If you’re thinking about starting an investment fund but not sure where to start, read on…
If you have no head for figures and the mere idea of investing (‘Oh, you mean watching the squiggly lines go up and
down the graphs on the JSE index?’) leaves small sweat beads running down the sides of your temple because you
‘just don’t get it!’, don’t stress – it really isn’t that complicated!
Whatever your age, the current economic climate is concerning. Is your money working for you, and will you have
enough to sustain you for retirement? Or what about an emergency fund for those awful situations where the geyser bursts, your car’s gearbox needs replacing, and the tumble dryer has given up on life? Or perhaps you’re thinking of sending your kids overseas to university? Money is always in demand.
Jenny Albrecht, a chartered financial analyst and portfolio manager at Satrix, says having a savings account doesn’t
really cut it anymore if creating wealth is an aspiration. ‘Inflation is money’s biggest enemy,’ she explains.
‘Inflation destroys your purchasing power. So if something cost you R100 this year, it will cost more next year. If your R100 saving hasn’t at least kept up with inflation, then you’re actually not getting ahead financially, even though in essence you believe you are saving.’
Who should invest?
So what about investing? You’ve probably had numerous calls from personal finance experts, hoping to meet with you to look at your bank balances and see where they can make you some more money. It usually involves time and commitment, paperwork and a gamble, but in the long run it can be extremely beneficial.
‘Investors come from every walk of life,’ says Jenny. ‘Some are enormously wealthy and some are just starting out. The common thread is they don’t always understand where to begin.’
But investing is becoming much less complicated. Let’s start with the basic questions: What sort of assets are you
interested in to achieve a defined goal? How much time do you have to invest? And how much risk are you willing to take in making those investments?
What can you expect from your investments?
‘The stock market and other investable assets may seem like a completely random gamble, but, in fact, there is order, and you can earn returns provided you stick to your side of the bargain – committing to a time frame and understanding volatility.’ Sounds rough, but don’t worry, it isn’t all risk and no reward.
- Equities (shares): owning a stake in a company
- Fixed income (bonds): lending money to a company or government for interest
- Property and commodities: owning something physical like real estate, gold coins or art
- Cash: the money in your savings account or hidden under your mattress
There’s a whole range of assets to invest in. ‘An asset class is a group that has similar characteristics,
ie they behave similarly in the marketplace and are subject to the same regulations,’ Jenny explains. ‘The
four main asset classes are equities (shares), fixed income (mostly bonds), property, and cash.’ Each one
comes with its own rules and regulations, its risks and rewards, and its own timeline on determining when
you may see results. Jenny says, ‘The risk level is an indicator of the potential return – higher risk equals an
increased probability of a higher return, and vice versa.’ When it comes to choosing what sort of asset to invest
in, this is the part that may require some homework.
Ideally, you should understand the asset, and its ups and downs. It should also be something you have an interest in so that you’re more likely to invest not only your money, but also your time. If you’re focused on investing as a means to wealth creation, you should invest in several asset classes. Having a diverse investment portfolio means you reduce the overall risk and increase the probability of making returns.
Risk and reward
Once you’ve selected an asset class to invest in and the time frame needed to see results or to suit your financial goals, you need to decide on the amount you’re willing to invest and the risk you’re willing to take to see potential growth. Money + time + risk = greater rewards. ‘The more you invest and the earlier you start, the better your chance of increasing the return you receive,’ explains Jenny.
‘For example, a 10% return on R100 is R10, while 10% return on R1 000 is R100. Factor in time and compounding,
and you’ll see growth on growth if you leave your money invested for many years, as it has the chance to make money for you by earning returns on returns.
‘Investing is a slow and steady game; it takes tenacity and commitment. As you might often hear, it’s about time in the market and not timing the market,’ Jenny adds.
In for the long haul
‘Let’s say you decide to invest in a Satrix index tracking fund instead of a savings account,’ says Jenny. ‘Typically, investing in shares is a long-term commitment – a minimum of five years. And you need to decide if you can live with the associated risk of stock market investing.’ If you’re looking for something more stable, investing cash with a constant interest rate might be more suitable, as everything else fluctuates and you therefore need time to play it out.
‘But keep in mind,’ warns Jenny, ‘that if your money isn’t beating inflation, you’re not making any money. Inflation in SA is around 6%, so your money needs to earn 6% just to stand still – earn anything above and you’re creating wealth.’
In SA, equity returns have given around 7% real returns over a 10-year period. ‘Add 6% inflation and it’s possible to get around 13% per annum from investing in a broad market equity index,’ says Jenny. However, as the marketplace is a fickle and flexible animal, the returns don’t always work in a straight line leading skywards: 13% is not guaranteed year on year; some years you can do much better, and some years you might see a negative result, depending on how the market you’ve invested in is doing.
‘This is why you need time, so that you can be rewarded for the risk you’re taking,’ explains Jenny. ‘With equities, always think very long term.’
Tax-free savings accounts (TFSAS)
If you’re serious about investing, a good place to start is by opening a tax-free savings account (TFSA). As Jenny explains, ‘In your TFSA, all dividends, interest and capital gains on your investment will not be subject to tax, and over the long term this tax saving will make a substantial difference to your investment returns.’ These are available from most financial institutions and across various asset classes.
What you need to know
- Individuals can invest a maximum of R33 000 per tax year, with a lifetime contribution limit of R500 000.
- This is a fixed limit per tax year and there is no ‘carry-over’.
- There is no minimum amount, bar those imposed by the product provider.
- SARS will impose a tax penalty of 40% of the amount that exceeds the annual contribution limit of R33 000 per tax year.
- You can have more than one TFSA, as long as you remain within the limits above.
- You can withdraw funds at any time, but bear in mind that any amount you withdraw from your account will count towards your annual and lifetime limit.
There’s no minimum investment amount for Satrix ETFs via the SatrixNOW.co.za platform. All Satrix products are approved tax-free investment options.
Feature: Taryn Das Neves and images from Fotolia.com