A Moneyweb reader sent us this question:
My wife and I have recently received an R80 000 windfall, and we have decided that we’d like to invest this money for our son’s university education, which is about 15 years away. Do you have any advice on how best to invest this money?
Mduduzi Luthuli, co-founder and an executive director of Luthuli Capital, answers:
Although at face value this might seem like an easy question, it’s actually quite difficult to answer. An investment is a living entity. It’s influenced by various factors and by its very nature is dynamic and thus is constantly evolving.
It is this very characteristic that makes it so important to:
- Have someone qualified looking after your money
- Have a distinct investment strategy that will guide you in bad times
Believe me, there will be bad times. If you’re not willing to ever have a period of poor investment performance or variable capital loss over a 15 year period, don’t invest in the markets. The truth is that simple. Markets go up, markets go down. An investment strategy determines how much money you make in a bull(going-up) market and how much of that growth you retain in a bear(going-down) market. People who fear risk and volatility, people who use risk and volatility as a reason not to invest, are people who don’t have conviction in their investment strategy, or have no strategy. Both risk and volatility can be managed. It’s not a perfect science, but it’s a working science(I hope that makes sense).
Getting back to my original point, why I say this is a difficult question is because I don’t know the following factors:
- How old are you?
- What is your risk profile?
- Will you need access to these funds in case of an unexpected emergency?
- Does tax play a role in your decision making? Should the investment seek to reduce your tax burden?
- What asset classes you’re currently exposed to? Are you currently overweight equities so that shouldn’t form part of the investment allocation?
I think you get my point. Not one to leave you disappointed though, perhaps let me answer your question by focusing on what should drive your decision making process when looking for an investment? The short answer is speak to a qualified Wealth Manager. They’ll act as your guide and assist you in making an informed decision. They’ll guide you in considering things like education inflation and tailor your solution to the education institution you’d like your child to attend. For the long answer, I’ll touch on 2 points so we can all make it home by Christmas.
Your objective for investing
A factor that determines where to invest your money is your objective for investing. You may want to hopefully grow your money fast and you do not care if you risk it because you have more time to pick yourself up and recover from a downturn. Or your goal is just to preserve your capital in the safest way because you will need your money soon, and it is important that it does not lose its value. These different goals are compatible with different kinds of investments or mix of investments. Working on nothing else but your investment term of 15 years, I would suggest opting to take aggressive risks for higher gains. If you can afford to take a risk with your money for higher gains, then growth should be your goal.
The target of aggressive investment strategies is the growth of capital. This is why aggressive investors put more of their assets/ money in equities instead of safer debt securities. This means that their investment has a higher risk associated with it. If you can wait for a period of 12 to 15 years, the chance of gaining money in the equity market is better. I would add here that also ask yourself what degree of risk are you comfortable with? If you want to invest in a high-risk venture be prepared to lose some of your money at some point. Don’t panic when this happens.
If your investment strategy still makes sense, remain status quo and do nothing with the expectation that performance will improve. A good rule of thumb is to be comfortable losing half the money you have in equities in any given year without changing your plan. So if you have 60% of your money in equities, you should expect to face about a 30% loss in your investments at some point in your life (though it may, and should, bounce back over time).
Fees, fees, fees
Did I mention fees? I still am shocked to meet knowledgeable investors, people who have been investing for years but have no idea of what fees they’ve paid over those years. To whom they’ve paid those fees? For what were those fees charged for? Could they have negotiated a better rate? What impact those fees have had on the performance of their investment? You need to watch fees like a hawk! The coming of RDR will look to address this disparity, at least we hope. Most problems I’ve found can’t actually be corrected through legislation. You have to incentivise those that provide investments services to change their behaviour and be more transparent about the fees they charge. The industry is changing, don’t get me wrong, and is embracing a more transparent outlook.
How do you convince those who don’t seek to change, those who feel transparency means to actively risk earning less? That’s the wrong way of looking at the problem. I only started changing my outlook(and fee structure) not because of legislation or TCF, but when I started to ask myself, what value do I bring to my clients? What fee justifies that value? Those who fear losing revenue are those who fear they don’t provide much value. If you want to earn more money, solve bigger problems. Someone smarter than me said that, and they’re 100% correct. It was Vanguard founder John Bogle who once said: “In investing, you get what you don’t pay for.” The quickest way to guarantee an increase in your investment returns is to lower your costs. In fact, the investment research company Morningstar found that cost is the single best predictor of a mutual fund’s future return, even better than its own star rating system! I think I’ll end of this topic on fees by sharing a Vanguard principle which states:-
Markets are unpredictable. Costs are forever – The lower your costs, the greater your share of an investment’s return. And research suggests that lower-cost investments have tended to outperform higher-cost alternatives. You can’t control the markets, but you can control the bite of costs and taxes.
There’s a lot that goes into making an investment decision. Many factors that I haven’t mentioned above. I hope the above at least starts to steer you in the right. Speak to a Wealth Manager for further advice.