MONEY CLINIC | I'm 18 with R10 000 to invest. What are the safest long-term investment options?

The most important step in any investment plan is the decision to save
The most important step in any investment plan is the decision to save

A teenager with R10 000 to invest wants to know how to go about investing in the long term. She writes: 

I'm an 18-year-old looking to invest my money for a long term, but I'm not sure where to start and which investment is safe. I have got R10 000.

Asavela Gwele, Client Relationship Associate at 10X Investments, responds:

The most important step in any investment plan is the decision to save, so well done, you have already made the start. One day you will thank yourself for starting early. I will try to give you a big picture overview, looking at key elements of investing.

To begin, let's touch on the term "safe" investment, or what is usually called a low-risk investment. This is an investment that gives an almost guaranteed return with close to no risk that you lose any of your capital (either because you make a poor investment, or, even worse, that someone steals your money).

Putting your money in the bank is considered a low-risk investment because you are almost certain to receive back the capital you put in and the interest rate you were promised. Low-risk investments (which usually includes government bonds) deliver low returns, typically no more than 1% or 2% per year above inflation over the long term.

The share market is considered a high-risk investment because it does not guarantee a return and share prices fluctuate daily. To compensate for this uncertainty, the share markets promise a higher return, but only measured over the long term. Historically, this return has been around 6% to 7% per year after inflation. The worst 35-year return from SA stocks since 1900 is 5% per year (after adjusting for inflation). 

Of course, future returns are never guaranteed, and this number will probably be lower in future. Still, it will most likely be considerably higher than the return you receive from cash and bonds. This makes shares a low-risk investment for long-term investors.

So, you see, the concept of "safety" or "investment risk" depends on your investment time horizon. For short-term investors (typically less than five years) the risk lies in volatile returns and losing some of their money just before they need it. But for long-term investors, the risk lies in earning too low a return and missing their long-term financial goal.

As a long-term investor, you should thus weight your investments heavily in favour of shares, accepting that returns may be volatile in the short term, but will most likely be considerably higher than from cash or bonds over the long-term.

Diversify

Another important concept is diversification, especially in the context of "safety". Don't invest in just a few shares, but rather a broad basket of shares that offer exposure to different industries, currencies and geographies. Also, you should allocate a portion to other asset classes, such as cash and bonds. Passive investments, also known as index funds, allow investors to buy a slice of the market as a whole.

The other big driver of long-term investment return is fees. Over a 40-year period, every 1% (100 basis points) increase in fees can reduce your final savings outcome by around 30%. R10 000 earning a nominal 10% per year for 40 years will grow to R453 000, but only to R314 000 at 9% per year. Therefore, you need to be very aware of the cost of the product.

Ideally, you should pay less than 1% per year in total fees. You will find that the providers who offer passive index funds charge far less than the providers of actively managed funds, while delivering similar and often superior returns.   

The most conventional investment vehicle in South Africa is a Collective Investment Scheme, or unit trust. The "trust" pools the money of many investors and does the investing on their behalf. You own units of that trust. These units are priced daily according to the performance of the underlying investments. Each unit trust will have its own fact sheet (or Minimum Disclosure Sheet) setting out its past performance and explaining how and in what asset classes it invests, and what fees it charges. Be warned that a fund having done well in the past does not mean it will do so in future.

You could also access the markets by opening a stock broking account, but the complexity and the cost make this option prohibitive for investors with relatively little capital and limited experience.    

If this sounds too complicated, the good news is you can invest in funds that meet all these criteria: balanced multi-asset portfolios. You can engage a financial advisor to help you access such a fund, or you can do it online by way of a LISP (Linked Investment Services Providers) platform, or by dealing directly with asset management companies or other financial institutions, also via their website or call centre. 

Whatever you decide to do, try to choose an investment that makes sense to you and comes at a cost that is manageable today and over the long term. Giving your money time to grow and compound will yield amazing results after 30 or 40 years. 

  • Questions may be edited for brevity and clarity.

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Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner. 

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