The stark reality of making ourselves richer is that it is more about discipline than intelligence: if there is a secret it’s that the more time we have the easier it is to create wealth.
The first step in the process is an uncomfortable one: you need to spend a couple of hours getting a handle on your finances. Imara Asset Management MD Lara Warburton suggests the first action of any novice investor has to be to settle expensive debt. With the JSE All Share Index having delivered a paltry 2,6% in 2011, it doesn’t make sense to have debt costing 15%. So first settle short-term debts such as credit cards (or better still, manage them correctly so you pay no interest) and overdrafts.
Then look at waste: go back in time and look at several months’ bank statements to see where you’re spending. Start a daily diary of every cash expense from all those tips spent on car attendants, parking, café lattés – you will find a host of unnecessary expenses that mount up each month and add nothing to your lifestyle.
This can be a sobering exercise: if 90% of families are anything to go by, says financial adviser Bryan Hirsch, there will be plenty of waste to be found.
“This by itself may just be enough to start your journey to wealth creation,” adds Warburton.
Turning savings into expenses
To lock in these savings, most financial gurus recommend that you turn your savings into an expense – the most important one that you pay yourself before all other expenses. Warburton says: “Take 10% of your monthly salary and pay yourself. You will soon get used to it.”
This will create some surplus cash every month. Because it won’t typically be much, initially just save the money, and only when you have a viable lump sum turn towards investing.
So where to start? Buying individual stocks is often beyond the scope of many people – just 100 Anglos can set you back more than R30 000, and that’s too high a risk for a novice, as are penny stocks.
Typically the best place to start for somebody new to the stock market is collective investment schemes: unit trusts or Exchange Traded Funds (ETFs). Both enable an investor to buy a basket of shares and track general market performance. The key benefits of ETFs are that they are cheap in terms of costs and give exact market performance. They track the market because they simply buy the shares in the market, put them into a basket and you can buy the basket.
Building up portfolios
Online investing trainer Simon Brown recommends that novices use ETFs to build up some initial capital and to gain experience in individual stocks. He suggests you track that basket of shares and avidly read up on each one, so by the time you’re ready to go it alone, you’re knowledgeable.
“Also remember, the best asset you have when investing is time so avoid the temptation to try your luck with get-rich-quick schemes, penny stocks or derivatives. Sure they can result in great profits but can equally be very dangerous, leading to large losses,” says Brown.
However, just as high-risk products are to be avoided, so too are low-risk ones. Warburton cautions that all too often financial advisers take the easy and safe option of recommending the money market.
Mike Soekoe, business development manager at Foord Asset Management says that anyone who has a time horizon longer than five years ought to be heavily exposed to the stock market.
ETFs have their place, he says, especially considering their low costs, but the top fund managers will typically outperform the index by 5% a year – which becomes huge when compounded over the long term.
Soekoe’s advice for under 50s is to go for pure equities. For example, the Foord Equity Fund has delivered 20%/year over the past decade, notwithstanding periodic bouts of volatility. “Now returns like that create wealth,” he says.
His (and Warburton’s) first preference is for a pure equity fund, followed by a balanced (also called asset allocation) fund, if you’re more conservative.
In fact, 90% of people opt for a balanced fund and they have produced an average return of 15% – 16% year over the past decade. “It is a safe way of earning an inflation beating return,” he says
An alternative to patiently building up a nest egg is to invest around R1 000 a month by stop order and keep at it for at least three to five years. That way you can start to build up some real capital – but you have to be disciplined.
A fourth option to the pure equity, balanced fund or ETF is the flexible fund. A flexible fund is not governed by the Pension Fund Act which leaves the fund manager with full discretion as to asset allocation. He may, for instance, decide to exceed the traditional 25% offshore allocation, if he sees opportunity there.