Zamokhule is a saver and wanted to develop a plan for his investments and savings. Picture: Leon Sadiki
Zamokhule is the saver in the group, having entered the Absa Money Makeover competition with very little debt. Most of his money goes into cash deposits and money market funds. While these are low-risk investments, the lower returns after tax don’t keep pace with inflation. Craig Pfeiffer, chief investment strategist at Absa Stockbroking, gave Zamo some general rules on what to look for when it comes to longer-term investing:
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Understand what you are investing in: Zamo’s bad experiences are largely due to the fact that he didn’t understand what the investment was for and the rules relating to the policies;
Invest monthly via debit order: The benefit of monthly investing can be felt through “rand-cost averaging”. Some months, you invest into a market near its lows, while at other times you invest at more expensive levels. However, over time, you will benefit from an “average” level of entering the market, which is better than investing a lump sum at the top of the market;
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Active or passive: Zamo could invest in an actively managed unit trust or a passively managed tracker fund. This is a personal preference as both give an investor the opportunity to grow their money over time.
Active managers invest client money and try to outperform a market benchmark – like the FTSE/JSE All Share Index – typically through unit trusts or “collective investment schemes”.
Passive managers aim to provide the same return as a market index – no more, no less – and tend to have lower costs.
Funds that return the performance of an index are called tracker funds or exchange-traded funds (ETFs). The fact sheet issued by the fund manager provides details of fund size, past performance, investment philosophy and fees. These documents are usually available online and should be considered before selecting an investment;
Know your time horizon: If you are investing monthly and have a long-term investment horizon, a medium to higher risk-profiled investment is suitable. As Zamo is looking to invest long-term, he needs to be more aggressive and look at a unit trust/ETF investing in equities (companies listed on the stock exchange) as it has the greatest long-term wealth-creation potential. Equities have short-term volatility (share prices move up and down a lot), but ultimately move higher over the long term;
Be tax aware: Zamo should consider selecting a tax-free savings account within a unit trust or ETF as the tax benefits are realised in the long term.
For example, if Zamo contributes R1 000 a month and receives about 10% a year growth, after 89 months, the R89 000 investment would have grown to R129 037, providing a profit of R40 037, which hits the capital gains tax (CGT) threshold of R40 000. So, Zamo would be liable for CGT if he sold any time after about seven years. The profit grows significantly after that, due to compounding. In just over 14 years, his profits would be R201 000. The longer the investment period, the more the growth and more tax is paid if you do not invest in a tax-free savings account; and
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Buying your own shares: Once he has accumulated a greater capital base and feels confident to do so, Zamo could consider managing the portfolio himself via a stockbroking account or have it managed by a private client asset manager.
It is important for him to understand the difference between trading and investing. Trading is buying and selling in the short term to try to make a profit. Investing is aimed at creating wealth over a longer time frame and involves a buy and hold strategy. While it’s not necessary to watch the markets hourly or daily, it’s important to regularly review your investments – it’s never a buy and forget strategy.