride ourselves on approachable professionalism, focusing on personal attention and consideration of clients’ interests. Our experience, knowledge and flexibility will help you to make informed decisions about your investments, ensuring both satisfaction and peace of mind.

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