How to Invest Your Money

To secure your financial future, investing your money now makes good sense.

Most people believe that investing their money is complicated or that it’s only for the rich. But the truth is that investing wisely can make you more money, and it’s easier than you think.

When is the best time to start?

Sonja Linde and Lauren Meeser, financial advisors from InSync Financial Services, say: “A good guideline is to start contributing to some form of an investment vehicle before the age of 25.” According to Lesyl Potgieter, a financial planner at Sasfin Financial Advisory Services, this gives you the advantage of time. Even if you start investing a small amount, the more time your money has to grow and earn interest, the more likely it is that you will achieve your personal financial goals in the long-term.

Why should you invest?

Over time, inflation reduces the “buying power” of your money. The “eroding factor” of inflation points to how much less food you can buy for R100 today than you could’ve bought 10 years ago. Investing offers your money the opportunity to increase in value and beat inflation. Investing also allows you to save for financial goals such as travel, purchasing a house, your children’s education, and your retirement years.

Where to start?

There are two main types of investments: compulsory and voluntary. Compulsory investments have the goal of providing retirement funding and are designed to ensure the maximum benefit goes towards your retirement. The government provides South Africans with tax benefits to encourage them to save for their retirement. Voluntary investments, also known as discretionary investments, are more flexible and provide the option of accessing investments at any time or after a set period. They have higher tax implications. Speak to a financial advisor to help you come up with the right strategy for you and implement it.

What are the risks?

The most obvious “risk” is equity exposure, in other words, how the number of shares that are traded – and their price – change daily. Another risk is when the markets do badly, the value of your investment will reduce and you might have to draw down an income or lump sum, which means you have to “realise” their losses. Another risk is simply choosing the wrong investment – for example, selecting a fixed investment when a flexible investment vehicle would have been more suitable because it allows access to the cash.

High-risk versus low risk

An investment risk is defined as the permanent loss of capital and/or underperformance relative to expectations. A high-risk investment is when there is a higher chance of loss of capital or underperformance. Thus, low-risk investing not only protects against the chances of loss, but also makes sure that none of the potential losses will be devastating.

All investments carry some risk, and the higher the risk, the higher the potential returns. Stay away from complicated investments. Choose one investment strategy and stick to it. Diversifying into a balanced mix of different assets can reduce an investor’s risk. This means not putting all your eggs in one basket.

Types of Investments

Compulsory

• Retirement annuities: These provide a lump sum and monthly payments once you retire.
• Pension funds: Funds arranged by your employer, to which you and your employer contribute. The fund provides pensions for employees when they retire.
• Provident funds: One lump sum is paid out when the employee retires.
• Preservation funds: These allow people to invest the proceeds of pension or retirement funds. Employees can transfer money to a preservation fund if they resign, are dismissed, or are retrenched.
• Beneficiary funds: These exist to receive lump payments on behalf of dependants under the age of 18 if an employee passes away.

Voluntary

• Endowments: Saving plans that allow investors to access their money after a set period or when the investor passes away.
• Unit trusts: These are schemes that pool together the money belonging to a number of investors for the purposes of investing in the financial markets.
• Shares: Shares are portions of a company that can be bought by investors. Investing in shares potentially generates high returns; however, with volatility in the stock markets, the risk of capital loss is high.
• Money market funds: These aim to earn interest for investors while preserving capital. The returns are quite stable and in the long- term returns are lower than those achieved by shares.

Credits: COPY: Adapted from an article originally written for RCS by Michelle Hattingh.

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