Investment fundamentals

Setting out on your investment journey can be a daunting task. The range of products, different types of investment vehicles, tax complexities and investment jargon can create barriers to entering the markets, but they shouldn’t. Here are some answers to frequently asked questions about the fundamentals of investing:

Do I need to invest through a financial adviser?

No, you don’t need to invest through a financial adviser, and you can choose to do your own investing.  There are a number of ways to begin your investment journey.

Buying stocks on the JSE

To invest directly in shares, you can set up an online account on any one of the numerous available platforms and invest through a listed stockbroker. Certain banks and financial institutions also offer online trading facilities which allow you to pick your shares and build your own investment portfolio. When buying shares on the JSE, you are effectively buying small pieces in publicly listed companies such as Naspers, Multichoice, Sasol and Vodacom.

Investing in passive funds

If you are keen to start investing but do not feel confident about trying to pick your own shares a great way to start exposing yourself to the markets is through a low-cost passive fund. The purpose of a passive fund is to track a certain market or a segment of that market without any active decision being made on what underlying shares to hold. These funds simply track the movements of those markets or indexes.

Investing through an active fund manager

Another way of investing is to use a reputable fund manager. These fund managers employ investment teams that make decisions regarding what they believe are the shares that will perform the best. However, fund managers are not personal financial advisers and therefore are legally not allowed to offer financial advice to individuals. They can give you factual advice, such as the rules and tax consequences of different investment structures as well as fact sheets of the available funds, but do not have insight into your personal goals and objectives. If you choose to use an independent financial adviser, he will charge a professional fee for developing a detailed financial plan for you. Part of this plan will provide you with tailormade investment advice that is unique to your goals.

Should I pay off debt before I start investing?

That just depends on the type of debt, because not all debt is equal. Generally speaking, if you are paying more in interest than you are earning in interest, then you are losing money. So, if you have high interest debt, such as credit cards and retail accounts, it may be advisable to use your available cash to eliminate this debt. However, if you have relatively inexpensive debt such as a home loan, be aware that extra payments here are made with after-tax money – whereas investing in your retirement fund is done be with pre-tax money.

How do I get started?

When Alice in Wonderland asked of the Cheshire Cat, ‘Would you tell me, please, which way I ought to go from here?’, he answered ‘That depends a good deal on where you want to get to.’ Similarly, your investment journey begins with determining what you want to achieve. Make a list of your financial goals and be specific. When do you want to purchase a property and for how much? What deposit do you want to put down? Do you want to travel and when? What age do you want to retire and where? How many children do you want and where will you educate them? Once you have recorded your goals, you can map them onto a timeline. Knowing your investment timeline is key to choosing the right investment vehicle and portfolio.

What type of investment should I invest in?

The type of investment vehicle depends on your goals and objectives. In general, the following vehicles will have a place in your portfolio.

Retirement annuity

A retirement annuity is an extremely tax-efficient vehicle to use for long-term wealth creation. This is because you are permitted to invest up to 27.5% of your taxable income (limited to R350 000 per year) towards an RA on a tax-free basis. In addition, no income tax or CGT is charged on your investment returns, and the money in your RA does not form part of your estate when calculating estate duty or executor’s fees. Contributions towards a unit trust RA are completely flexible, and you can stop or start your contributions without fear of penalties or hidden costs. At retirement, the first R500 000 withdrawal from your RA is free from taxation. Because of the significant tax benefits, it makes sense to maximise your tax-deductible contributions to an RA as soon as possible.

Unit trusts

A unit trust is a portfolio of assets which includes varying combinations of stocks, bond, property, cash or other asset classes. These portfolios are constructed by professional funds managers in accordance with their investment goals and are actively managed by the fund managers. A unit trust fund is split into equal units and sold to investors, and the performance of that fund is tracked daily. As an investor in a unit trust, you share in both the gains and the losses, bearing in mind that returns attract dividend and/or interest taxes – and possibly capital gains tax on withdrawal. A unit trust is a flexible, discretionary investment and you are permitted to access your funds at your will. In general, minimum investment contributions start at R500 per month or a minimum lumpsum of R20 000.

Exchange-traded funds (ETFs)

An ETF is a listed investment product that tracks a defined index such as the JSE Top 40 which tracks the stock exchange’s top 40 companies. ETFs track JSE-listed shares which give investors exposure to multiple companies by investing in the chosen index. However, these funds are passively managed and do not require much intervention from the fund manager, resulting in significantly lower investment fees.

Tax-Free Savings Accounts (TFSA)

A TFSA is best suited for longer-term investment goals such as your child’s education or retirement. Although your contributions towards a TFSA are not tax deductible, all proceeds including interest income, capital gains and dividends are free from taxation. Individuals are permitted to invest up to R33 000 per year towards a TFSA, with a lifetime contribution limit of R500 000. Most insurers, financial institutions and unit trust platforms offer TFSAs, making them very accessible investments.

Money Market Fund

A money market unit trust is effectively a short-term savings vehicle and is a good place to park your money while you are making decisions about the future. It’s also a good place to house your emergency funds. The returns in a money market fund will be lower than those in a normal unit trust investment which means that it is not ideal over the longer-term. Money held in a money market fund is easy to access and there are no penalties for doing so. Unlike a deposit held in a bank, your funds in a money market fund are held across a number of issuers. In general, money market funds are appropriate for investments of up to one year.

How much should I invest each month?

Determining how much you need to invest each month depends on your goals. Without a clearly defined set of goals, there is no way of answering this question. Most people have short-term goals such as purchasing a property, medium-term goals such as paying for a child’s tertiary education or travelling overseas, and longer-term goals such as saving for a comfortable retirement. Reducing these goals to writing is a powerful first step in setting your investment plans in place. For instance, you may decide that you want to be in a financial position to retire at age 70 and draw a post-retirement income of R25 000 per month, with this income keeping pace with annual inflation until you reach age 100. With the help of your financial adviser and a solid set of assumptions, you can quantify how much you need to invest every month to achieve this longer-term goal – keeping in mind that the type of investment vehicle you choose will have  fundamental bearings on your investment outcomes.

What if my investments lose money?

Investment risk comes with the territory and there is always a chance that your investments will lose money. However, lack of knowledge, lack of diversification and investment fraud are also risks that investors face – all of which can be mitigated to a certain extent. Each main asset class – being equities, fixed income, property and cash – comes with its own risks, rewards and timeline for anticipating positive investment results. The higher the risk presented by a particular asset class, the higher the likelihood of the return over the expected time frame. Before you start investing, you need to make peace with the fact that investing is a long-term commitment and be sure that you can live with the associated risks of the stock market. Markets are volatile by nature, and while you are likely to experience positive returns over the long-term, returns don’t always work in a straight upward trajectory. Market returns ebb and flow over the short-term and tracking your long-term investments on a daily basis serves no purposes other than to invoke fear and panic.

When is the best time to start investing?

According to an ancient Chinese proverb, ‘The best time to plant a tree was twenty years ago; the second-best time is now’. Finding room in your budget to set aside for investment purposes may be a challenge, but the benefits of starting your investment journey sooner far outweigh any short-term pain you might experience. Because of the incredible power of compounding, the cost of delaying the start of investing cannot be overstated. Every year you delay, you shorten your investment timeline, miss out on positive market returns and lose out on the exponential growth as a result of compounding.

Stay safe and stay invested.



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