Earlier this week I was interviewed on radio about savings accounts for children. I related a story about the savings account I opened for my son — a story I have written many times.
For the last eight years I have invested R200 a month into Satrix 40, the latest statement shows that the investment is worth R35 200.
That relatively small amount which one hardly notices going off the account each month has grown into a very healthy lump sum and it demonstrates the incredible power of compounding returns.
In total I have only invested around R19 200, the rest is pure growth — and all this through one of the worst stock market crashes in history.
I was inundated with calls after the show about this amazing investment product and where people could find it. The point is in fact completely the opposite. This is no fancy investment; it simply tracks the average performance of the local stock market.
In fact I would have done even better if I had invested with a top performing equity unit trust fund like the Nedbank Rainmaker Fund or Allan Gray equity fund — then my son’s investment would have been closer to R50 000. The secret is simply saving into a growth investment.
If you save every month into an investment that gives you exposure to growth assets like equities (shares) and property, then over time it will grow. There will be ups and downs but over the long-term it will produce results.
But the real power is not only in the growth, but in the power of the debit order. Lump-sum investments can be negatively affected by market timing, ask any investor who invested a lump sum in the market at the beginning of 2008.
The debit order however allows for rand cost averaging because you are buying whether the market goes up or down. In fact when the market falls your future investment benefits because you are able to buy more units/ shares with the same R200 so that when the unit’s price rises along with the market recovery, you can multiply that price by even more units.
There is no secret in making R200 grow into R35 000, it is simply about starting today. Do not get worked up about whether or not you have chosen the best performing fund — that is wasted energy that usually results in inertia or even worse the switching of investments at the wrong time.
By all means do your homework, but even if you are just getting an average return, you will be smiling in eight years’ time when you open that statement.
Visit Smart Money for more news, blogs, tips and Q&As. Post questions on the site for independent and researched information.