Your guide to getting started with investing

National Savings Month, with its focus on motivating you to save to improve your financial situation, ends this weekend, but if you commit now to investing in your future, you will reap the benefits for many months and years to come. Laura du Preez report

If you are inspired to save or invest, but paralysed because you don’t know enough to get started, don’t feel alone. The recently released Old Mutual Savings & Investment Monitor found that less than 50 percent of those surveyed believed they knew a lot about financial products.

If a lack of knowledge is preventing you from making this Savings Month the one in which you start saving for a better future, here are few tips on how to get going. or a new car, or university fees, have investment horizons of between a year and five years. You typically want to achieve long-term goals over more than five years.

The longer your time horizon, the more your investment will grow, the more your returns will compound, and the more investment risk you can afford to take. the index they track and are not selected by a fund manager. There are also passively managed unit trust funds that track indices. Passive funds have lower costs and deliver returns in line with the index they track.

Fund managers that select shares and other securities charge higher fees, but aim to out-perform what the market delivers by following an investment style or philosophy (see “Both active and passive funds can deliver, if you stick with them” on

As a South African investor, you can use rand-denominated unit trusts and ETFs to access offshore markets without the hassle of investing in a foreign currency.

Unit trust funds classified as multi-asset funds are particularly suitable for investors who want to diversify across the main asset classes of shares, bonds, listed property and cash.

For your investment to grow meaningfully, it must earn a return that at least beats the inflation rate, currently at 6.3 percent (year on year to the end of June).

The bank’s best five-year fixed deposits are earning about 8.4 percent a year, while money market funds (from which you can withdraw at any time) are earning returns of about 7.5 percent a year (subject to change in line with changes in interest rates).

A unit trust that aims for a little more than a cash return (an income fund or an enhanced income fund) could earn about one percentage point more than 7.5 percent. You should not expect a local bond fund to return more than 1.5 percentage points above the inflation rate.

According to Old Mutual Investment Group’s Long Term Perspectives 2016 survey, equities, as measured by the FTSE/JSE All Share Index, have, on average, earned 7.5 percentage points above inflation since 1 929 (see table). That equates to a return of 13.8 percent a year at the current inflation rate.

A local multi-asset fund delivers 5.8 percentage points more than inflation. Global share markets have a long-term track record of delivering 5.1 percentage points more than inflation. Although the long-term average returns from equities will grow your money, you could lose money over the short term, such as a year. But you will realise this loss only if you cash in your investment. The returns in subsequent years are likely to make up for the losses in previous years.

However, you have to be comfortable with the fact that longterm statistics show that, after inflation, South African equities have produced negative returns in one in every three years.

Old Mutual’s research shows that if you invest for five years in a South African equity investment, your average annual return after inflation could be anything from 31 percent to minus 14 percent. Over a 20-yearperiod, however, the range of annual average returns is much narrower, between two and 13 percent.

If you can’t stomach the risk you need to take to meet your investment goal, or your time horizon is too short to allow you to risk incurring a loss and waiting for the market to recover, you need to invest more or push out your time horizon. contributions are tax-deductible up to certain limits. Remember that you can’t access money saved in a retirement fund for other needs in the short term, unless you resign from your employer, or, in the case of an RA, after the age of 55.

If you want to save tax on longterm investments, but may need to access your savings at short notice, or you have exhausted your retirement fund tax deductions, consider a tax-free savings account. You can contribute up to R30 000 a year or R500 000 over your life-time to one of these accounts. You will not pay any tax on the interest income, the dividends or the capital gains, regardless of how much growth you earn. Many of these products are offered on investment platforms, known as linked-investment services providers, that give you access, at a cost, to a range of unit trust funds, ETFs and shares through a single financial company. Ensure that a product provider is registered in terms of the relevant legislation. Unit trusts and many ETFs are collective investments that should be registered under the Collective Investment Schemes Control Act, and the unit trust company should be registered as a financial services provider with the Financial Services Board (FSB).

An ETF that is not a collective investment scheme should be listed on the JSE. A stockbroker and an online stockbroker should be registered with the JSE.

A financial adviser should be registered as a financial services provider with the FSB.

Because current performance may be the result of a stroke of good luck, you may want to look at a measure of consistency of performance – that is, performance that is repeated consistently over time – such as the PlexCrown ratings, which are included in our weekly performance table.

Personal Finance also publishes the PlexCrown survey of unit trust managers. This survey identifies which managers have topperforming funds across their range of funds on a consistent basis.

It is more difficult to check the performance of a stockbrokerrecommended portfolio or a portfolio of unit trusts recommended by a financial adviser, but stockbrokers and advisers should be able to show you the past returns of the portfolios they recommend. If doing all of the above yourself seems too much like hard work, there are two easier options. One is to turn to an independent, qualified financial adviser for help. You will typically pay an annual fee of up to one percent of the value of your investment.

These websites can help you to find a good adviser: www.fpi.co.za, www.findanadvisor.co.za and financialplannerawards.co.za

The other option is to use a roboadviser that guides you through identifying your goals, investment horizon and choosing a suitable range of unit trusts.

The robo-advisers offered by listed financial services company Sygnia and Galileo’s SmartRand direct you to passively managed unit trust funds.

Financial advice firms, such as Beanstalk, Bizank and Investonline, that offer robo-advisers direct you to a mix of actively managed funds.

FINAL WORD

Just do it. You are likely to lose more money by not being invested at all than not being invested in the perfect investment. As long as you avoid the scams, it is more important that you choose an investment that earns less-than-spectacular returns than it is that you do not earn any growth at all.