Get your savings timing right

IT HELPS TO CHOOSE THE MOST APPROPRIATE INVESTMENT VEHICLE In times of volatile markets, it’s even more critical to realistically estimate your time horizon to get the most from investments.

Knowing how the time horizon of different types of investments affects savings outcomes can help investors choose the most appropriate investment vehicle to earn the best growth over time. Investors often choose bank fixed-deposit accounts and money market funds: both benefit from set interest rates and provide fairly easy access to savings. Average 12-month interest rates for fixed deposit accounts from SA’s four biggest banks are currently about 6%-8%, with average money market rates about 7.5%-8.5%. With money market funds, investors can get access to their money within 24 hours.

By moving “up the yield curve” (investing in fixed income funds), investors get average returns of between 8%-9.5%, while keeping within a low-risk investment and having access to funds within 48 hours.

Income funds (low-risk to more aggressive) are on the conservative side of the efficient frontier risk spectrum. An efficient frontier shows the opportunity to earn higher returns for more risk.

Also in the low-risk investment category, with a time horizon of a few months to several decades, are unit trust tax-free savings accounts. These provide access to underlying funds and are a good way to combine tax efficiency with investment savings.

The time horizon spectrum is equity-based investments, e.g. property and balanced funds. They require a five-year time horizon: the higher-return opportunity they provide comes with higher risk.

Long term, equities have proven to be the highest-performing asset but shortterm downturns can take years to recover.

Balanced or multi-asset funds, have a 7-10 year investment time horizon: managers focus on longer-term macroeconomics and business cycles to position portfolios for growth, while keeping volatility low.

Balanced funds aim to provide investors with “the best of both worlds” by including exposure to equities and bonds. The equity allocation can be as high as 75%, dropping to 60%.

Understanding the mindset driving managers’ decisions is also important.

Investors can go wrong by choosing an equity or balanced fund, then stressing about short-term underperformance when the manager’s managing the portfolio for the long term.

At the far end of the time-horizon spectrum are private equity and other alternative investments e.g. infrastructure and credit funds – longer-term investments only available to investors with a R1 million minimum lump sum investment.

Private equity involves buying a stake in a private company and transforming it by replacing management, introducing new product lines or selling non-core business units – which can take years.

Over the past decade, ending December 2016, private equity funds managing assets of between R500 million and R1 billion returned 18.6% per annum, according to the latest RisCura SAVCA South African Private Equity Performance Report, while SA equities returned 15.6%.

Realistically estimating a savings time horizon is about effective planning. It determines the types of investments available for investors to choose from.

Don’t over- or under-estimate the time horizon.

If you’re not planning to access your savings for ten years, consider investments with a higher return profile that can enhance your returns.

Anthony Katakuzinos is Stanlib Retail COO.