It’s the job of our investments to get us to financial independence. There over 400 companies listed on the JSE, not to mention investment products. It’s only natural to feel afraid when you start. Some terms are difficult to understand and we’re all a little scared we’ll end up losing money.
In this article we explain a number of options to get you going. Don’t worry about finding the perfect approach, because nobody really knows what that is. Go for the option that feels most comfortable to you right now, because time is the most important ingredient in investing.
However, it’s important to keep coming back. Learn as much as you can so you can review your investments at least once a year. Always keep a close eye on your fees. Since your long-term investments will amount to hundreds of thousands or even millions of rands, a small percentage when you only have a little bit of money can quickly turn into thousands per year. Remember, you can always change or add to your strategy when you start to feel more comfortable.
I want to take the first step on my own
A retirement product like a retirement annuity (RA) or pension fund through your company is a great way to start. These products are regulated to prevent them from being too risky. You can choose how much you’d like to invest every month and you get some tax money back when you contribute to them. You won’t be able to access these products until you are 55 years old, which forces you to give them time to work.
If you go through your employer, you might be able to choose between funds, but not between providers. It’s worth giving up that choice if your employer is also contributing to the fund on your behalf. If your employer doesn’t match a part of your contribution, you aren’t obligated to stay with the fund they recommend.
If you don’t have access to a pension product through your employer, you can get one directly through a retirement annuity provider. Don’t be afraid to shop around for a good fit. Most new products cost 1% or less in fees every year and invest in index-tracking products. Start with a small amount every month and read everything you can about the fund you chose. It’s a wonderful way to learn.
I want someone to hold my hand
Making your first investment with the help of an independent financial advisor can be very reassuring. Unfortunately it can be hard to distinguish between a truly independent provider and one that sells products on behalf of a large company. When looking for an advisor, find someone who can help with every aspect of your financial life, from medical aid, insurance products and wills to retirement planning and discretionary investments. A truly independent advisor will work with a number of product providers and offer a comprehensive strategy instead of offering you a one-size-fits-all solution.
An independent advisor will offer you a choice between paying upfront for their advice services or paying a commission. If you only have the option of paying a commission, it’s usually a clue that you’re paying someone to sell you a product.
I want some guidance, but I don’t want an advisor
If you’d like some guidance without the pressure of an advisor waiting for you to make a decision, a robo service is for you. These online services ask you questions and recommend an investment strategy suitable for your investment time horizon based on the amount of risk you can afford. You can play around with the variables to see how different financial choices will affect your future. These services are a great way to learn about the long-term impact of the financial choices you make today.
Most robo services offer a few funds for different investment needs. While you can control some of the inputs like how long and how much you’d like to invest, you are limited to the funds offered by the robo service. If the idea of choosing between the hundreds of funds available to local investors freaks you out, a robo advisor is perfect for you.
A great robo advice service will take your overall financial situation into account. Look for a service that asks about your income and debt, not just a single savings goal. Remember to keep an eye out for fees. Your robo advisor’s fee has to include an advice fee as well as the fee of the underlying fund. Be careful of advisors who only declare one or the other.
I prefer to do my own thing
If you want to be completely independent, great research is your most powerful weapon. You have more choices than in any of the other options, starting with finding a broker. A broker is a platform that allows you to buy shares on the JSE. Not all brokers are created equal; some offer more functionality like live data charts, but are more expensive. Others are completely free but offer limited functionality.
Your second important choice is the type of account you’ll open. All South African residents are allowed to invest R33,000 per year in a tax-free savings vehicle. These are usually a great place to start because of the future tax savings. However, you are only allowed to hold cash and index-tracking investment products in these accounts.
Your third important choice is what product to invest in. If you want to invest in individual shares, which ones and why? If you decide to go the index-tracking route, are you aware of the fund fees associated with these products? Read as much as you can about your options before making a decision and don’t be shy to ask those that have gone before you for guidance. Be sure to consider multiple points of view to weed out radical ideas. This is your financial future we’re talking about, after all.
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