The investment universe can be complex to navigate without a good grasp of what your needs are. But once you understand why you're investing and what you'd like to achieve, the process becomes far simpler.
July is savings month, an initiative aimed at encouraging South Africans to adopt a savings culture and ultimately save more. To help you sort through the clutter, we have outlined key questions you should be asking yourself before choosing an investment.
Why am I investing?
While earning a living brings about its own sense of achievement, the primary reason many of us do so is to afford those things we need and desire. It all starts with understanding what these goals and aspirations are. Is there a preferred school to which you'd like to send your children? Would you like to travel the world, or would you like to retire comfortably? Once you've mapped out what you'd like to achieve, and by when, it is easier to structure a financial plan around your needs.
Do I need a financial adviser to assist me?
Having a financial adviser doesn't mean you're any less astute than someone who plans his or her own finances. It simply means that you have a support system which helps you make informed decisions. A financial adviser is also not reserved simply for those with millions to invest. A financial adviser deals with investors from all walks of life and is able to take you through the full process of analysing and understanding your needs. Based on the outcome of the process, the adviser will make recommendations that are specifically tailored to your needs. Many international research studies have confirmed that investors with financial advisers achieve better outcomes than those without. Added to this, the financial advice industry has evolved tremendously. More financial advisers now charge negotiable advice fees as opposed to commission over the lifespan of the investment.
How much do I have available to invest?
Many investment products provide the option of lump sum, monthly and/or ad hoc investment. The minimum investment requirements differ, depending on the investment you choose. Typically, investment companies include a reference to the minimum investment amount on their product descriptions, available on their websites. Unit trusts are cost-effective investment options that have relatively low minimum investment requirements. If you do have discretionary income each month, it is prudent to institute a debit order towards your investment. How much you invest should be linked to how much you will require at the end of your investment term.
How long do I have to invest?
Many investment companies refer to this as your time or investment horizon. Simply put, it means the amount of time you're able to invest for, before you need to disinvest. Your investment horizon is determined by your investment goals. Shorter-term goals such as a holiday in December may require a different approach to saving for your daughter's wedding in ten years' time, or your retirement in twenty. A low-risk, low-return investment that provides easy access to your cash is different to a higher risk investment that requires you to remain invested for a long enough horizon to see the long-term gains.
Do I need access to my money before then?
When investment companies tell you a fund is liquid or it offers liquidity, it means that there are no significant barriers preventing you from gaining access to your cash. This is especially useful when you need a portion of your investment, without disinvesting the full amount. Some investments, such as retirement annuity funds, offer limited liquidity but offer the benefits of disciplined savings over time. Others offer high liquidity and the convenience of withdrawing the required cash when you need it, but they require you to be disciplined. So if you need to access your money for an emergency or for specific goals, it pays to take note of what the liquidity constraints of a particular investment are.
How much risk am I willing to take?
Risk is inherent in any investment, albeit to different extents. Usually the level of risk in an investment is directly linked to the level of capital growth or potential returns targeted in that investment. Taking a high level of risk is not necessarily a bad thing provided the risk is well managed. Taking too little risk can be as detrimental to your investment portfolio as taking too much. It is thus important to establish your preference for risk and your risk appetite. Your preference for risk refers to how much risk you are willing to take, whereas your appetite for risk refers to how much risk your current situation and financial goals enable you to take. These are not always aligned because sometimes the amount of risk you should be taking to achieve your goals is higher or lower than the level you'd prefer to take. Fund fact sheets typically advise what the risk rating of a fund is on a scale from least to most risky. Although not the only factors, your time horizon and life stage can have a bearing on the level of risk you should be taking.
How much is sufficient?
You may often read about the 94% of South Africans who can't afford to retire comfortably. Yet, so many South Africans have a measure of savings whether through an employee pension or provident fund, an informal stokvel or other investments. If you're investing for retirement, the key consideration is whether you're investing enough, and whether the amount you're targeting at the end of your investment period will be enough to sustain you throughout your retirement. Even the most affluent of investors may underestimate the impact of inflation on their purchasing power over time. People are living longer and the cost of living keeps rising. It may therefore be wise to speak to a financial adviser to help you ascertain how much you should be investing, taking your investment goals into account.
What if I have not invested enough yet?
The answer to this is different for each person. You may need to increase your risk or boost your savings amount each month. Alternatively, you may need to reduce your income expectation at retirement or work for a little longer. Investing doesn't have to stop the day you reach retirement. Remember, if you have an annuity for example, only a small portion of the income is withdrawn and all the other funds remain invested.
During savings month you will encounter many messages encouraging you to invest, but remember that it all starts with you. Once you've established what your goals and dreams are, designing a financial plan and finding an investment to suit you becomes less complex. Don't be afraid to use professional support. If you need help with this process, we are happy to put you in contact with an experienced and professional PPS Investments accredited adviser.
Happy investing!