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By Helena Conradie*
Everyone knows they should invest. It’s akin to brushing your teeth twice a day, or eating take-aways in moderation. But while it’s easy to understand why brushing your teeth or eating healthily benefits us, it isn’t always that clear why we invest.
Investors come from every corner of life – some are enormously wealthy and some are just starting out. The common thread is that they don’t really understand investing, but they want to start. We’ll get into many aspects of investing in this series, but first let’s recap some investing basics.
Why do we invest? Of course it is to get rich, have some money for retirement or at the very least have an emergency fund. While simplistically it is about that, it is also about a lot more. People set aside money for many reasons. Where you invest those savings is, however, the most important part of achieving a desired outcome. So, the first question is – “What is it you desire?”
Inflation is money’s biggest enemy. Inflation destroys your purchasing power so that which costs R100 this year, will cost more next year. If your R100 saving hasn’t at least kept up with inflation then you are in fact losing money, even though in essence you are saving or investing.
So, what exactly 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 returns you can earn provided you stick to your side of the bargain – committing to a time frame and understanding volatility. Sounds daunting? Don’t worry, we’ll get there.
Investors invest in a range of listed (on an exchange) instruments grouped into classes of assets. An asset class is a group which has similar characteristics, i.e. they behave similarly in the marketplace and are subject to the same regulations. The four main asset classes are equities (shares), fixed income (mostly bonds), property and cash. Each asset class has a particular level of risk associated with it. The risk level is an indicator of the potential return – higher risk equals an increased probability of a higher return and vice versa.
When investing, the first decision you make is which asset class to invest in. Think about the choice you make to either keep your money in a bank account or invest in a Satrix index tracking fund. Here you are choosing between cash or equities (shares).
Your decision depends on how much time you have to invest. Typically investing in the stock market is a long-term investment – minimum five years. Then you’ll decide if you can live with volatility. The only investment which doesn’t go up and down is cash earning an interest rate. Everything else will fluctuate and you need to have time for this to play out.
The chart above shows the average percentage return to expect from each asset class given that you commit to the time required. To calculate the real returns above we used 117 years of data and then looked at average annual returns over rolling 10-year periods.
A real return excludes inflation. Remember, if your money isn’t beating inflation you are going backwards. Inflation in SA is around 6% currently, so your money needs to earn 6% just to stand still – earn anything above 6% and you are creating wealth.
So, equity returns, on average, have given a 7% real return over 10-year periods. Add 6% for inflation and it’s possible to get about 13% per annum from investing in the broad equity market. HOWEVER, those returns do not come in a straight line, i.e. you don’t get 13% every year, year-on-year. Some years you may get 18% and some -5%. This is why you need time so you may be rewarded for the risk you are taking on. With equities, always think very long term.
Extrapolate this thinking to the rest of the asset classes above and you’ll start to see which asset classes give the best returns – they also tend to have the highest risk. How much risk are you comfortable to take on?
Now that we’ve established what to expect from your investment, there are two more things to consider (and which are completely in your control).
- How much can you invest? The more you invest and the earlier you start, the better your chance of increasing the return you receive. For example, a 10% return on R100 is R10 while 10% return on R1 000 is R100.
- How much time do you have? Compounding is simply growth on growth. If you leave your money invested for many years, it has a chance to make more money for you as you’ll earn returns on returns. The example below illustrates this.
The ‘compounding’ column gives you growth on growth, while the ‘no compounding’ column just gives you a simple return year-on-year. I’ll take compounding any day and leave the money for as long as I can.
Investing is a slow and steady game, it takes tenacity and commitment. As we always say, it is about time in the market and not timing the market.
We have made it our business at SATRIX to allow every person in our beautiful country to be able to afford and have access to the power of the stock market through our online platform www.SatrixNOW.co.za . We’ll continue listening to what our investors want and democratising the market for all.
As always and till next time, #JUSTSTART
- Helena Conradie is CEO of SATRIX
- Satrix Managers (RF) (Pty) Ltd is an authorised Financial Services Provider and a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS Act. The information in this article does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Collective investment schemes are generally medium- to long-term investments. Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to it being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF Minimum Disclosure Document and/or on the Satrix website.
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