MONEY CLINIC | I managed to save R200k while I was employed. How should I invest it?

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A Fin24 reader who is currently unemployed has managed to save R200 000 during his employment, and wants to know how best to invest his money. He writes: 

l worked at Transnet for two years. During my period of employment l managed to save up to R200 000. 

Now l am unemployed and in search of a job. What is the best way to invest my money and have it grow? 

Craig Gibson, Investment Consultant at 10X Investments, responds:

The starting point in determining how to invest your savings would be to assess your financial needs and situation. As we don’t have this information, we can provide only general guidelines, not specific recommendations.  

The most important information in answering your question would be your age and time horizon; this is critical in choosing your investment strategy. If it is likely that you will need to access these funds quite soon (bearing in mind your current employment situation), you need to invest defensively (in cash or a low equity portfolio) to preserve what you have. If you don’t intend to access this money for many years (not until your retirement, perhaps), you should invest for growth, which means taking on more market risk.

In general, the longer your investment horizon, the more exposure to growth assets (shares and property) you can afford to have. Growth assets have historically delivered the highest returns of the main asset classes over periods of five years or longer, typically 6-7% pa after inflation. Although future returns are expected to be lower, they are still likely to beat the return from cash and government's bonds (so-called defensive assets), which have historically returned 1-2% after inflation.    

The downside of investing in growth assets is that returns over shorter periods are volatile, meaning the value of your investment can fluctuate significantly. This can be detrimental if you need to cash out a portion of your investment when markets are down. Or if you don’t have the fortitude to ride out the market’s ups and downs and switch to cash after a market crash, thereby locking in your losses.

Investors with a horizon exceeding five years should invest in a high equity portfolio (roughly 75% allocation to shares). Medium equity portfolios (60% allocation) are better suited as 4-5-year investments and low equity portfolios (35% allocation) for 2-to-3-year periods. These portfolios should be broadly diversified, giving you exposure to a mix of foreign and domestic property and shares, bonds and money market instruments.

The asset mix is one of the two main drivers of long-term investment return. The other is fees. Over a 25-year period, every 1% (100 basis point) reduction in fees will improve the investment outcome on a lump sum investment by 27%. For example, if your R200 000 investment earns a 5% p.a. after-inflation return, net of a 1% p.a. fee, you will end up with R677k (in today’s money terms). If you paid 3% in fees, you would end up with R419k. By paying 2% p.a. less in fees, you end up with 62% more money!

You need to be very aware of the cost of the product. Be careful of hidden layers of fees. Be sure to examine the “Effective Annual Cost”, a comprehensive breakdown of all fees. Adding up advice fees, management fees, admin fees and other fees, people often pay 2 or 3% per year. Ideally, you should pay less than 1% pa in total fees. Providers of passive/index funds charge far less than the providers who actively manage their funds while delivering similar and often superior returns.The elements of investing are relatively simple, but choosing and executing on your own can be daunting, given the myriad of options and enormous choice. Don’t let that put you off, though, because the long-term rewards will be worth the upfront struggle.              

*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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