Investing & Money
piece written on the 23rd January 2014 by  

I’ve had a lot of people asking me questions recently about where to invest their money, I guess it comes from the previous posts I’ve written and my general interest in sharing what I learn. The problem is, I’m not a financial advisor and although I’m happy to share what I’ve learnt, I’d always recommend further research. However, some topics I can take a stab at and know that I’m right as I’m merely communicating my findings from accredited resources.

Back to the question at hand; where should someone invest their money? That’s a huge question in itself, from property to managing an account on the JSE to a retirement annuity to a managed fund, the options are quite broad and each and everyone depends heavily on one factor in my opinion: What is your aim? Do you need liquidity, how soon do you need the return, are you able to take a risk and so the list of questions goes on. Unfortunately, you need to determine your goals before you commit to something if you want to do it perfectly. By “perfectly”, I mean in terms of finding the right fit, not necessarily getting the best return because it’s impossible to predict the future.

So one thing that people talk a lot about are accounts like the Satrix 40, RMB Top 40 and so forth. These are known as ETFs – Exchange Traded Funds. Investopedia defines an ETF as “A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.” Let me break that down into my understanding and somewhat of a more simple explanation: A financial institute selects, say, 40 blue chip shares on the JSE and tracks their performance. They show by way of results that they’re able to get a decent return and as such other people (i.e. customers) decide to hand their money over to the institute, which in turn invests that money and supplies their customers with a return. It’s essentially a managed account of people’s money that’s invested and carefully monitored. So instead of getting a broker account and trading directly on the JSE, you hand your money over for someone else to do it for you. Sure, you can make more doing it yourself, but it’s a great deal of work and you have to weigh up whether the time you spend is worth the return relative to letting someone else do it. I’ve done both to test the waters and I’m sad to say that the managed funds perform better than mine, but I also stick to blue chips shares most of the time, I’d have to take greater risks to outperform the managed ones. You get the drift.

Once again, returning to the question at hand; a number of ETFs have been established for longer than 5 years. Moneyweb reports that there are “40 exchange-traded funds (ETFs) and 23 exchange-traded notes (ETNs) listed on the JSE. Of these, 15 have been in existence for five years or more”. What this allows us to do is make comparisons between the different ETFs over the past 5 years to get an understanding of which one is performing the best. Here is a diagram outlining the top 7 ETFs in South Africa over the past 5 years:

Top ETFs South Africa

Data originally from ProfileData, table constructed by Moneyweb.

As you can see, most of the funds have achieved a very similar return, this makes it hard to decide which one to go for. Once again, this boils down to your aims, but what I can tell you is that the most important things here are to research the trade costs associated with each fund, which shares the funds attach themselves to, how the funds are managed and so forth – in other words, you’ll have to do your research. I’m attached to RMB Top 40 and Satrix 40, the other ones are quite new to me.

There are two other things that I’d like to mention while we’re on this topic:

  1. With an ETF it’s possible to put money in and take money out as and when you want to, this in comparison to an RA (retirement annuity) which as far as I know means you can only withdrawal your money when you’re going to retire (age 65 or so) and when you do, only 30% may be withdrawn and the other 70% must be reinvested. Please don’t take my word for the percentages I could well be incorrect on those, but I am certain about not being able to pull the money out early, not unless you pay a hefty penalty fee.
  2. When it comes to opening an ETF account, you usually pay into the account on a monthly basis. ETFs have different minimum monthly amounts and that’s something else to look into. The ones I’ve used normally require a couple hundred rand a month. Second to this, you usually increase your monthly payment each year by a percentage to assist with the competing inflation rate.

The more I conduct and the more people I chat to, the more I’ve realised that an RA is not the direction to go in and that your money has far more chance of growth in an ETF. That’s a personal opinion, but it’s built on a lot of research. I’m a big property fan, so the way I see it is that if you open a Satrix 40 account, deposit a few hundred a month for several years and then require a deposit on a house, you can pull the money out and do that – that’s not going to happen with an RA.

Whilst we’re on the topic of money, take a look at this fantastic Global Rich List tool: