How to navigate the many investment vehicles

And why it’s important to consult an independent financial advisor on your savings goals.

‘You’ve got to be in it to win it’, as the well-known saying goes, but your financial future shouldn’t be a gamble. Just like you should go to see a doctor to take care of your physical needs, the same should be done when it comes to the health of your savings.

It is imperative for one to consult an independent financial advisor to help you achieve your savings goals. The Financial Intermediaries Association of Southern Africa (FIA) maintains that financial advisors are important, given the complex nature of investment and risk products. This makes it “difficult for a consumer to structure a product portfolio that meets all of their needs.

“A good financial advisor will conduct a comprehensive overview of your financial needs and assist in structuring a portfolio of investment and risk products that matches your income and life stage. A financial advisor can offer valuable guidance when critical financial decisions must be taken and often dissuades clients from making ill-thought-out decisions with costly consequences,” states the FIA.

The abundance of content and overwhelming media coverage in the public domain on the available investment options out there muddies the water for the layman, making it very difficult to get started. But a licensed (with the Financial Services Conduct Authority) and qualified practitioner will help you navigate the maze of product choices and answer all your questions, including: Should I invest in an exchange-traded fund (ETF) or unit trust? Should I consider investing in the money market or sticking to a tax-free savings account (TFSA)? What retirement product should I choose? Where does offshore investing fit in? Should investors have exposure to all the options or stick to one or two? What about property? How does it all fit together?

If you think it’s simply a matter of finding the best performer, that is a mistake. For example, some published unit trust performance tables look at say the five-year return numbers and many investors then select to invest in a unit trust, based on that fact – without considering what the underlying investments are or objectively considering whether the perceived strong returns are likely to continue. Other investors believe “anything other than money in the bank is just ‘too risky’” and prefer money market-related investment options. It is just not wise to look at individual products within your portfolio in isolation.

This is where the advice of an advisor becomes invaluable. A good place to start is for you and your planner to take stock of where you stand financially. Assess your goals and what the future might hold and consider your experience and attitudes. Then identify what money is available. The process by which you gather such information is called a ‘fact find’ – this enables you to be more ready to set up your future financial plan.

The next phase is to determine the time horizon of your investment. You need to think about how soon you need to get your money back. Time frames vary for different goals and will affect the type of risks you can take on. For example, if you’re saving for a property deposit and hoping to buy in a couple of years, investments such as local equity funds or offshore portfolios will not be suitable, because their value goes up or down and is considered investments for the longer-term. Stick to cash savings accounts like money market funds or even a TFSA. If you’re saving for your pension in 25 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over the long term, retirement products, property or collective investment schemes other than cash savings accounts tend to give you a better chance of beating inflation and reaching your pension goal.

Once you’re clear on your needs and goals – and have assessed how much risk you can take – draw up an investment plan. This will help you identify the types of products that could be suitable for you. Your advisor will help you understand what is available and what the role of each product is in your overall savings strategy.

Here are some of the options:

  • Unit trusts: You can invest in unit trusts for most of your financial goals, from saving for longer-term needs, to meeting your shorter-term objectives. You can access your money at any time and make changes to your investment whenever you need to, with no transaction fees or penalties.
  • ETFs: You can trade index funds like stocks, which offer the advantage of ETFs being more liquid. They can be bought or sold any time during trading hours and are accessible to smaller investors, because they allow the purchase of individual shares or portions of indices at fractional instalments, while many unit trusts have minimum investments requirements.
  • Money market funds: These vehicles invest in short-term instruments that mature in less than a year. By keeping a short time frame, these funds attempt to reduce risk and provide liquidity.
  • Retirement products: When you invest for retirement, you typically have three main options: a pension fund, a provident fund or a retirement annuity. All have some form of tax benefit and can only be accessed at retirement, so this investment is for the long haul.
  • TFSAs: The new kid on the block is exempt from income tax, dividends tax or capital gains tax on returns. You can only contribute a maximum of R33 000 per tax year (annual limit). There is a lifetime contribution limit of R500 000 per person.
  • Offshore portfolios: The first option is to invest directly offshore in foreign-domiciled funds. When investing in such funds, you are required to convert your rands into your chosen currency. To take the money offshore, you will use your annual discretionary allowance or will be able to apply for tax clearance for an amount up to R10 million.
    The second option is to invest indirectly offshore in rand-denominated funds. These funds have mandates to invest in foreign assets. You invest in rands, after which the unit trust management company then converts the rands into foreign currency, using its foreign exchange capacity.  All rand-denominated funds are priced in rands.
    You can also invest in offshore share portfolios that are managed and reported on locally or via endowments.
  • Property (either actual buildings or listed entities): Buying into property goes much further than just bricks and mortar. You can invest in real estate ETFs or unit trusts, put your money into real estate investment trusts (REITs) or buy shares in a property-focused company. You can even buy a physical property and upgrade it for resale or to buy a building a rent it out per square metre, here or abroad.

This list goes on, and one can drill further into the intricacies of each various asset class. This is proof that one needs a financial advisor to properly unpack it all, and make sure your nest egg is sufficiently diversified. The importance of managing and improving the balance between risk and return, by spreading your money across different investment types and sectors whose prices don’t necessarily move in the same direction, cannot be emphasised enough. It can help you smooth out the returns while still achieving growth, and reduce the overall risk in your portfolio, so that one day you can retire in the style you have become accustomed to.

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