It’s all about the units

Back to Money advice
9 November 2018
That really funny-old-looking dressing table in my mom’s house that she wanted to toss years ago suddenly has a handsome rand value. It is now an antique and worth so much more than she paid for it. But how did it become so valuable?
 
The short answer is time and patience. The longer she kept it, the more it multiplied in value.

Many years ago that dressing table was nothing more than pieces of wood carefully crafted for a specific purpose. In fact two weeks after purchase you could not even sell it to recoup what you paid. Yet today it is worth twenty times more. It was never about the price but rather the purpose for purchase, the desire to have a practical dressing table.

Investing is similar. It’s about the purpose for purchase – and when it comes to unit trust investments, it’s all about accumulating units.

Unit trusts are powerful investment tools that can help you invest for any goal or investment aspiration you may have.

They are ideal for short- and long-term investing; anything from your next big holiday or your kids’ education, right through to supplementing your income in your retirement years.  

The value of a unit trust is relatively easy to calculate. Each unit trust in the investment market has a market price. When you buy (invest) into a unit trust you give the unit trust manger your money and they buy units in the unit trust for you at a certain price.

These purchased units now belong to you, effectively making you an owner in the unit trust along with other investors. The value of your investment in the unit trust at any point in time is determined by multiplying the number of units you own by the current market price of the unit trust.  The market price of unit trusts changes over time.

For example:  You want to invest R1 000 in a unit trust that has a market value of 50 cents per unit. Your R1 000 will buy you 2 000 units in the unit trust (R1 000 ÷ 0.50). If the price of the unit trust moves up in value to 60 cents, your investment value increases to R1 200 (2 000 units x 0.60). If the price falls to 40 cents, your investment value drops to R800. 

Fees, terms and conditions, and proper financial advice are extremely important when choosing the unit trust that’s most appropriate for you. But once you have done your homework and you’re satisfied with your choice, it’s all about the units and how many of these little things you can accumulate over time.

I recall times when my mom’s antique table was out of fashion and worthless. But its true financial value was only realised over time. Again, investing is similar. There will be times when the investment appears to be going nowhere, like it’s worthless. But it is in those times that opportunities present themselves to increase wealth and really get ahead.

If my mom knew at the time that her dressing table would be worth so much 30 years later, she would have bought three more back then. The same holds true when investing. When unit trust prices fall – usually in gloomy economic times – it can actually be a great time to buy more to benefit later.

Consider the following example:

Investor A invests R1 000 into a unit trust that cost 50 cents per unit and receives 2 000 units (R1 000 ÷ 0.50). Investor B invests R1 000 into the same unit trust 20 days later, when the price per unit has dropped to 25 cents. Investor B therefore receives 4 000 units (R1 000 ÷ 0.25).

Two months later the price of the unit trust recovers nicely to 60 cents. The value of Investor A’s investment in the unit trust is now R1 200 (2 000 units x 0.60) while Investor B’s units are worth R2 400 (4 000 x 0.60).

So you see, the more units you can accumulate, the better. Don’t let a drop in unit trust prices scare you. Rather see it as an opportunity to buy units at a much cheaper price.

You should have fun when investing in unit trusts. If you’re not sure how, approach your investment in the same way you would approach buying antiques or other collectable items.

Don’t worry about how much it is worth right now. The best approach is to accumulate as many units as you can for future reward and wealth.

Remember, long-term investing is not about how much money your investment made or lost in the past year.

In the case of unit trusts, it’s about how many units you accumulate. These little “budding antiques” are what help to build your wealth over time.

Invest in one of our uniquely-engineered unit trust funds by speaking to our financial advisors today. 

 

 

Gareth van Deventer CFP®
OUTvest: Head of Advice
0860 688 837
This article does not constitute holistic financial advice as it does not take into account one’s personal financial circumstances. Please contact OUTvest before implementing any financial plan or advice to ensure that you make an informed decision.
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