A Fin24 reader who managed to save over R100 000 over the years seeks the help of an expert on how to invest the money.
I have just over R100k saved up, mostly from my salary over the years. I don't foresee having real use for it for at least the next five years. How do I go about investing this money?
Brett Mackay, Investment Consultant and Group RA Manager at 10X Investments responds:
There is no short answer to this question. The toughest decisions when it comes to investing are deciding what vehicle to invest in and how long to invest for. You already know the time horizon is five years or more; now you need to decide on where the best place is to invest the funds.
Keep in mind that when it comes to investing certain things are out of our control (market performance, inflation) so it is crucial to focus on the things you can control, particularly the fees you pay and the cost of running the investment.
An important question to ask is whether you should invest the funds as a lump sum, or in stages throughout the year. I prefer to start with a small lump sum and continue with a recurring debit order. This ensures that I am buying units at a different price every month (this is called rand-cost averaging).
Diversification is very important too, so make sure your money is invested in a wide range of assets.
Holding a diverse range of equities will give you the best chance of generating inflation-beating returns over time. There may be some bumps in the road, but over five years you have enough time to ride out any ups and downs.
Here are some options:
- Tax-Free Savings Account (TFSA): Maximise on your annual tax-free saving allowance. You can contribute R36 000 per annum into a TFSA. A TFSA should be seen as a long-term investment: the longer you leave it to grow, the more tax-free returns you get. However, you do have the option to withdraw the funds at any time. A TFSA also allows you to invest 100% of the funds in equity or shares, and there is no offshore limitation – ideal for the time horizon of five years or more. Another great thing about TFSAs is that they are generally low on fees and costs, helping you get more return at the end of the day.
- A unit trust: A great way to invest for any time period. The underlying portfolio determines what the return will be. The longer the term (the time until you need the funds) the more aggressive (higher equity exposure) you should be. Shares (or equity) tend to be more volatile over the short term but deliver better returns over the longer term. Diversifying your investments across assets, asset classes and geographies reduces your risk.
- Retirement annuity: The perfect investment for anyone looking to add to their retirement savings and a way to max out on tax incentives for retirement savings. If you haven’t already used up the year’s allowances for retirement saving, you could deposit your savings as a lump sum into an RA and claim back the income tax you paid on R100 000 of your earnings at tax-return time.
When choosing a fund remember that fees are the most reliable predictor of returns (according to Morningstar) so make sure you understand the fees you will be paying.
If you need to pay someone to understand the product, or the fees charged for it, ask yourself if this is in your best interest.
Investment returns matter, but remember retirement saving is a marathon, not a sprint. Once you have a shortlist of funds look at returns for the last 10 years or more.
Starting with the suggestions above was based on the presumption that you do not have short-term debt. If you do, it is important to consider prioritising paying this off. Carrying debt limits your potential to increase your total wealth or net worth via investments.
Questions may be edited for brevity and clarity.
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