READER QUESTION: WHAT SHOULD I DO WITH MY MONEY?


Investing & Money
piece written on the 11th February 2014 by  

This morning I received a question from a reader who wanted an opinion on some saved up money. Instead of replying directly via email I asked for permission to publish the question here and offer my 10 cents in hopes that others could learn from it, but also in case someone more experienced would be able to leave a comment with another opinion. Please note that I’ve masked out quite a few of the details for obvious reasons.

Let’s have a look at the question:

Hi Chris!

I hope this isn’t rude but I’ve recently noticed you posting quite often on the topic of investing and I was wondering if you could give me a little advice. I know you’re not a financial advisor but just hoping for your 10c if possible..

I returned to South Africa from ######## last year as I was in the position to pursue further studies, thus at the moment being a full time “mature” student. My fiancé and I were able to go halfsies and we bought a great property cash for just under a million. I also have my car and studies paid off so currently I have no debt. I have a small amount of monthly income to cover my basic expenses of insurance, food etc. My fiancé is finishing up his studies now and is working as a ########, thus covering most of our monthly expenses that we have together.

I currently have R80,000 in a 7 Day Call Account which isn’t a lot of money but I dislike taking from it to cover day to day expenses from time to time (for holidays, clothing etc.)

With my situation explained, I just wanted to ask if you think I’m making the right choice keeping it in the call account? I’m not actually getting anything from it but I’m not losing either, except for when I am spending it. Would you invest it somewhere else? Is there a good website you know of where I can do some reading?

I thought for some outside advice I’ll post my position on a forum but would be great to hear what you think too. I prefer keeping my finances private from friends and family so I don’t have many people around to ask advice from.

Thanks a ton!

Have a wonderful day,

########

As the question mentions, I’m not a financial advisor, but I can certainly give my opinion on the matter. First off I reckon I should say that this sounds like a really calculated couple, I love nothing more than hearing from people who take matters like this seriously and I have no doubt they’ll go darn far! Mental note: Keep contact for future *wink*

When ever it comes to “spare” money or money that isn’t being used, it’s always best to put that money somewhere it can grow. A 7 Day Call Account is not going to earn you much, most 7 Day Call Accounts offer a few percent return and although that sounds like a little gain, against inflation you’re actually losing money. Inflation stands at 6% so the money will drop slightly against that.

Over the years that I spent chatting to advisors and the likes I was presented with the same question over and over again, “You need to define your goals first” and I feel like such a hypocrite saying this, but that really is important. However, I’m going to assume that this couple doesn’t need this money as the message above comes across in that manner, so if the money isn’t needed then let’s rather put it somewhere that it can grow decent interest.

There are a number of options available when it comes to investing and I’ll list the ones that are low risk, but should state that the market is very volatile at the moment and therefore anything can happen. Although, I hardly see the market crashing and all the articles I’ve been reading on MoneyWeb and Fin24 certainly don’t point in that direction. So, I can’t go out on a complete limb here as I’m not qualified to, but I feel quite safe in saying that these are the options:

  1. Satrix 40 (ETF – exchange traded fund) – This investment portfolio has got to be one of the most popular ones available. I’ve put out polls and questions to friends, colleagues and family, and Satrix 40 comes up continually. Opening an account is a piece of cake, their call centres are darn efficient and the transaction costs are fair. The return on a Satrix 40 account will be substantially more than that of a 7 Day Call Account and the risk level is incredibly small. To be honest, I think that if the Satrix 40 completely died, so would all banks and therefore regardless of where your money is, it would be in trouble (unless it’s overseas or in a portfolio with strong overseas ties). I’ve written on South Africa’s Top ETF Funds, might be worth reading that.
  2. Retirement Annuities – I’m not a big fan of retirement annuities, the more and more I read about them, the more and more I realise that they’re not that great. However, they’re low risk, you receive a tax break and the growth would once again be greater than a 7 Day Call Account. There are many options for RA’s from Old Mutual to Liberty to Sanlam. The important thing here is to know that the money would be locked up!
  3. Unit Trusts – Unit trusts are another way of investing into a managed portfolio – Very similar to that of the Satrix 40, although unit trusts are managed whereas ETFs track an index. I currently have a unit trust with Allan Gray called the Orbis Global Fund of Funds and the performance over the past few years has been decent. Further to this I have two unit trusts with Old Mutual, namely the Nedgroup Investments Rainmaker Fund A Class and a Coronation Balanced Plus Fund – The performance on these two unit trusts has not been as good as the Allan Gray one so that’s something to keep in mind.
  4. Money Market Account – Another option is just a money market account with a bank, this sometimes offers more return than simply a 7 Day Call Account and means that your money stays safely in your bank account. You could even go with a long-term fixed account, but you’d need to look at what the bank offers.

Read: Exchange Traded Funds vs Unit Trusts

Some important points:

  • Always look at what the advisor and transaction fees are.
  • Always look at how long the money has to be locked away for.
  • Always look at the historical performance of the account.

So, the question remains, what would I do if I was in this position?

Put it into my bond probably ;) But in this case that isn’t applicable, so I’d probably put it into the Satrix 40 to be honest. From a risk point of view it’s very low, from a return point of view it’ll be above inflation. The most important thing I’d look at is probably what much it would cost to put the R80,000 into the account and weigh that cost up against the projected return. Another thing I’d probably look at is whether renovating the house to the value of R80,000 would get me a greater return in the future when selling.. sometimes that’s a creative way to get a good return.

Opening a JSE account and buying into shares is another option and although you can target one of the Top 40 Bluechip shares, it’s more risk that the above mentioned options so I’m going to leave that out of this equation.

I think that wraps things up quite nicely? Please do leave a comment if you have a question or would like to give an opinion or even correct me on something.

  • basheer

    Im not an advisor..yet but If you thinking of investing the R80k for Long term i’d also suggest ETFs like Satrix. I have a monthly debit order for Satrix divi & Resi. Those 2 indexes are going to perform well in the long term. I’d recommend you invest a portion of your capital in those products. Also some blue chip stocks – but hold on to your cash for a little while longer, i foresee a market correction coming soon- so those people holding Cash will have the perfect opportunity to buy blue chips at bargain prices. Im personally invested in MTN, Vodacom, SASOL. Sasol will most likely provide you great returns for the forseeable future as the Rand weakens against the $. The weaker the Rand the more Sasol profits. I’d recommend you get intouch with a broker and invest some in Sasol. Shares are risky but rewards are great – all depends on your risk profile & tolerance. If you qualify for those BEE shares id put some into MTN Zakhele, Sasol Inzalo and Vodacom Yeboyethu.

  • http://www.contrarianinvest.blogspot.com/ basheer

    Like i said in previous comment the safest bet would be ETF’s for the long term. Time IN the market, rather than trying to time the market, is key. Stock markets are very difficult to predict, so if you are constantly buying and selling, you can expose yourself to greater risk.

    a wonderful strategy that i personally implement is called Rand cost averaging. How it works is you budget a ?xed amount of money to invest at regular intervals instead of a lump sum. This way you take advantage of market ?uctuations – without worrying about timing your transactions. By implementing this strategy, I buy more units when prices are low and fewer when prices are high, generally resulting in a lower average cost per unit. It’s one of the reasons i do not panic sell when prices fall, infact i get happier when they do. This is a great strategy for ETF’s.

  • nicksoper

    I just finished reading a book titled “Become Your Own Financial Advisor: The real secrets to becoming financially independent” by Warren Ingram and my understanding of his strategy would be something like:

    1] congratulate the individual on an amazing job of being debt free and
    2] putting 6 months of expenses in a money market account with the money available in 24 hours with no upfront fees and no more than 0.5% commission from financial advisor. This is for emergencies, not holidays and clothes.
    3] Invest in shares via ETF with no upfront fees.

  • James

    First off, if you are a mature student, then I take it this is now your only savings towards retirement. Because you actually need to dive into the odd bit of capital (naughty, naughty) you actually need to have some of the money accessible ie. not anywhere close to a 7 day account. Like Nick says, I would try not to touch this money as this is technically the only fail safe that you have (by the sounds of things). I would head for the Satrix40 and put the money away not too be touched for a loooong time – preferably like 10 years. Also, simply reinvest any dividends in there and suddenly that little pool of money will look pretty handsome after 5-10 years. But don’t trust me – I am only 22 and like Chris, have absolutely no inkling of a qualification about this.

  • http://www.imoddigital.com/ Christopher M

    A Money Market Account should be instant access – the one I had at FNB, I could draw from it from an ATM machine. It’s a really safe and easy option to go for, the return just isn’t as great as an ETF. ETF is great provided you do your research to ensure that the tracker it follows has promising prospects, especially considering what South Africa is going through. A unit trust will probably cost a bit more, but it’s managed and can therefore shift and shape according to the market, which could get you a better return. 0.5% commission from a financial advisor is quite standard, that’s what I pay on all 3 of my unit trust accounts.

    Sounds like an interesting book though, Warren Ingram is very well known so I have no doubt that it’s a top read!

    Cheers for your comment Nick, valuable information and nothing like a lekker tldr for a book ;)

  • http://www.imoddigital.com/ Christopher M

    Satrix 40, lump sum deposit for the long run, dividends reinvested and if possible, try to put a couple hundred extra bucks a month in there too. I remember that table from a few posts ago showing what happens with a big lump sum deposit :)

  • http://www.imoddigital.com/ Christopher M

    A good idea, but perhaps a little advanced for someone who’s only just starting out Basheer ;)

    But yes, a SATRIX 40 or RESI or DIVI would be a great starting point. I think there are two stepping stones for new investors:

    1. Not being scared above putting money somewhere other than the bank.
    2. Having patience to see how return looks on paper.

    Those 2 hurdles are big ones, but once you’ve crossed them I find that most people start spreading their wings and the additional advise gets lapped up quickly!

  • http://www.imoddigital.com/ Christopher M

    Could you elaborate on the Rand Cost Averaging perhaps please? @disqus_z9I99vJoFl:disqus also mentioned he was interested..

    I love this, “Time IN the market, rather than trying to time the market”

  • http://www.contrarianinvest.blogspot.com/ basheer

    I have a post on my blog that touches on & explains Rand Cost Averaging. Pls check it out at this link. :) http://contrarianinvest.blogspot.com/2013/11/the-advantage-of-rand-cost-averaging.html?m=1

  • http://www.imoddigital.com/ Christopher M

    Thank you very much @disqus_ILheMEWvyC:disqus, I’ll take a good read. @disqus_z9I99vJoFl:disqus here you go :)

  • Dita

    Thanks James. Actually, I’m not that much older than you (being a mature student and all). I appreciate your advice.

  • Dita

    Thanks Chris, this was really helpful! I’m definitely going to read the book @nicksoper:disqus suggested (thanks Nick!). I’m leaning towards either saving up a little bit more and using it as a deposit on a second (cheaper) investment property that we can currently afford or going with the long term Satrix40. Appreciated!

  • http://www.imoddigital.com/ Christopher M

    @disqus_sIscgjNYyo:disqus It’s an absolute pleasure. It’s always a tough call when it comes to property vs ETF/Unit Trust investments. I usually keep my eyes on Moneyweb and the likes to feel out the markets before I make that sort of decision. With rates being up, less people will be able to afford property meaning that less people will get their asking prices, at least that’s how I see it. Based on that thought process, it makes me think that you could get some great deals on property and then ride things out with a tenant. Tenants will be on the up as well, so it’s a nice match. Good luck and let us know what you do!