Short-term savings and an emergency fund are often the last line of defence against expensive debt. In addition, cash and near-cash for shorter-term goals give your long-term savings more time to grow. However, finding a great place to grow short-term savings can be a challenge.
The golden age of up to 10% return on longer-term cash savings came and went with COVID. In a lower interest rate environment, such as the one we’re currently experiencing, getting inflation-beating returns on cash becomes challenging. If you have a five-year savings goal, this could have a real impact on whether you can afford what you’re saving for.
A potential solution to the problem of low interest rates is short-term investing. The most important consideration here is the relationship between time and risk.
Certain investments are considered more risky than others because of how much their prices can move in a short time. Ordinary shares, for example, can be bought and sold at any time. The price of a share is determined by supply and demand, which is sometimes influenced by news about the company or the economy. If all of your savings are in shares, the share price could fall the day before you need to withdraw the money. You could end up selling your investments at less than you bought it for or not achieving as much growth as you had hoped.
The more time you have, the more risk you can afford to take. If a share event affects the value of your investment, you simply stay invested until the shares recover. The idea is that a more risky investment gets rewarded with better investment returns. As you get closer to withdrawing your investment, however, your risk should decrease. The closer you get, the more of your savings should sit in cash so you’re sure the amount you need is there exactly when you need it.
In terms of risk, shares (sometimes called equities for no good reason) are the Wild West. Property is slightly less risky, but still no joke.
Next up are bonds. They are considerably safer because you are very likely to get back at least your original investment. On top of the original investment, you’ll receive interest. In the case of total return ETFs, the interest earned on bonds is used to buy even more bonds. Think of this risk as being pick-pocketed on a vacation in Portugal.
Safest of all is cash—in the short term. The longer you have it, the more risky cash becomes. If your cash grows at a rate lower than inflation, your buying power is systematically destroyed without affecting the balance you hold. It’s the silent killer. You have the option to just leave your cash in a fixed interest account for the duration of your investment. However, money market ETFs offer easy access and solid returns.
The below ETFs are suitable for investments of 10 years or less.
|ETF||Asset class||Investment period|
|1nvest Global Government Bond Index Feeder ETF||International Government Bonds. The currency conversion adds a level of risk making this more suitable for a slightly longer investment horizon.||3 – 7 years|
|1nvest SA Bond ETF||South African Government bonds||3 – 7 years|
|ABSA NewFunds GOVI ETF||South African Government bonds||3 – 7 years|
|ABSA NewFunds Volatility Managed Defensive Equity||South African equity that converts into cash in volatile times. While this ETF is designed to smooth out your ride, it is still an equity ETF. Therefore it should be held for a longer period.||5 – 10 years|
|ABSA NewFunds MAPPS Protect||Equity (40%), Nominal Bonds(15%), Inflation-linked Bonds (35%) and Cash (10%).||5 – 10 years|
|ABSA NewFunds S&P Namibia Bond||Namibian Government Bonds||3 -7 years|
|NewFunds TRACI 3 Month ETF||Money Market||0 – 3 years|
|Ashburton World Government Bond||Global Government Bonds. The currency conversion adds a level of risk making this more suitable for a slightly longer investment horizon.||3 -7 years|
|FirstRand Dollar Custodial Certificates and 2-year Dollar Custodial Certificates||US Treasury Bills. The extremely low interest rates in the US means you don’t want to hold on to these guys for too long, especially when compared to South Africa’s inflation rate. It’s best to think of this as holding US dollar in cash.||0 – 3 years|
|Satrix Global Aggregate Bond ETF||Global Government Bonds. The currency conversion adds a level of risk making this more suitable for a slightly longer investment horizon.||0 – 3 years|
|Satrix SA Bond Portfolio||South African Government Bonds||3 – 7 years|
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