Your investments could fund your dream holiday, education for your children and even buy a business and property! If you start investing today, you can build an investment portfolio and achieve your goals! Follow these tips for first time investors from Palesa Dube, certified financial planner and South Africa’s financial planner of the year for 2022, and you can start building your wealth!
“It really is important to start your investment journey early,” Palesa says. The reason is compounding, which is when your investment earns returns, such as interest and/or dividends, on the original amount you invested as well as any returns earned! The longer your investment has to benefit from compounding, the more it can grow.
“Invest as early as you can, even if it is only R100,” Palesa says. “ R100 is better than nothing. Whatever you have, start investing early and it will really stand you in good stead.”
Know why you are investing
Palesa says we should have three investment “buckets,” and know which bucket we are investing in.
Bucket 1 is your emergency savings, for when you have a broken oven or fridge, or need new car tyres or cannot earn, as many experienced during the COVID-19 pandemic.
Bucket 2 is for your short to medium-term goals (around 2 to 7 years), such as making plans for a trip to Europe with your friends, or sending your young teen to university in a few years time.
Bucket 3 is for your long-term savings such as your retirement. Any goal that you are aiming for in more than 7 years.
Deciding on an investment
Knowing which bucket you are investing in will guide where you invest, and in some cases how much. You can work with a financial adviser or financial planner who can give investment advice and help you make appropriate investment choices.
Bucket 1 (short-term goals, 1 to 2 years)
Investment aim: Preserve your capital
Your emergency fund, Palesa says, should be a minimum of 3 to 6 months worth of expenses, ideally 12, 24 if you can (think COVID!). She says these funds can be placed in a bank account, such as a savings or call account. The goal is to have quick and easy access to these funds, as you often need them in emergencies. And don’t forget to replenish these funds when you use them!
These funds should earn some interest, but the overall goal is to preserve these savings so that your capital amount stays intact.
Bucket 2 (medium-term goals, 2 to 7 years)
Investment objective: Preserve and grow your capital
When you are investing in Bucket 2, you need to preserve your capital and give some of it a chance to grow. Palesa says you should consider an investment that includes bonds, such as a bond unit trust fund, and income fund investments such as enhanced income unit trust funds, as these can give a return of inflation plus a little more. These investments are fairly safe (your capital is unlikely to reduce in value). In addition, you should consider giving some of your capital a chance to grow by investing a portion in equity and property investments (for example, shares in companies listed on the JSE, a platform such as EasyEquities, unit trust funds or exchange traded funds (ETFs) that invest in equities and/or property), which can grow at above inflation rates.
Bucket 3 (long-term goals, 7 years or longer)
Investment objective: Grow your capital
Palesa says this is where you can invest mainly in growth opportunities such as equities and property so that you give your capital the maximum opportunity to grow. “Equities and property can be volatile, which means their value can go up and down in the short term. Over the long term, these volatile moves tend to be smoothed out.”
Palesa says you should also consider any tax benefits for these investments. For example, pension funds and retirement annuities offer tax benefits as do tax-free savings accounts. Pay less tax and you have more to invest and your money can grow faster!
How much you invest in Buckets 2 and 3 depends on your individual goals.
Do some homework
Palesa says you must check that your adviser or financial planner and any company you invest with are all registered as financial services providers (FSP) with the Financial Sector Conduct Authority. You can search using names or the FSP number. And, your adviser or financial planner must be licensed to give advice for the products they are advising you on. “When you deal with registered people and companies you have recourse if things go wrong,” Palesa says.
Don’t forget to: Find out what the investment fees are and how they can affect your overall return! Your financial adviser, financial planner or the company you are investing with are required to provide full details of all costs and charges.
Invest in good financial advice
Palesa says spending time with a financial planner to help you with all your finances and offer investment advice is an investment in yourself and your future.
“Young and first time investors are often wary of approaching financial planners and advisers and pay for advice. I think this is one of the most important investments you can make in yourself and your financial well being. It will ensure your needs are properly assessed so you know how much insurance you need and how much and where you should invest to reach your goals.”
“Money may be tight but I would really advise first time and young investors to invest in themselves and seek the expertise so they can be sure the groundwork has been done well.”
Fortunes take time, have realistic expectations
We see a lot of stories of people who made a lot of money, seemingly quickly. These give the impression that you can get rich quickly. “It rarely happens,” says Palesa. “A few people do get rich quickly, but most of us work and invest over time and build our wealth. And, even the entrepreneur that looks like they got rich quickly has spent years working and trying things out before achieving success. But, it can be quicker than you think! Stick with your strategy, invest when you can as early as you can and your wealth will grow!”