Many South Africa's investors are currently asking themselves: “would my money not have done better if I left it in the bank?”, as opposed to investing it with a Financial Services Provider. With all the economic and political uncertainty that we are exposed to, it’s only normal to be cautious about our investment decisions.
Before we consider the options, let’s try to understand the difference between speculating, investing and saving. Knowing the difference can make a fundamental impact on your financial planning and it's important to understand the differentiation and the need for all three.
Saving can be defined as the short-term processes of putting money aside for a short-term goal, whereby growing your wealth is not necessarily your top priority. The most important element of savings is the safety of your money; you don't want it to fluctuate because you will need all of it to achieve your short-term needs.
There are various ways of saving including money markets, savings accounts and even fixed deposits. Unfortunately, as a trade-off for protecting your money, savings accounts typically give you an interest return barely above inflation which is currently 5.5% in South Africa. Therefore, in real reality your money will become stagnant.
If you want to partake in potential returns more than ‘just higher’ than inflation, then you need to look at investing. Unlike saving, investing is generally a long-term process and it often involves taking a portion of your money and committing it to a variety of assets classes with the expectation that you will receive a higher return than inflation.
Now this typically comes with the higher risk as you are looking for higher returns. Risk, or as we say volatility, would vary depending on the asset class. Equities being the riskiest by nature and bonds being more conservative. Risk in investing generally plays the biggest part in the short term and that's why investing is more lucrative in the longer term.
Speculating involves putting your money at risk so that you can get a high return in a short period of time. Day trading is a good example of speculating. Day Traders can make big money and lose big money all in one day.
To put it in short - save your money to protected it, invest your money to grow it and speculate money to gamble it.
The money market’s fundamental goal is to maintain the value of your investment, allowing you to access your money whenever you need it. It typically targets returns higher than a bank deposit. You can think of this account as a safe parking bay for your money.
While this is a very low risk instrument, it is not entirely risk free and returns are unlikely to keep up with inflation, which means that the value of your savings may decline in real terms over time.
Money markets also generate interest which means any growth is subject to tax. Up to 45% depending on your income tax bracket. There is, however, an exemption every year of R23 800 on interest, for natural persons under the age of 65, and R34 500 for over the age of 65.
Investments in South Africa are generally (not only) categorised into two vehicles: unit trusts and endowments. Both use underlying funds from various asset managers, allowing them to invest into different asset classes to achieve higher returns. These investments are considered diversified and can also take into consideration the use of money markets within its portfolio, depending on how conservative the fund wants to be.
Investment funds can be risk profiled from conservative to aggressive or goal based as we seek a target return higher than inflation.
If we look at money market versus the JSE over different time periods, we can see the relationship between volatility and growth is justified over a longer period. In the below charts by Profile Data. Fund Analytics, we look at growth of a single R1000 investment over a 1, 3 and 5-year time horizon. The message here speaks to the rewards of long term investing in the market versus the short-term need of safe saving…