Timmy wants to know where he should invest his cash.
I am 35 and have some savings in a ”park-it” account that offers some OK interest. I was wondering if I should put some of that into something like Satrix 40. If so, what portion? I have no kids, no bond and no debt. But as I save, I realise that I have to do something that grows it at least more than inflation. Help! Some cash, but little know-how or guts!
Maya replies: I would hazard a guess that the reason you are only invested in cash is mostly because you are afraid of losing money. You are also probably daunted by all the options that are available and which one would be the right choice.
Risk of cash
Let’s first deal with the fear. People focus on short-term risk which is that stock markets can fall substantially as we saw in 2008. However over the long term the real risk is inflation. Inflation is far more detrimental to your long-term savings than choosing an underperforming fund manager. Cash simply does not keep up with inflation. Even a high yielding money-market fund would, over time, underperform inflation by about 1% a year. Based on an inflation rate of 6%, in order for R250 000 to have the same buying power in 20 years time it would have to be worth R827 000. If your average cash return is 5%, your investment would be worth R678 000. That is a real loss of 18% that you will never be able to recover.
Without above inflation growth from your investments you would have to save 41% of your monthly salary to fund your retirement (this assumes you started at age 25 and retire at 60 and live to 80). That is virtually impossible for most people. In fact, the less you are able to save, the more you have to rely on growth.
If you were saving in a low-risk fund of 3% above inflation, you would need to save about 25% of your salary. If you invested in balanced fund with 70% equities and earned 5% above inflation, you would only need to save 15% of your salary. Put another way, if you invested in an asset that grew at 5% above inflation for 35 years (25-60 years old) about 60% of your final return would be from growth, not contributions. These figures clearly show the necessity of investing in growth assets.
Where to invest
This is the tough part. There are simply too many options and it can be very confusing. This is where it would be a good idea to sit down with a financial advisor to look at your overall assets and create a long term financial plan. Here are some things to consider, especially if you are risk adverse:
- Property
We tend to talk about the stock market but property investing, if done correctly, can be a very successful way to invest. It is also a favoured asset by people who are nervous about stock-market investments. By putting down a deposit and having your tenant pay your bond, you will have a fully paid asset generating an income on retirement. I have interviewed people who have successfully built up property portfolios which provide them an income on retirement. Have a look at this website for some information.
- Equities:
Despite the recent market crash it may come as a surprise that JSE All-Share Index (stock market) returned 119% from 2005 to 2009 (that is about 17% a year). The problem is that these returns do not come in a straight line. One year the market may be up 40% and the next year it is down 10%, or, in a real market crash, as much as 30%. The most effective way to counteract this volatility is through rand-cost averaging. This is a fancy way of saying invest through a debit order. The beauty of this is that you do not have to worry about the value of the market when investing and when the markets fall you know that your monthly investment is simply buying more shares because the shares are now cheaper and so will benefit when the market recovers. If you are investing in this manner, you should be comfortable with a 100% equity investment, but if it still makes you nervous, consider funds that aim to protect investors on the downside (Investec Opportunity Fund, Nedgroup’s Managed Fund are examples of these type of funds). These funds may also be a good place if you wanted to invest your lump sum.
You mentioned Satrix. Personally I like Satrix RAFI because it invests in blue chip companies based on valuation. Another investment to consider is Invest Online. This is a recently launched website that — based on your risk profile — will invest you in a portfolio of underlying unit trusts. This will give you diversification of fund manager risk and what I like about it is that it is far more cost effective that other ”fund of fund” products on the market. The minimum investment is R2 000 per month.
Ultimately you need to get some advice to create a holistic financial plan. This will take your tax situation into account and also clarify where you want to be financially in 10 years time, but hopefully the information above will give you some ideas and some key questions to consider.
Whatever investment you decide on make sure you understand the costs and that you are getting value for money.
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