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By Sonia du Plessis*Â
Many individuals avoid investing in the stock market or in savings products because they are not familiar with it or do not understand how it works. In fact, many people keep their savings in cash, but with interest rates at historically low levels, that choice can be a costly one.
Unwilling to take the risk and only falling back on what you know, even if other options could potentially have been better, can be the reason you do not reach your financial goals.
Sonia du Plessis, CFP®, highlights five easy choices that can work for any level of investor and can be included for investment amounts large and more modest alike.
CashÂ
Interest rates in SA and around the world are at historic lows, which means investors interested in the security offered by such liquid options over the short-term may lose out on better returns over the longer term and also may find inflation erodes the interest earned over this period.
An ordinary savings account, not a fixed deposit, which typically offers a low interest rate, is only suitable for a short-term savings goal like a holiday.
Fixed-term deposits or money markets accounts offer more favourable interest rates and are good options to consider for savings goals like a rainy day fund for emergencies.
Adding a tax-free savings account to the mix is an easy effective way to save for your long-term goals, without having to pay tax on interest, dividends or capital gains. Other distinguishing features include the ability to withdraw money at any time, contributions up to a maximum of R36 000 per year and a lifetime contribution limit of R500 000.
Government bondsÂ
In times of market uncertainty, bonds can shelter investors from losses and market pullbacks as they behave differently to the equity market (providing the benefit of diversification). Bonds have outperformed south African equities over the last five years.
The yields available on government retail bonds compared to money market options are phenomenal at present, especially over the longer term, equating to inflation plus 4%.
The fixed-rate option, however, is a good way to go, especially in the current diverged interest rate scenario between money and capital markets, and because the government is presently paying a premium to attract investment.
It is a good call for investors with a lower risk appetite and who do not appreciate the volatility of current markets. The interest payments on retail government bonds are guaranteed by the state.
It is an ideal vehicle for individuals that do not want to take on much risk with their savings. The minimum investment is only R1 000, which makes it very accessible for all levels of investors, and one can invest in multiple types of bonds and various intervals.
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Unit Trusts
There are more than 1 000 unit trusts available in SA, which means investors have a wide range of choices depending on their risk appetite or investment goals. To navigate the myriad of choices it is advisable to consult an accredited financial advisor.
Collective investments are transparent, well-regulated and easy-to-understand investment vehicles, and are well-suited to a wide range of investment objectives. Distinct advantages of unit trusts are that they include professional portfolio management, the ability to diversify a portfolio cost-effectively, relatively low transaction costs and the ability to buy and sell at will.
Unit trust are the ideal investment vehicle if you are savings for a long term goal, like a child’s education. Unit trust are also used quite frequently in retirement savings products.
ETFs (Exchange Traded Funds)
Index trackers are low-cost options to track popular stock or bond market indices and other underlying commodities like gold. Thousands of indices track the movements of various sectors, markets, and strategies on an ongoing basis, for instance, the JSE Top 40, the S&P500 and many more. Indexing is mostly automated and therefore does not involve as much ongoing research and analyses by fund managers and analysts, resulting in lower costs and more fee transparency and it can be easily liquidated if need be.
Investing offshore
As the SA economy continues to deteriorate many investors are seeking diversification away from the risks of the local market and to share in the superior returns currently achieved by investing in international markets.
Investing in an international currency. Due to the prevailing exchange rate of the rand against the leading global currencies, this option does require larger amounts and also the expert assistance of a forex expert and a financial advisor.
Many local asset managers offer funds that invest exclusively in international assets. Sygnia and Ninety One are two such companies (of many) with a range of funds for investors wanting to invest in rand but have exposure to the better returns available through investing in global assets.
A mix of these five options can create a well-rounded financial plan, but the choices of the funds and the weighting of each option in an overall investment portfolio needs to be chosen carefully. Best way to navigate the choices is with the guidance of an accredited, qualified advisor that can tailor it to the investor’s financial goals, risk profile, and personal circumstances.
Read more about investment planning.
- Sonia du Plessis is head of the Stellenbosch office of Brenthurst Wealth. [email protected].
