Two readers ask where they should be investing their savings
Where can I invest my money and after how long should I expect reasonable returns, asks Buhle.
Ms Hatlane is currently studying and wants to know which institutions offer monthly savings products.
Maya replies:
This is a difficult question to answer without knowing more about your financial situation. But if you are young and have a five to 10 year investment horizon, then you need to be investing in equities. This is a fancy way of saying that you invest in companies that are listed on the JSE (Johannesburg Stock Exchange). When you invest in shares, you benefit from the profits that the company makes, which in turn is reflected in the share price. So after five years of investing, the share price of the companies should have increased.
There are a few simple rules to follow:
Beware of cash: Over time, cash will not keep up with inflation, so unless you are only saving for one or two years, it is best to invest in a growth asset like equities. If, however, you have a shorter time horizon and want to be in cash, there are two products worth considering.
Firstly, consider a savings account with Capitec. This bank offers excellent interest rates and you can fix your interest rate even if you are saving on a monthly basis. The second is a money-market unit trust; these offer better returns than a bank account although the returns will fluctuate. Most unit trust companies offer a money-market fund.
Power of the debit order: One of the best ways to invest is to have a monthly debit order. Firstly this means your savings go off before you can spend the money! Secondly, you do not have to worry about whether the share market is cheap or expensive because you will be buying regularly every month and over time you will have paid a fair price for your investments. You will be amazed at how quickly your money will grow. For example I started to invest R200 a month for my son about six years ago and today that investment is worth R30 000.
Where to invest: Unless you have a lump sum and have a good understanding of the share market, it is not advisable to invest directly into shares. Rather invest in a unit trust or an exchange traded fund (ETF) that in turn invests in a range of companies on your behalf. To invest the minimum monthly debit order is about R300 a month for most of these investments. As a starting point something like the SATRIX RAFI is a good start. It is low cost and tracks some of the larger companies listed on the JSE. For further information you can go to www.etfsa.co.za. If you want to invest in unit trusts there are over 800 funds available, so it can be a bit daunting. Focus on well known fund managers that have a proven track record and look at funds that have high exposure to equities. Be careful of fund of funds, for a small monthly debit order the additional costs are not always justified. If you are investing R2 000 a month then you could consider investing in a portfolio of unit trusts through www.investonline.co.za.
Costs: One of the biggest impact on your returns will be the costs incurred, so make sure you understand the costs of the investment
There are several costs:
Initial fee: This is taken off your investment before the money is invested every month. If you are investing R300 and the initial fee is 3% then you would only have R291 invested. This fee is charged by the unit trust company although some companies like Investec have waived this fee. If you use a financial advisor he or she could also charge an initial fee.
Annual fee: This is charged by the unit trust company and is usually about 1,5% per year on the total value of your investment. The financial advisor could also take an annual fee. The best way to find out the costs is to ask for the total expense ratio (TER). This will include all the unit-trust fees but not the financial advisor fee. One of the reasons I like exchange traded funds is because their fees tend to be far lower than unit trusts.
Return expectations: While an equity investment is expected to double your money every five to seven years, you need to remember that this return is NOT in a straight line. Last year, for example, the JSE all-share index (the combined performance of all the shares) delivered a return of 40%. The year before it delivered a negative return — so you would have lost money. If however you averaged the return out over the two years you would have a 20% return. So be careful of just looking at annualised performances over time, they do not show the volatility (the gains and losses) but just the average return over that time. For this reason you need to have a longer term view. If you are going to need this money within the next year then stick to cash.
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