The world of investing is filled with outdated rules of thumbs and generalisations that have no bearing on our personal financial planning, and which can hopelessly mislead us. Here are some investment myths worth debunking:
1. You need 70% to 80% of your pre-retirement income in retirement
This is a rule of thumb guideline which assumes you have no debt at retirement and are in excellent health. This guideline is tossed around like a magic percentage, whereas in reality it is based on an ‘all things being equal’ scenario and uses your current income as a starting point for future planning. This type of rule of thumb also makes no sense to those starting out their careers and who are earning entry-level salaries. At the start of your investment journey, it is difficult to predict what your pre-retirement income will be. A better approach is to base your retirement projections on your spending rather than your income. This involves determining what you are likely to spend in your retirement years taking into account where you would like to live, whether you would like to travel and the type of lifestyle you would like to lead.
2. I’m too young to think about retirement
Time is compound interest’s best friend and the earlier you begin investing, the more your investments will grow. Further, if you don’t take advantage of the tax benefits of investing in a retirement fund, you are doing yourself a disservice. You are permitted to invest up to 27.5% of your taxable income towards a registered retirement fund, which effectively allows you to invest with pre-tax money. Many mishaps can happen between your first job and the day you retire – things such as retrenchment, disability, chronic illness or failed business ventures – and investing with your first paycheque gives you a longer investment timeline in which to prepare for possible setbacks.
3. I don’t have enough money to invest
There are very few barriers to entry for anyone wanting to set up an investment portfolio. Most reputable unit trust platforms, as well as reputable robo-advice platforms, require a minimum investment premium of R500 per month or a lump sum investment of R20 000, to begin with. If you can’t afford a monthly premium of R500, start setting aside as much as you can every month in a separate account to build up ‘seed’ capital. Once you have built up the minimum lump sum investment, set up your investment portfolio. As you trim your budget and your earnings increase, you can work towards achieving the minimum monthly premium of R500 to ensure that you can keep adding to your investment every month.
4. Investing is too risky
Many people shy away from investing because they believe it is akin to gambling and the risks are too high. There is a common misconception that, because investment markets are volatile by nature, investing in equities represents a higher risk whereas investing in cash is lower risk. Bear in mind, however, that your ultimate goal when investing is to protect the purchasing power of your money and ensure that it beats inflation over the longer term. Leaving your money in cash practically guarantees that your money will lose its purchasing power over time. While investment markets are more volatile, a well-diversified portfolio will grow your wealth in the long-term making it less risky. On the other hand, keeping your money in cash will devalue the purchasing power of your money in the long-term, effectively making it a more risky place to put your money.
5. The aim of investing is to get the highest return
The aim of investing should be to beat inflation over the long term so that you can achieve your goals. If your aim for investing is to achieve the highest returns possible, then it is likely you may take unnecessary investment risk, try and time the markets and speculate. If you are constantly chasing the highest returns for the sake of more money, it is likely that you are going to be pursuing last year’s best unit trust, share portfolio or ETFs. This is a dangerous tactic as you may end up cashing in your investments at the wrong time and/or paying unnecessary tax. Your financial advisor will help you map out your goals, assess your propensity for investment risk and determine an investment strategy that is most suited for your purposes.
6. You should aim to invest 10% of your income
If you work from age 25 and intend retiring at age 65, you will need to save enough money to live off for a potential 30 years or more. To achieve this, it is likely you will need to invest way more than 10% of your income. In fact, ordinary South Africans probably need to save at least 20% of their money to ensure a comfortable retirement. There are so many variables that affect how much you need to invest on a monthly basis, including when you started investing, when you plan to retire, how much you want to draw in retirement, what vehicles you are invested in and how much investment risk you are happy to take. Rather than using an outdated rule of thumb, engage a financial planner to develop a comprehensive retirement plan using a realistic set of assumptions.
7. You should monitor your investments daily
If you’re invested for the long-term then there is absolutely no need to check your investments daily or even weekly. Investment markets fluctuate all the time in response to political events, policy uncertainty, economic activity and even natural disasters. If you have a well-diversified investment portfolio, daily tracking of the stock market will serve no purpose other than to create anxiety. Short-term market noise is the ‘nature of the beast’, as it were, and provides a constant stream of noise for the average investor. Closely tracking the market noise can lead to fear-based trading and knee-jerk investment decisions. A younger investor with many years until retirement should review their portfolio on an annual basis. As you get closer to retirement, you and your financial advisor are likely to review your portfolio on a quarterly basis to ensure that everything remains on track.
8. It is too late to start saving for retirement
If you haven’t yet started saving for retirement, you probably feel overwhelmed and defeated. Although you might be a late starter, starting late is better than not starting at all. Once you’ve committed to the process, there are a number of options you can consider to help build a retirement nest egg. The first step is to undergo a ruthless budgeting exercise to free up some income that you can redirect towards investing for retirement. As you settle debt and free up more income, you can slowly increase your monthly savings. Thereafter you will need to consider working past the age of 65 to allow you more years to earn and invest. Depending on your career, you may need to take steps to ensure you can continue generating an income past age 65, including the possibility of a second job or side hustle. Another consideration is to invest more aggressively to take advantage of higher investment returns. The ideal would be a well thought out strategy that combines spending less, saving more, working longer and taking more investment risk in line with your risk tolerance.
9. I must invest in my child’s tertiary education first
While every parent would like to be able to pay for their child’s tertiary education, this is not always financially possible. It is never advisable to prioritise your child’s education funding over your retirement funding. Firstly, providing a child with a tertiary education is not a guarantee that she will be successful and earn enough money to support you in your old age. It is also not fair to place this burden on your child. Secondly, there is nothing wrong with making your child contribute in some way towards their education, whether in the form of student loan, internship, scholarship or part-time work. While you may be able to borrow for your child’s education, you definitely won’t be able to borrow for your retirement. Lastly, becoming financially dependent on your adult child only serves to perpetuate the cycle of financial dependency. Work towards a comfortable retirement for yourself, and be open and honest with your child about what you can realistically afford in terms of tertiary education.