Discuss the topic of investing with a group of young adults, and you’ll find most of us will agree that in our twenties and thirties, we’re often so absorbed in the here-and-now that it’s hard to picture a date far ahead in the future. However, “one day” when our retirement years start inching closer, we’ll thank our past selves for making a concerted effort to truly understand how to invest wisely from an early age.
Apart from tending to think that “we still have time”, another reason for erring on the side of inaction is our fear that investing will reign in our carefree lifestyles. If approached with a plan, though, investing doesn’t have to cramp our lifestyles (although we shouldn’t be living above our means). When that “one day” of retirement comes and we’re able to maintain our desired lifestyle, the small sacrifices we made now will pale in comparison to the long-term advantages we will reap.
As young adults, we’re facing a world of excessive study debts and may struggle to find jobs in our chosen fields at one or another point in our lives. Many of us will find it difficult to get on the property ladder early on in life (much less budget for our own weddings) and might be necessitated to live with our parents for longer. Regardless of all the challenges facing us, we’re a resilient generation – no problem is too big for us – so how do we best approach and overcome these challenges?
We’ve interviewed Anthony Palmer, Carrick Wealth Director of Investments and Products. Read his insights below and tailor it to your own needs, creating your own investment philosophy from his tried-and-tested tips and tactics, relating to general savings and investments which should be run parallel with saving for a down payment on a property. By doing this, you will sidestep some of the common traps threatening your financial goals – in style.
Anthony’s investment advice
Take the time now to learn the basic behaviours necessary to build your financial future. For anyone striving for long-term financial security it can be overwhelming, and for a young person just starting out, it can certainly cause fear and paralysis, but the secret is to start simple and be thoughtful. It is possible to build great habits today that will benefit you for a lifetime.
- Start with the basics.
Knowledge is key to making great investment decisions. A few easy ways to start is to attend basic courses on economics, look for courses or YouTube videos on how to analyse company financial statements, or read books on these subjects. Another tip is to read the money and market segments of newspapers to keep updated on happenings in financial markets, or better yet, seek out an experienced mentor who can give you guidance.
- Set a budget.
Before you can start thinking of setting your investment goals, the second step is to work out your income and expenses. Once you’ve done this and drawn up a budget, it’s well-advised that you set aside a minimum of 10% of your income towards your investment plan. Setting up a regular, automatic transfer will keep your goals on track and save you time. Remember to review your budget twice a year to ensure that your investment goals are still in line and if needed, adjust your budget accordingly.
- Set your investment goals. Keep in mind the power of compounding.
Setting your goals is a very personal and individualised process. Your situation and goals will differ from your friends or colleagues’ realities, so be careful of looking at someone else’s path to determine your own plan. It’s important that you really dig deep and decide what is important to you and where you want to be in the long-term. You can play around with some of the many online calculators available, which will help you understand how time isn’t on your side.
Even though you may not yet have enormous amounts of money to invest, no amount is too small as a start. Starting early will help you to build your financial assets progressively. The power of compounding over the years can help your cash grow significantly. This is because you will earn interest not only on your initial principal but also on the interest accumulated. Even a little invested now, when compounded, will pay off in the future.
Here is an example of compound interest:
- R500 a month invested from age 25 to age 65 at a 10% return = R3 162 039
- R500 a month invested from age 35 to age 65 at a 10% return = R1 130 243
- R500 a month invested from age 40 to age 65 at a 10% return = R 379 684
Now that you’ve completed the first three steps, your groundwork is covered. Next up are general investment tactics to keep in mind.
- Pay down debt. Avoid new debt. Establish good credit.
I’m sure everyone is familiar with the term ‘debt trap’ – it is a significant problem for millions of South Africans. Once you’re caught in debt, it’s extremely hard to free yourself from its relentless hold.
It’s imperative that you sit down and examine your various debt obligations, your monthly payments and the interest rate on each. If you have any high interest rate loan or credit, there is no point in investing just yet. It’s better to pay off debts since you’ll be spending a greater amount paying interest on your debt and will struggle just to ‘get ahead’. Now, build a payment plan to focus on the highest interest rate debt first, building it into your monthly budget and committing to having your debt paid off in a reasonable time.
Make it your sole priority to avoid new, unnecessary debt. We all want to treat ourselves every now and then, but you’ll regret excessive expenses later. Build up your savings first before buying the big temptations. Also, make it a habit to pay all outstanding debt on time and build a good credit record: it can help you qualify for home and car loans in the future, rent a house and even land a job.
- Invest only in what you understand.
Be wary of investments that appear to be overly complex (or seem too good to be true), or to invest in a business that you don’t understand. If you are unfamiliar with forecasting success in a field you don’t know (e.g. developments in pharmaceutic drugs, information technology innovations, etc.) it’s safe advice to pass on it. There are so many other ideas out there that you will understand, that it’s not worth wasting too much time on trying to understand a sector you don’t know by heart. Stay within your competencies and have the discipline to research and only buy investement products that you fully understand.
As Peter Lynch once said, “Never invest in an idea you can’t illustrate with a crayon.”
- Embrace a buy-and-hold mentality; Don’t let your emotions drive your decisions.
When deciding whether to invest or not, ask yourself if you’ll own it for at least ten years. If your answer is no, it would be better not to buy.
On this topic, it’s important to have realistic expectations of your investments, as not every (in fact, very few) investments will immediately start delivering great returns. Of course, when the markets and economy are doing well, there are investments that have great immediate returns, but remember that the markets are unpredictable. Always avoid knee-jerk reactions such as stopping investment contributions when markets fluctuate.
In the same way, be selective and keep in mind that not all news deserves your attention or action. Always ask yourself if a news item truly impacts your investments and its long-term earning potential. You would be wise to disregard short-term highs and lows in the market and your individual investments. Rather stay focused on the long-term: by diversifying and remaining realistic and unemotional about your investments, you will be able to build wealth comfortably over time.
- Start your retirement savings. Automate other savings. Prepare for emergencies.
Investing in your retirement is non-negotiable. It can be difficult to determine how much you should have saved. In South Africa, the general rule of thumb is that you’ll need to be able to replace 75% of your income to retire comfortably, and this is only if you’ve paid off your home loan or any other large debts by that age (meaning your monthly expenses will be lower). Increasingly, however, financial planners are starting to work on a 90% replacement ratio (keeping in mind that medical expenses tend to rise after retirement). A nice resource is one of the many online calculators here.
Set up a savings account to use for special purchases or short-term goals. By making your savings automatic by scheduling regular transfers from your current account, you can manage your monthly cash flow without having to think about it again. Build an emergency fund of three to six months of your current cash flow. This is not money that should be invested; it should be kept readily accessible and safe from market fluctuations.
That’s a wrap
Being a good investor is all about continuously educating yourself and staying up to date with developments. And remember: the earlier you begin, the more time your investments will have to grow in value. Well-researched, disciplined, regular investment in a portfolio of diverse holdings is the secret to being a good investor.
Still uncertain? Shop around for a reputable professional financial adviser who can work with you to set and achieve your financial goals. A qualified financial adviser will also be able to guide you on changes in legislation, guiding you though your different life stages and keeping you focused on your end goals.
Anthony Palmer CA (SA)
Director – Investments and Products: Carrick Wealth