So you’ve decided to invest but don’t know where to start. The unknown is scary – it can take over a year for the average investor to get going, according to research from Allan Gray. But with a few easy steps, you can get your investment plan off the ground.
Saving or investing?
Even though we often use these terms interchangeably, they’re not quite the same. Saving is for short-term goals such as an emergency fund or a holiday, and it’s usually done in a bank account. You’re paid a predetermined rate of interest, so it’s low risk.
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Investing is for longer-term goals (including retirement) and can include shares, Exchange-traded Funds (ETFs) and most unit trusts. There’s no guaranteed return, and your investment grows as the price of the shares, ETFs or unit trusts grow over time. So it’s more risky, but investing longer term reduces the risk. You’ll also generally get far better growth compared to a bank account.
Anyone can invest, and the sooner you do, the more your money will grow. Starting earlier with a small amount is far better that starting later with a larger amount. “The cost of delay is huge, so the best time to start is always now,” emphasises Founder and CEO of Southwood Financial Planning Lisa Hudson-Peacock.
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Know your why
Having clear investment goals will keep you focused, so identify why you want to invest in the short, medium and long term. Then, calculate how much you need to put away each month to get there. There are some great online calculators to crunch the numbers – try the one at smartaboutmoney.co.za, then you can use an app such as JamJar or Savings Goal to set your goals and deadlines and keep track of progress.
Don’t fall into the trap of going into unnecessary debt, warns Head of Direct Clients at Allan Gray Nomi Bodlani. It’s easy to whip out your credit card or borrow money to fund short-term goals such as a holiday. “This type of debt makes you poorer in the long run, so plan ahead so that you earn interest instead of paying it,” she cautions.
Balance your budget
Start by working out how much you can set aside each month. Many financial experts recommend that around 15% of your income should be invested for long-term goals, including retirement, but a 70-20-10 money rule could be more practical considering the current high cost of living, according to UK money management app HyperJar.
This means spending 70% of your income on needs, 20% on wants and 10% on investing. Either way, find an amount you’re comfortable with and make it part of your budget.
If you need to cut back on some expenses to free up money, do so. “Don’t look at your budget as a limitation but rather a tool you can use to allocate your money so it can work the hardest for you,” says Lisa.
Once your goals and budget align, draw up a plan of action. You could go it alone or get professional help from an independent financial adviser.
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DIY or advice?
If you’re confident enough, you can invest in shares, ETFs or unit trusts through apps such as Franc, EasyEquities or Stash, starting with as little as R100. The downside is that there’s no personalised advice with these apps, so you could end up making poor investment decisions.
On the other hand, having a good financial adviser could be a great investment decision. “Personal finance is personal, and there is no one- size-fits-all solution,” says Nomi.
“An independent financial adviser can create a financial plan that includes appropriate financial products, which is updated as your circumstances change.” Lisa agrees.
A financial adviser has the skills and knowledge to assist drawing up a budget, identifying goals and implementing investment strategies to achieve these goals. A DIY investor risks making mistakes along the way, impacting on the long-term outcome of their investment.
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Choices, choices, choices!
The longer you have to invest, the more risk you can take.
Unit trusts or ETFs are a good option as they allow you to tap into the growth offered by shares without having to make decisions on buying and selling individual shares.
There are options to suit every budget, risk profile and investment horizon. As an example, a money market unit trust is low risk and offers a steady return, while an offshore linked unit trust has far higher risk but offers excellent long- term returns. In between are a range of funds of varying risk and returns.
It’s important to remember that investment returns never come in a straight line. “The squiggly roller coaster of returns can cause stress to some investors,” explains Nomi. So guard against knee-jerk reactions when financial markets dip, as they will do from time to time.
Always consult trusted sources of information if you’re unsure, and don’t make hasty decisions. Stay focused on your long-term goal – as long as you keep investing, short- term losses are theoretical and on paper. Only when you withdraw funds you’ll make real losses or gains.
Golden rules
1. Start now.
2. Invest regularly with a debit order.
3. Diversify and spread your risk for better returns.
4. Be patient – your money needs time to grow.
5. Don’t run scared when markets dip.
6. Invest with a reputable organisation and avoid fly-by-night operators that offer the world (check with the fsca.co.za to see if the product provider is registered and legitimate)
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