Grant asks: I am very interested in investments, but do not know where to start.
People have advised me on Satrix 40, Nedbank Rainmaker, and Allan Gray. I would like to get my wife involved as her salary is about R6Â 000 per month. We also have a baby on the way and I would like to invest for her future.
Greg asks: I have a lump sum of R5Â 000 to invest and I want to put away an additional R2Â 500 away every month.
Please can you help as I have never done this before and I don’t want to get taken for a ride. I also don’t want to lose my money so I am looking for the safest option with the best interest rate.
Maya replies: With so many choices it is difficult to know where to begin and then we read all those media reports on being ripped off by fees. I sometimes wonder if this is not one of the main problems with our savings industry — we simply have too much choice, and that choice costs us money.
We worry about not making the “right” choice and that there may be a better option than the one we have chosen. This often leaves us in limbo. We have to move past this indecision if we are to start saving.
You need to start breaking down your savings decision as follows:
- The biggest influence on your final savings balance will be the amount you have saved. If you don’t start saving, you will have no savings
- Short-term savings of under three years should be in cash or cash like investments
- If you are looking at long-term savings then inflation becomes your biggest enemy, not stock market crashes. At the current inflation rate every 10 years your money halves in value. You have to invest in a growth asset that beats inflation over time — this means shares and property
- If you are seriously worried by the thought of opening your investment statement and seeing your savings halved by a stock market crash, select a multi-asset class fund like a balanced fund, flexible fund or an absolute fund with a CPI+5% benchmark. These funds allow the fund manager to move between equities (shares), property, cash and bonds and limit the losses from market volatility
- Select fund managers with strong track records. That means a fund that remains in the top quartile of its sector over a longer period of time. This fund does not have to be the best performer but must consistently beat its benchmark — otherwise you may as well invest in the benchmark. Consider fund managers like Coronation, Allan Gray, Investec and Prudential
- Fees are another major part of your decision; you need to look at the total cost ratio (TER) of the investment. A fund that has high upfront fees and high annual fees will erode your growth over time. Performance fees are also something you need to consider. If a fund manager only gets paid if they outperform (Allan Gray for example earns no fees if they underperform) this aligns the interests of the fund manager with the investor. However when the fund is performing well the TER can be very high
- A financial advisor can help you with your investment decisions, but the most important role they play is not in recommending funds (you can do that yourself) but in helping you create a proper financial plan which includes future commitments like education for your children. If you have a proper plan you are more likely to stick to it. But you need to find an advisor who can provide proper advice and is not just a product pusher. Also understand the fees involved
- Passive vs active fund. As many fund managers underperform their benchmarks (the JSE All Share Index) there is a strong argument for just investing in index tracking fund like the Satrix Rafi (see related articles — EFT vs Unit trusts). These are low cost and guarantee that at least you will get the average market performance. The downside in that these are 100% exposed to the share market so the volatility (ups and downs) will be higher than a multi-asset managed fund
- Switching hurts performance. Numerous studies have shown that the average investor underperforms the fund he or she is invested in simply because they move in and out of the fund in an attempt to time the market. Once you have made a decision, stick with it (unless something dramatic has happened to the fund management) and remember that this is a long-term investment. Attempts to time the market by withdrawing your money when you get nervous will only hurt your long-term performance
- Even if you managed to select the best performing fund, it will at times underperform, so don’t focus on short-term relative performance. Even if you invest in a fund with average performance, you will see your money growing far more than sticking it under the mattress (see related articles). Don’t sweat the decision of which fund manager to invest with as a decent manager should still perform over time
If you have R2Â 000 a month to invest and want to invest with active fund managers and would like some independant advice, consider investing through Investonline.co.za.
Via a questionnaire, they assess your risk profile and recommend a portfolio of unit trusts. There is no upfront fee and they charge 0,5% a year.
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