BOITUMELO NTSOKO: Welcome to the Money Savvy podcast. I’m Boitumelo Ntsoko. Investing – we all know it’s important for wealth creation. The number of reader questions we get at Moneyweb on how or where to invest X amount shows just how much interest there is in maximising the funds you have today for the future. So here to shed some ideas on where you can invest your money is Trent Hodges, a certified financial planner at Gray Capital.
Trent, if I have a tight budget – and let’s say I have R100 to spend monthly – is there a product that I can invest in?
TRENT HODGES: Hi Tumi, thank you so much for having me. Yes, if you have a tight budget, there are products that investment houses offer with no minimum that you need to put in. If you have R100 spare to put into an investment, companies like EasyEquities don’t have minimums, Satrix doesn’t have minimums – and they’ve got quite a big investment pool that you can put your money in between ETFs and direct shares. Or you can go to your bank. It would be between those companies you’d look to place your money on a monthly basis. But possibly, looking at what your budget is, if you have a very tight budget just look at your capital and what you’re spending it on – is it on debt, or are there other things that limit your budget and you can be investing more? But there’s no point in investing if you’re paying so much in interest.
So I would look at what your budget actually is. Are you paying a lot of debt payments? Maybe your credit card is one of the things that you have that’s bringing down your budget on a monthly basis. Look at paying with a credit card first. Look at the highest interest options where you’re going to pay more in interest, and actually what the returns on the investments are. I’d focus on that.
But if your budget is tight and you’re a pensioner and you’re looking to invest in the markets, or you’re a student and you want to put money aside, look at EasyEquities or Satrix or at your bank investments which have no minimums.
BOITUMELO NTSOKO: What if I’m in my twenties or thirties and have, let’s say, R1 000 that I can set aside each month – what investment options are available to me?
TRENT HODGES: I would look at a tax-free savings account. As a start, you’re allowed to put in R36 000 a year, so R3 000 a month into these tax-free savings accounts on an annual basis.
You could set up a unit trust with the likes of Sygnia, Satrix, EasyEquities, and so on. EasyEquities and Satrix generally have direct shares and ETFs that you can put money into. And you can set up an investment portfolio where you can put aside money on a monthly basis in your twenties and thirties, and built up a nice pot for later on investing in other assets. Unit trusts obviously are simple investments you can put money into. You can do a lot of research online or contact a financial planner who will be able to assist you with that.
BOITUMELO NTSOKO: I know there’s a lot of interest among that age group as well, wanting to gain access to technology shares – especially overseas companies like Facebook and Amazon and Netflix. Would these products then be able to give them that exposure?
TRENT HODGES: You’d have to look at EasyEquities. What I find with a lot of clients in their twenties and thirties, under 35, is they’re generally quite comfortable with technology. They want to invest in those technology stocks, and something like EasyEquities would be an easy way to purchase those shares directly, whether local or offshore.
You can buy an index like the Sygnia 4th Industrial Revolution Fund, which tracks fourth industrial revolution-type products, or they’ve even got a Fang fund – which is Facebook, Apple, Alibaba, Netflix and Google – those type of funds. Tesla is also in that basket of shares. So a do breakdown of that, and you can buy it on the EasyEquities platform, which is fairly simple to set up if you are between your twenties and thirties. I find those clients are very comfortable in setting up their own investments, doing their research. The only caution that I offer is to understand that in investing in equities there’s a lot of volatility. So it’s putting aside capital that you can lose, but also building an investment pot if you have a strong conviction about those companies.
BOITUMELO NTSOKO: Let’s say you get R10 000 back from Sars this tax season, how can you invest this lump sum to get offshore exposure?
TRENT HODGES: A lot of the time with R10 000 the biggest problem that you have is finding a place that will take minimums. A lot of the investment houses want minimums in their funds. So again, it seems like I’m going off on the EasyEquities side of things. I like their platform. That’s a good platform and they have no minimums – so EasyEquities, Satrix. There are other companies called Swissquote, which have stockbroking accounts that you can open up. Interactive Brokers or online stockbroking comes with your local bank. You could actually set up an investment and have access to offshore exposure.
Alternatively, you could look at an ETF fund that tracks the S&P 500 or the Eurostoxx 50, or the FTSE 100. You can look at a lot of options that are available, and those would be on the Sygnia platform, on the EasyEquities platform. There are a lot of options on offshore-based ETFs and indexes that track these funds
BOITUMELO NTSOKO: If I’ve saved up R100 000 what alternative investments can I explore to maximise these funds?
TRENT HODGES: On alternative investment fronts we’re looking at private-equity type investments, hedge funds. They’re generally more complex structures than the other investments, which might be a little bit simpler to understand. So I would recommend do a lot of due diligence on the investor’s side. Probably get some professional help on where you want to put your funds. The R100 000 is a bit of problem when it comes down to the minimums; a lot of guys have about a R250 000 minimum up to a R1 million. Some offer hedge-fund options only from R5 million and above.
So the barriers to entry are a lot higher on those types of investment. But then you can look at the cryptocurrency side of things, where you could open up a Luno account with nothing. That’s a bit of an alternative investment where you have access to some Bitcoin – Ethereum on their platform.
Again, it comes with risk and I’d suggest that you do your research properly, get advice from someone who understands the investments – and look out for a lot of scams. We’ve recently seen in the news some serious scams around the cryptocurrency markets. Understand what the underlying investment or structure is, what Bitcoin is, or what Ethereum is – and the other cryptocurrencies. There are thousands of coins that you can literally make at a click of a button. Understand what you investing in on that side of things. There are no general minimums on the cryptocurrency side of things.
Private equity and hedge funds generally have high barriers to entry. So your R100 000 might not be enough to get access to them. That’s one of the downsides. If you invest in a fund that has exposure to hedge-fund equity like a managed unit trust that has hedge-fund exposure, that’s one of the ways that you can get into the hedge-fund space at a lower cost.
BOITUMELO NTSOKO: And if I’ve inherited R1 million, how can I invest this to possibly double it?
TRENT HODGES: Well, Tumi, you can go to Montecasino and put it on black, and hope that it comes right. [Chuckling] I think Tsogo Sun would appreciate your money. But I probably wouldn’t go on that from a financial-advice point of view; 50% odds on red or black doesn’t really sound too much in your favour – but you can double your money by doing that.
What I find is a lot of people look for get-rich-quick type options; there’s no quick-rich place to get rich or double your capital necessarily easily, or else everybody would be rich and everybody would be doubling their capital every six months or 12 months, or every time they go to the casino. The house always wins.
There’s something called the rule of 70 – I don’t know if you’ve heard about it, Tumi.
BOITUMELO NTSOKO: No, I haven’t.
TRENT HODGES: The rule of 70 – there’s a very complex equation. It is if you take 70 and divide it by the return that you’re getting on your investment, that’s determines how long it would take you to double your capital. So if you are getting a return of 10% per annum, and take 70 divided by 10% per annum, it’ll take you seven years to double your capital. If you’re getting a 15% return, divide 70 by 15 and it’ll take you just less than five years to double your capital. So it depends on the return on the investments to tell you how long it would take to double the investments.
The past performance of a funds doesn’t necessarily predict its future performance. If you want it within five years, you have to go for a higher equity-based structure, but that doesn’t actually mean that you’re going to get double your capital within that period of time.
TRENT HODGES: There are, you would have heard in the media, a lot of companies offering to double your capital within five years, but they use a lot of structured products to do it. The Eurostoxx 50 and the S&P 500, for instance, show a positive return over that period of time; they use various instruments to structure the doubling of an investment – less their costs. There’s one on the market at the moment offered by Discovery, but there are also costs involved there. So you’ve got to weigh up the costs. There’s no real way to get rich quick or double your money as quickly as possible. If you’re getting a 7% return, you are looking in 10 years to double that capital, for that R1 million go to R2 million.
BOITUMELO NTSOKO: At retirement, if I have R10 million and I don’t want to invest in a living or life annuity, what options are available to me?
TRENT HODGES: As long as the funds are coming from discretionary assets, meaning not coming from non-discretionary sources like your retirement annuity, pension or provident fund; in those generally the one-third gets paid out in cash and with two-thirds you have to buy a living annuity. So, assuming that you have R10 million in cash that’s not from those products, you can invest – depending on your risk profile – in various assets. Generally clients at this age want some guarantee. So there are guaranteed funds that you can look at that the houses offer, a guaranteed growth plan. The yields are fairly low at the moment, a 5%, 5.5% return on an annual basis.
They also offer income options. But again, it goes back down to maybe a unit trust portfolio, depending on your tax structures and endowment. If your tax is higher than 30% per annum, then you’d look at an endowment of 28% per annum. You would look at an endowment-type policy, a direct-share portfolio; but the best type of portfolio is one that is diversified and structured to your risk profile.
So, depending on that investor’s time line – they may want to invest R10 million for less than 24 months, or less than three years. Then it’s probably [best to] put it in cash or cash instruments, reducing your risk.
If it’s longer than that period of time, then you can look at more diversified funds with access to cash bonds, a bit of property, a bit of equity. It all depends on your risk profile. But again, it has to be money that’s free and you’re kind of forced to put it into a living or life annuity if the source of funds is a retirement annuity or pension. So it has to be a discretionary fund that you’ve accumulated over that period of time.
There’s no fixed investment option, and every client is different. But we look at various timelines of the clients, we look at their risk profile and what their propensity to risk is – how much risk they want to take on. But the assumption here is if the person is looking at a living or life annuity at retirement age. They generally are less risk-averse, so it should be more bonds and cash and a bit of equity in a core portfolio.
BOITUMELO NTSOKO: On something a bit different – ESG funds, would they be an option for anyone?
TRENT HODGES: A lot of the investment funds are looking at those ESG structures. The environmentally sustainable investments are a big portion of a lot of the funds and companies looking to structure their specific ESG funds. And then a lot of investment funds now are following an ESG-type process, looking to make sure that [for] the capital that they’re raising most investors want an ESG-type background. And so, yes, that’s something that you can look at. There are structures there. There are a lot more ETFs coming out, a lot more funds that are ESG-centric.
In the past we didn’t really care much about the environment, and there weren’t any available funds that were looking for future generations on which these funds are centred. So there are funds available.
BOITUMELO NTSOKO: How accessible are they? We went through different budgets. And in what range would you be able to access these in terms of finances?
TRENT HODGES: Generally if you wants access to the funds within a short period of time, if you want an emergency fund, those need to be available within seven days or so. Unit trusts are very flexible in the way that you can access them. If you hear the term ‘unit trust’ they are generally flexible investments that you can access at any time. Endowments have a five-year time horizon, and you can access them only after a five-year period. So it depends on which products you put them in. A retirement annuity you can access only at 55.
As much as retirement planning is important, a lot of 25-year-olds aren’t looking at 55, they’re looking at the next weekend after all the other lockdowns. They’re looking at a one-year time horizon, two-year time horizon.
And so a retirement annuity is important for them, but it’s not necessarily what they’re looking at, and they want cash to access when they may be buying a property and those kind of things.
So selecting the investment product is important. Your EasyEquities-type structures are flexible. Your unit trusts are flexible. An endowment is five years; a retirement annuity’s earliest age is 55, when you can access the funds, unless you are severely disabled. Or, if you pass away, your family will benefit from it. But you can’t access it prior to that. And that’s one thing a lot of clients learnt during the initial lockdown 500 days ago – that their retirement funds weren’t accessible if they weren’t at retirement age, and they hadn’t saved up emergency funds.
Another thing to look at is to build up an emergency pot; six times is generally recommended – six times your expenses to cover emergency events like we’ve experienced with the Covid pandemic.
BOITUMELO NTSOKO: Are there any last thoughts you’d like to share with our listeners on what they should consider first before they start investing?
TRENT HODGES: Yes. Look at your budget. That’s the most important thing. Be cautious about that. I’m not averse to accumulating debt as long as it’s the right type of debt. In my personal banking or personal bank accounts I call them good debits and bad debits. The good debits are the ones that are going into investment funds and growing capital. The bad debits are the ones that are interest-bearing. If it’s a credit-card payment or a car payment and you probably shouldn’t have bought a car that was on residual, and it was more than you could afford, look at that; make that mistake once and then learn from it.
And then pretty much the only real debt that you should have is your home loan; and stay within your budget. The bank will during the lending period generally give you 30% of your actual gross income as monthly payments on your bond.
But if you go for that, then 30% works out about 50% of your net income is going to a bond payment, so don’t stretch yourself so thin that you can’t put money in for additional investments. Always be cautious with your budget.
For investments there’s no such thing as a get-rich-quick scheme. Anybody offering you above-market returns like the ones that I’ve seen, like 15% per month or 10% per day, avoid with extreme caution. You don’t want to put your money in investments and lose the capital that you’ve worked hard to invest. So always be cautious, contact a certified financial planner. There are a lot of financial advisors out there, where a lot of them need [only] a matric and a driver’s licence to give you advice. That’s the minimum requirement. As per Fais, it is adding additional areas to entry as such, to make sure that the advisors are more skilled.
Look for someone that’s got a CFP. That means that they’ve done the tertiary education, that they’ve done board exams, and they’ve got a code of ethics that they need to follow.
So look for a certified financial planner or CFP to give you the best advice, one who is authorised to give you advice. Sometimes around the braai friends tell you that you will make 100% on this investment, and you should put your money there – “I can guarantee that investment will continue to grow at that same rate”. Sometimes it’s luck and sometimes it’s skill; try and mix luck and skill and get decent advice.
BOITUMELO NTSOKO: Thank you, Trent. That was Trent Hodges, a certified financial planner at Gray Capital.