Once you have a lump sum, should you buy property, purchase shares in a start-up company, or invest on the JSE?
“I am ready to formulate a financial plan and want an idea of where I should be investing my money for a real return. Once I have my lump sum should I buy a property, purchase shares in a start-up company that looks very promising or invest in shares on the JSE?” asks Dalen.
Dalen has already saved up R150 000 which is invested in a flexi-fixed FNB account. She would like to grow this lump-sum over the next few months by adding further deposits and hopes to have accumulated R300 000 by then. She is however concerned that the 5.35% interest rate she is earning will not keep up with inflation.
Maya replies: As you have a 10-year time frame these are all viable options, so one needs to look at each one in turn and understand the risks and return potential.
In terms of your current interest rate, in the short term inflation is less of a concern than capital risk. As long as you are receiving the best interest rate available there are not many other options unless you start taking market risk which is not ideal for a time frame of less than 18 months. Over the long term market risk declines and inflation risk increases so it would be wise to look at growth investments for your lump sum.
Over the next year we will see good opportunities for buying property. According to the FNB Affordability Index, houses are now the most affordable they have been since 2004 as house prices have stagnated and salaries have increased. At the same time rental yields should start increasing as higher deposit requirements and stricter lending criteria make it difficult for people to buy a home and they tend to rent for longer, increasing the demand for rental property.
The risks are non-paying tenants and unexpected interest rate hikes. Property is also not very liquid and you cannot sell it in a hurry. You can manage tenant risks by being pro-active and properly vetting potential tenants. There are also insurances available that pay for legal fees and defaults if you have a problematic tenant.
You can manage interest rate hikes either by fixing your interest rate or building up a buffer and paying more towards the mortgage each month so that you can absorb future rate increases.
Shares in a start-up company
This is a high risk, potentially high reward situation. A small business that grows into a large one can deliver massive returns for those early investors. However only around 40% of small businesses survive let alone go on to do great things. An investment in a start-up company should not be a corner-stone of your financial plan. High risk investments should only make up around 10% of your total investment portfolio. So either allocate only R30 000 towards this venture or wait until you have built up more capital.
When looking at investing in a start-up, make sure you understand the business very well:
- Do you trust and believe in the people who will run it?
- Will you be kept up to date on all developments and will you be able to see the books on a monthly basis?
- How involved do you want to be?
Companies listed on the JSE
By investing in companies listed on the JSE you are effectively a shareholder in a business that has a proven track record. By investing in a unit trust or exchange traded fund you will spread your risk across many different companies. If you have a 10 year view then equities should form part of your financial plan. You do not have to wait until you have accumulated a lump sum; in fact one of the best ways to invest is monthly rather than a lump sum, especially during volatile markets. If the market falls you are able to buy shares for even less than you did the month before. If you decide to go this route you can immediately switch from saving into your flexi-fixed deposit and rather contribute monthly to a unit trust or ETF.