Why NOT INVESTING
is only for the very confident

Very recently I read an article about one of the biggest fears that people have and that is the fear of not having enough savings at retirement and being without money at any stage of your life. This very common fear made me want to write about getting into the habit of starting to invest money early and never stopping to invest a portion of your monthly income towards the medium term or the future.

Investing is different than saving in that investing is putting your money away now for a term longer than 2/3 years in funds that earns you interest higher than inflation (inflation linked rates you will find in a bank account) so that you can use those funds at a much later stage in life (could be for buying a property or retiring etc).

Clients tend to think that to stash all their money in a bank account will be enough to protect their capital for future spending (longer than 3 years) but this is a mistake. You run the risk of the buying power of your money decreasing over time.

If you do not need all the current funds in your bank account and you already have a sizable emergency fund (3-6mths expenses) then you have to consider taking the next step and saving funds in investment vehicles geared for longer terms.

Now there are plenty of options out there and let me summarize the most important ones:

  • Collective Investment (Unit Trust investment): Every month you buy units with your contribution and these units are then allocated to your investment account. You form part of a large pool of investors that buy shares in bulk and these get divided up as units.These units increase in value over the long term. These units can also DECREASE in value over short terms hence the reason to not invest your short-term emergency fund in here. Can be local or international. You get taxed on the capital growth in the fund as well as on the interest earned.Form part of your estate at death so please assign a beneficiary in your will.

 

  • ETF`s (exchange traded funds): These investment funds track the daily movement of certain markets and linked to these movements will increase or decrease the capital value of your investment. Linked to an exchange like the JSE and funds registered at the JSE or MSCI. Same tax rules apply as a Unit trust. You also do not have ownership in the companies traded in the ETF compared to a direct share.Form part of your estate

 

  • Direct shares – Buying direct shares in companies gives you ownership and equity in that company and you can even vote on certain meetings if you feel like it. Most people just buy the shares and keep for long term capital appreciation. Owning a direct share in a company is riskier than buying units into a pool of shares that are diversified (Unit trust fund) so be very careful: You can own 100 shares in Steinhoff and the value of the shares can lose 90% of its value overnight. In some cases, companies can also close down completely and you can lose the shares and your money. You have to do your research before buying a share. You do not need to own a full share, these days you can also own a fraction of a share to suit your budget and build your portfolio up until you own a full share. If you buy and sell shares on a regular monthly basis it can be taxed as income. If you hold the shares for longer than 2 years it is seen as capital growth and CGT will apply. Form part of your estate

 

  • ETN (Exchange traded notes): These are a hybrid between an ETF and corporate bonds (lending your money out) and you get a payment every month into your investment. Not very popular in South Africa. Same tax rules apply as Unit trust investment. Form part of your estate

 

  • Endowment policy: This is also a unit trust investment but in an endowment policy wrapper- the only reason why clients might opt for an endowment is if they have a marginal rate of tax higher than 30% as the tax payable in an endowment is 20% PLUS the endowment policy can get a beneficiary assigned in the policy that will pay out directly to the beneficiary after your death without having to wait for an executor to first settle your estate. Estate duty might still apply but the funds are not stuck in an estate for too long for dependants. We sometimes forget about the issue of passing away and how your investments will be handled. In all the cases above except the Endowment policy will your beneficiaries have to wait until your estate has been settled before they can receive the funds. Even your bank account gets frozen at death.

I left out a Retirement Annuity and other retirement investments on purpose as this will be tackled in a separate article next time

Hope this helped a bit and please let me know if you have any more questions on the investment vehicles above.