Investing as a young person:
Investing doesn’t have to be complicated. Sadly though when you’re just starting out, it can be a hard ask due to so many competing demands. You also need some basic investment knowledge, which often supplied in high school classes or college.
On a positive front: There are more attractive options for entry-level investors than ever before. Many mutual funds costing hardly anything for each rand you invest. Some firms might even offer them for free. Getting professional advice is easier than ever as well. And after you get the hang of it, you can set your plan on autopilot for a while.
But narrowing down where to start can be daunting. Here are a few points to help steer you in the right direction:
There are a couple of items you want to deal with first: preparing for a financial emergency and creating a plan to attack any high-cost debt you might have.
Building a financial cushion will help should your money situation change, whether that’s because of the loss of a job or because of a giant unexpected expense. Most financial planners suggest keeping at least three to six months of living expenses in cash — to cover the basics like rent, food, utilities, loan payments, student loans, etc.
How much to save and invest, and where?:
So you have some money to invest or are working and want to set up a plan for your long-term goals. Many financial experts recommend saving at least 12 to 15 percent of your salary to achieve a secure retirement, and others suggest even more.
But even 10 percent might seem impossible at this stage. There are ways to get closer to that goal, however, without doing all of the savings on your own.
Much of how you get there will depend on whether you have access to a retirement plan through your employer. If you do, then much of the hard work is done for you. Employers must vet and assemble the plan’s menu of investment options. On top of that, you contribute money that hasn’t yet been taxed, so it lowers your tax bill. The money then grows tax-free over time, and you pay tax on the money when it’s withdrawn in retirement.
However if your employer does not assist then the duty falls to you, this would require more effort on your part but comes with the benefit of your full control. The most commonly suggested investment is considered a tax free investment, offered by most banks and investment managers across South Africa. The main effort would involve researching who offers the best returns and client services, but this is essential for all future investments as well, so building the habit of extensive research is a relevant skill to nurture.
Why you should use index funds:
Resist the temptation to use the latest app promoting investing in cryptocurrencies or single stocks. You want to do the exact opposite: Own a collection of cheap and boring mutual funds that invest in different kinds of stocks across the world, with a helping of safe bond funds to cushion the inevitable swings of the stock market. That way, if anything goes wrong with a particular stock or sector of the market — say, a virus outbreak, load shedding, or our struggling currency — you’ve covered your bases.
Some mutual funds are run by professional stock pickers who work to beat the average market’s performance, however over long periods of time they often fail. That’s why you’re better off investing in index funds, whose investments simply mirror big sections of the stock market — the S&P 500 Index, for example, tracks the 500 largest publicly traded companies in the United States.
Often these index funds can be incredibly cheap hence performing better.
Picking the right mix of investments:
One of the more important decisions you will make — besides how much you allocate to investments — is how you decide to split up your investments among stock, bond and other funds, something known as your asset allocation.
Younger people can generally afford to take more risks and invest more heavily in stocks — which have the potential to generate more growth over time — because they have many working years ahead of them. If the market tanks, their portfolio has time to recover.
You need to weigh up the risks, stocks are the riskiest option but offer the most growth. Other funds and bonds generally are safer but offer far slower growth in general. The most common approach is to split the amount you want to invest equally across the various asset types available. Others focus on the bulk of their investments being in the safer options before allocating any “free” or excess income from side hustles and other sources in riskier options. The choice is yours to make, but overall the general consensus is to start as early as possible regardless of which choice(s) you make.
Saving for goals besides retirement:
Shorter-term goals — buying a home or a car or saving for a wedding — generally require a less risky approach.
If you will need to use the money in three years or less — say, for an emergency fund or a holiday — the answer is easy. Put your savings into a high-yield savings account each month, one with a competitive interest rates. With time frames this short, the amount of money you save is more important than any returns and you do not want to risk losing anything.
If your goal spans anywhere from three to ten years away, a hybrid strategy might be better. If you for example, you want to buy a home in five years but can be a little flexible on timing, you could invest one half in a savings account and the other half in a fund balanced between stocks and bonds.
In general you should expect that in any given year you could potentially lose half of your money invested in the stock market. This can be recovered over time, but shorter time periods make that less likely.
Where should I go to get started?:
Outside of a solid employer-sponsored retirement plan, one of the best places to get started is at one of the banks – Nedbank, Investec, ABSA and more. Another approach is to go to brokerages where you can gain access to index funds with ease. These require a bit of research to know who offers services that suit your personal preferences.
One up and coming site for investing in stocks is Easy Equities. They offer very flexible investment option often starting from lower than you expect with the flexibility of investing in the stocks you care about.
Lastly if you have a good starting capital(over R100 000) you can invest with us through our private wealth investment options. This gives the advantage of us advising you personally on the various aspects of investment.Through this we can demonstrate the growth you can potentially expect from your starting capital.
But most young investors really don’t need all that much help. If you’re just looking to become more knowledgeable about investing, there are plenty of materials that can assist:
- “I Will Teach You to Be Rich, Second Edition,” by Ramit Sethi
- “If You Can,” by William Bernstein
- “Broke Millennial Takes On Investing,” by Erin Lowry
- And anything by John Bogle or Helaine Olen.
Some information inspired by or sourced from the article: https://www.nytimes.com/2020/02/10/smarter-living/the-young-persons-guide-to-investing.html written by Tara Siegel Bernard