A Fin24 user who has a diversified investment portfolio seeks advice on what to do with the earnings from her bank savings account. She writes:
I’m a 23 year-old female, I have a retirement annuity and I’m currently employed by the state.
My question is about what to do with my bank savings account that's earning 3.5%. I have other savings vehicles that I contribute to monthly and I’m thinking of just adding to those or just starting another savings account. The other savings are Satrix, etfSA and Old Mutual unit trusts.
Matthew Chapman, NFB Financial Services Group, responds:
As always with isolated questions it’s impossible to provide bespoke applicable financial advice without insight into your full financial affairs. Issues such as current assets and debt; income and expenses; tax efficiency; investment portfolio composition; estate plan provisions and risk tolerance would all play major parts in formulating a plan that would be designed specifically to accommodate your exact needs and goals.
To then answer your query about the bank savings I would make the following observations:
• As you are young you should be allocating more of your monthly investments towards growth orientated assets such as equities.
Assuming with reasonable certainty that your Satrix and etfSA investments are both equity orientated these would form part of the growth allocation in your portfolio which means that you are in fact currently correctly positioned.
• The Old Mutual unit trusts I cannot comment on as I do not have an indication of how these are allocated along the risk spectrum.
• In terms of your retirement annuity, again I have no insight into underlying allocation and would only make comment that contributions to a retirement annuity of up to 15% of your non-retirement funding income can be deducted against your taxable income which may serve as food for thought on current contributions.
• The 3.5% interest you are earning from the bank does seem low and I would imagine this would be in a fully liquid call type of account without any liquidity restriction/yield enhancement trade-off.
It would ordinarily be advisable to allocate a portion of your portfolio to a more liquid cash/bond type of investment so as to provide liquidity in the event of an emergency or to cover for unforeseen debt expenses.
We would suggest that this should amount to approximately three times your monthly salary. Although, without insight into your current debt situation and assuming you have sufficient liquidity provisions I would err more towards continuing to increase your growth allocation.
As the two current equity investments are passive in nature (attempt to track the index), this has covered your beta base (market exposure). It may well work in your favour to add an active manager into the mix to create a core-satellite approach and introduce an element of alpha into the portfolio.
These managers aim to outperform the market and charge fees to do so, however we have seen the top managers outperforming the index after fees over the long term, especially in smaller; less efficient markets like South Africa.
Again I’m not sure as to the value or contributions levels of the current investments you have but it may well be wise to consolidate the portfolio into a single discretionary investment platform which will allow for 1) leveraged costing efficiency and 2) ease of administration and fund switches should you wish to change the underlying managers.
These products effectively act as carrier pigeons for the underlying unit trust managers which would allow you to have a single view of your entire discretionary portfolio.
As this cannot be construed as formal financial advice, it would be in your interests to contact a certified independent financial adviser, who will be able to conduct a full analysis on your financial position and goals provide professional guidance with regards to your entire financial plan and risk profile.
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