Things I would teach my daughter about starting her investment journey

Once you graduate, you step into your next stage of life full of energy, ambition, and drive. Entering the stage where we begin earning money is exciting and daunting, as some take on a greater degree of responsibility for their own liabilities and expenses. As fully fledged adults, you need to start paying for a host of things you’ve never worried about before. Car insurance, gym contracts, medical aid and rent are perfect examples of things that can quickly eat away at your first salary. Let’s dive into common questions you may experience when entering the first stage of your career.

The first paycheck: setting the stage

Your first salary is a milestone. But how do you allocate it correctly? Budgeting is usually the first step, where we match our income against the things we need and want to spend our income on. The priority for anyone new to earning money is to start with an emergency fund. Future expenses may be planned or unplanned, being realistic about the full range of eventualities. You may have to factor in travel costs for your best friend that’s getting married in a different province, or an emergency root canal preformed after an unexpected tooth infection. Life happens, guaranteed. A tooth ache is a perfect example of one of those things that just can’t wait for the next pay day.

Depending on which financial planning book you read, the amount you need to save can vary, but as a guide let’s use three to six months of your current salary. This money would need to be available at any moment for an emergency but should also grow as ideally, you’d like to avoid the rainy day scenarios. It’s therefore best to invest this money into an account which provides a return, usually in the form of interest through a money market fund which is usually accessible through your online banking app.

Planning for the future

Once you’ve ticked the box on the emergency fund, you can then start saving for the long term or for something specific like a car or house deposit. Again, when you intend to use this money would dictate what type of investment you should choose for these goals. If it’s general saving where you’d like to put money away and forget about it for a while, to use in 10+ years, a tax-free savings account invested in equities would be a great place to start.

Among the major types of investments available to all investors, equities have produced the highest return over longer periods. The higher returns, however, don’t happen every month and often equities can decrease in value. History has shown though that sticking to your long-term horizon and contributing regularly to the investment leads to a much better outcome than hiding in a steadier money market fund.

The power of time

Time is really your friend here. Use it wisely. Investing in the tax-free savings account in the longer term and allowing the investment to grow will allow you to best use the tax benefits. The ‘tax-free’ part comes in as you won’t be taxed on any of the growth in the investment. If you’d like to use the product for shorter term savings though, you’ll probably miss out on the tax benefits and once you’ve withdrawn your money you may not be able to replace that amount as annual contributions are limited and there’s a lifetime contribution limit which will apply.

Short-term goals and smart choices

If you’re saving for shorter-term goal, regardless of whether it’s in a tax-free savings product or a usual normal taxable investment, you’ll need to consider the mix of asset types you’re invested in. An asset is simply something you can invest your money in which should grow in value or provide you with an income.

I’ve mentioned equities as a class of asset, but other common asset classes include cash (like a money market fund), bonds (like a bond on your house, but you get paid not the other way around) and property. Depending on the range of outcomes you’re comfortable with and your investment time horizon, you’ll have more of less of these assets in your investment portfolio. When deciding what’s the best mix of assets, invested local or globally, it’s preferable to seek the assistance of a qualified financial advisor to best match your selection with your expectations. But those who prefer the DIY approach or simply want to up your knowledge of investments before reaching out to an advisor, there’s simple savings vehicles and platforms you can use or browse for more information.

Navigating investment options

The South African savings industry is very well developed and has a wide range of investment funds and investment managers to choose from. The simplest products to use are:

1. Collective Investment Scheme (CIS)

CISs is sometimes referred to as a Unit Trust or Mutual Fund. You can access them from a range of places, either directly through the Asset Manager you want to invest with, via a platform called a Linked Investment Services Provider (LISP) which provides access to a range of fund (like a supermarket of funds) or even through your banking app.

2. Exchanged Traded Fund (ETF)

To access an EFT, you’ll require a stock broking account. Fortunately, it is quite easy to open one of those through a range of different providers. When digging into the space, you’ll stumble upon a document called a minimum disclosure document or fund fact sheet, this gives you the basic info you’ll need to know about a fund (CIS or ETF).

Fund fact sheets illustrate cost, performance, risk category, asset allocation and several other items. Another useful item on the fact sheet is the fund category, this gives you a good clue of the potential risk in the fund. The Association of Savings and Investment in South Africa have allocated different fund categories for funds with different asset class limits which give a rough guide to the amount of risk the fund is able to take.

These limits also indicate the amount the fund can invest offshore, which has many benefits but can also increase the variability of your funds especially due to changing value of the currency exchange rate. In general, the lower the allocation to riskier asset classes like equity and property the lower the risk.

Given how far our market has grown over the last 20 years as well as the range of options and information available, it’s easy to become overwhelmed. Getting started with a simple index tracking funds which cover the whole market is usually a good way to get started. Getting financial advice however will place your mind at ease and make your path on this journey considerably easier and understandable.

by Imraan Jakoet, Head of Invest: Graviton 

Graviton Financial Partners (Pty) Ltd is an authorised financial services providers in terms of the Financial Advisory and Intermediary Services Act,2002. The information in this article does not constitute financial advice While every effort has been made to ensure the reasonableness and accuracy of the information  contained in this document (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any  representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability  for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance  upon the information.