Why investing is important even amid a pandemic
“The best time to plant a tree was 20 years ago. The second best time is now.” This well-known Chinese proverb is not lost in the context of saving and investing. If one has missed the opportunity in the past to save, it is important to take the lesson from the proverb and start saving now, no matter how small the amount.
“In the last four months we have seen the biggest shock to the financial system since the Second World War. This has made many of us question the conventional wisdom around wealth preservation and saving. There are many misconceptions about investing - such as, investing is for the rich, small amounts don’t count, or it is too late to start.
Investing has become a lot more accessible, small amounts accumulate, it is never too late to start the process. However, with the impact of compounding returns the benefits of investing early in life are evident. This is especially true if you don’t want to outlive your savings, something which is becoming more and more commonplace,” says Duncan Wattam, Head of Investments at Standard Bank.
If you want to build any kind of wealth through investing, you are going to need to utilize the power of compound returns on your investment. If you spend on consumables rather than assets that increase in value over time, and never learn to save, you will miss out on this valuable financial opportunity.
Compound interest is extremely powerful; however, you need to give it enough time to work its magic. The more time you waste, the less opportunity you have to allow this compounding to work. To put it in practical terms:
If you invested R20,000 once off for 35 years at a 9% return (JSE has returned 8.7% over the last 35 years after inflation), it would equal R461,268 at the end of the investment period. Alternatively, if you saved R500 per month over 35 years at 9% return it would equal R1,470,892. Whereas, if you contributed R500 per month over 35 years, in addition to the initial investment of R20,000, the investment would be worth R1,932,160 after 35 years.
Inflation is another major consideration when investing. Let’s say you have R1000 in a savings account that pays a 3% interest rate. After a year, you will have R1030 in your account. However, if the rate of inflation is 5%, you would need circa R1050 to have the equivalent purchasing power. Any time your investments doesn’t grow at the same rate as inflation, you will effectively lose money.
Financial markets can be difficult to navigate - here a few tips which can help you get started:
Tax-free investment accounts (TFIs) are a great place to start investing. TFIs were launched by the South African government on 1 March 2015 as part of their initiative to encourage people to save more. South Africa has one of the lowest savings rates in the world, and many South Africans do not have any form of formal retirement savings.
TFIs aim to improve financial security by encouraging an investment culture. Unlike other investment products, all proceeds, which include interest income, capital gains and dividends from these accounts, are tax free. Tax-free Investments will therefore significantly increase the returns for individuals. Contributions are currently limited to R36 000 a year and R500 000 over your lifetime. It is important to note that any funds withdrawn from these accounts cannot be replaced and that any contributions over the annual R36 000 limit will be subject to tax.
Don’t avoid equities and the associated volatility, especially if you are young and have many years of saving ahead. Equity returns have outperformed other asset classes and inflation over the last 100 years and are expected to do so for the next 100 years. Unless you are a trader, buying shares on the stock market should never be a short-term gamble. Investing is a long-term discipline and starting early will allow for greater resistance to volatility and risk. The longer the investment period, the greater potential to grow wealth on initial investments.
Use an Investment Experts:
Many people unconsciously exhibit traits that make them poor investors and can lead to unintended investment losses. Financial advisors are in a position to assist investors identify the appropriateness of investment strategies and to counteract some of the investment biases we may fall victim to.
Investors are often lured by the prospects of large gains toward the end of a bull market and panic when there is a market correction, resulting in poor returns. In addition, trying to opportunistically “time the market” is also incredibly difficult to do in practice and this strategy is inevitably met with disappointment. Investment Advisors can help you achieve your investment goals.
Prepare for Retirement:
If you have dreams of retiring, you need to start investing as soon as possible. The longer you wait to start investing, the more you have to put away every month at a later stage. You will also delay putting yourself in a position where early retirement is a genuine possibility. Remember that if you want to retire early, you will, in the majority of instances need to supplement your pension fund or retirement annuity.
The Freedom of Youth:
Young investors have greater freedom to create positive saving and investment habits – as you get older, your living expenses increase, often limiting the money you are then able to invest. Take advantage of the reduced financial responsibilities in your youth and invest what you can afford now.
The financial habits you learn in your twenties can make or break your financial future. Good financial habits, appreciating the power of compounding, and making sound investment decisions will help secure a better long-term financial position.
For many people it is easier to put off investing decisions until their financial situation becomes more stable. But doing so delays the effects of compounding – one of the greatest benefits afforded to investors. Investing is a key first step on your journey to building wealth and achieving your financial goals.