How to invest to obtain maximum returns
Most South Africans do not retire with enough money. The main cause of this relates to individuals who leave companies and do not preserve what’s already been saved for them in their retirement fund.
Consequently they lose out on the eighth wonder of the world – namely, the power of compound interest. Money invested on a monthly basis or even a lump sum only starts to really grow 15 to 20 years later.
You have three choices:
- Take the money and pay tax on an amount above R22 500. The balance will be taxed at 18%. This is a very low tax. However, you always get this benefit up to R600 000. If you take the cash now, then, when you retire, the first R300 000 is tax free, the next R300 000 will be taxed at 18%, but SARS will deduct what has been previously taken.
- You could put this into a retirement annuity but then you are locked in until age 55.
- A preservation fund could be an option. Both options 2 and 3 are tax neutral. The advantage of the preservation fund is that you can withdraw the money at any time, subject to the tax formula above.
It’s also possible to service debt with this money. If you choose this route, always settle your most expensive debt first in the following order:
- Micro lending
- Credit card
While I encourage individuals to pay off their bonds, one also needs to save so that by retirement not only do you have a home paid for, but you also have an income. There is no point being asset rich and income poor.
Is property the best way to invest?
It has been long proven that the foundation of wealth invariably starts with the ownership of property.
If you can afford it, then it is preferable to purchase residential property as this has proven to be a sound medium to long-term investment. Because of the challenges presented by the National Credit Act, and a CPIX inflation that hovers above the 6% mark, The South African property market is presently a buyer’s market.
Due to the prevailing economic factors, the supply of property is greater than the demand. This means that you are likely to find yourself in a position to drive really good bargains.
Study recent surveys
The FNB Residential Property Barometer is a quarterly survey of a sample of estate agents in the country’s major urban regions, aimed at obtaining their opinions on a wide range of issues pertaining to conditions in the residential property market.
Estate Agents who took part in the most recent survey believe that the banks’ strict lending criteria and high deposits on home loans are to be blame for the low levels of demand.
In addition, although interest rates have dropped, there is still upward inflation pressure on food, petrol and other commodities, which acts negatively on disposable income.
No one can tell when the market will bottom out, there is also a danger that those who wait too long will miss the boat and find themselves buying on a rising market.
It is wise to educate yourself about the residential market and area in which you are interested. To do this visit show houses in the area, go to the Deeds Office and consult with aligned, independent agencies and mortgage originators to find out what prices homes in the area are really being sold for.
When Ask Entrepreneur spoke to Chairman and co founder of Private Property Holdings, Justin Clarke, to find out where he sees current activity and profitability in the residential market in South Africa, he said:
“This is the proverbial question, and it is best for me to give you an opinion. The four different indices published on house price movement show that the statistics can be translated very differently, but this is how I see it. I have no doubt that the most activity is still in the R300k to R800k house price range, but owners, buyers and sellers in this range are most exposed to the market conditions, they are most affected by interest rate changes, and increases in the cost of living.”
Clarke explains that this market is so active because of the economic climate:
“While employment is on the decrease, and there are fewer jobs in the market, jobs in this range favour new incumbents into the market who may have been in shared accommodation or the upwardly mobile township dweller, who strives to live in the suburbs and now can. Also seller’s activity includes those who are forced to sell due to their own financial circumstances and the overexposure they have to cost of living increases. The majority of economic indices show price deflation in this market, so although it is very active, sellers are accepting lower prices for their properties, and this the effect of the banks tight credit criterion.”
Outlook for the next 12 months
Clarke supports the theory that house prices will remain flat for 12 months. There are three reasons for this:
- Finance: We have entered a more conservative era and I can’t see banks changing their credit outlooks dramatically. They will definitely loosen up, but we will not see a feast like in the previous five years where they “”bought”” business just for market share.
- Supply: There is still some settling which has to happen. The banks have very high levels of distressed home loan accounts, and many of these sellers will need to offload their properties to recover from their high level of debts. Also Developers sit on large volumes of unsold inventory, which they are offloading into the market when the market will pay the price, so the volume is not evident, but I believe it is significant.
- Confidence: “Confidence takes time to build, and property will not be the hot topic it was in the last half decade. It will take time to turn.”
R1 million to spend
If Clarke had R1m to spend in property in the next six months this is how he would invest: “I love property, and have looked around at other investment classes recently. I still will bet on property in the current market. Look at the auctions, especially on privateproperty.co.za because the opportunity is incredible and you can find great buys. We always talk about “average” in the movement of the market, but I have bought property recently at 50% of the banks valuation. It is out there,” he says.
So what would he buy?
“I can only say you have to decide between property with low yield, (that your rental income falls far short of your bond) which is most likely to appreciate faster when the market turns, and high yield, low growth properties which you can pick up at cash positive positions.
“Developers are facing exorbitant increases in getting land on which to build and the restrictions and costs of servicing are becoming ridiculous, and you can be sure that the cost of creating new houses will increase dramatically, which will pull the price of second hand properties up at the same time. Apart from holiday houses, time share or any leisure properties, you will do fine if you buy to the maximum of your price range.”
Where has Clarke recently bought?
“I am buying a small block of flats in the Johannesburg CBD at the moment, it is cash flow positive and you would probably find similar investments in your R1 million price. Otherwise you will be safe with 2 to 3 bedroom townhouse type unit in a secure complex, and try to be close to major places of work, but buy well, because you can.”
Ronald Ennik, managing director of Pam Golding Properties says: “The difficulty at the moment is the shortage of cash and it’s defining the market. South African’s do not have a “savings culture”” so the number of buyers are going to diminish. Little pockets will do well, for example, areas close to the rapid bus system and the Gautrain will result in people changing their lifestyle and these areas will become high-density areas – and great investment options.
“If I had a million to spend now, I would follow my own advice. But I must add some advice. Do your homework. Don’t buy property on rumours. Try to find out if there are plans that will uplift the area that you are looking into. Check your facts – there is no rush because the market is flat, so take your time.
Understanding the Markets
What are primary and secondary, money and capital markets?
Primary markets are markets dealing in the issue of new securities. In a primary market, the security is sold directly to the investor from the company or organisation itself. Primary markets are a vital part of the capital markets and underlying strength of the economy
Once something has gone through its offering in the primary market, it will then be made available in secondary markets such as stock exchanges and through brokerage firms.
Once securities are on the market, they can be bought and sold based on demand. To make it to the primary market, they must go through an underwriting process to ensure that the company making the offering has completed all financial disclosures and has fulfilled all requirements necessary to make the offering.
Market makers are essential in the success of both the primary and secondary markets. These are firms, broker-dealers that hold a certain number of shares of specific securities to be traded. The firm assumes risk in doing so by investing its own capital
Making money off of your savings
While many will concur that is in fact no ‘easy’ way to make money, passive investments demand little to no involvement on the part of the investor. Passive investments include taking equity in someone else’s business or investing in the stock market.
Alternatively, you could peruse our Business Ideas Directory to find a type of business you are interested in starting – this would constitute an active investment. Be aware that all investments contain inherent risks, do your homework and seek professional advice from a business and/or financial advisor.
Share trading workshops
Standard Bank Securities offer courses throughout the country and many of them are free of charge. It’s recommended that one attends a beginner’s workshop such as an ‘Introduction to Investing’ which covers the basics and takes about five hours. From there you can take advanced courses and follow a specialist path.
Log onto the Standard Bank web site, www.standardbank.co.za and then select online share trading where you will find lots of useful information.
Are SA Retail bonds a wise choice as an investment vehicle?
With regard to SA Retail Bonds, the money is invested with the South African Government and is therefore a safe investment. Interest and capital are paid electronically into your bank account. It is a paperless investment (there are no physical certificates) registered in your mother’s name. If she has an urgent need for cash, she can take an early withdrawal after 12 months, subject to payment of a penalty.
“What you need to think about is how often you need to access funds. For example if you invest in the most conservative fund at Allan Gray, such as the money market fund, you would probably earn 6.2%, while a riskier fund, such as equity funds, can earn 8.5%,” says consultant Jaweed Allie of Allan Gray.
The return is high
The RSA Retail Savings Bonds have been designed as a savings product for South Africans. If you have a South African ID number and bank account with a financial institution in South Africa, you can participate in South Africa’s saving scheme. A two year fixed rate offers 8% interest, while a three year rate offers 8.25% and a five year fixed rate offers 8.5%.
The Comprehensive Beginner’s Guide To Investing (And Growing Your Personal Wealth)
Are you a first time investor? You may want to get some guidance before you know your way around the investment world. We’ve got you covered! Read on to learn more about the best types of investment options, strategies to grow wealth and the dangers and pitfalls to avoid in investing.
Why should I invest?
Keeping your life savings in your back pocket or under a mattress isn’t going to bring you the wealth you desire. “There are only two ways to make money in our modern world: By working, for yourself or someone else, and/or by having your assets work for you,” says trader, advisor, and author Alan Farley.
Investing means your money is working for you and gives you the opportunity to grow what you save or receive through inheritance. As an investor, you’ll generate money through interest on what you set aside or by purchasing assets that compound in value.
When is the best time to invest?
Start today. When it comes to investing, the magic of compounding is best achieved when you realise that time is of the essence. “Compounding makes your money work for you by earning returns today on the returns you earned yesterday,” explains Thandi Ngwane, Head of Strategic Markets at Allan Gray.
“If you start early and save consistently over long periods, less of your total amount saved will be from your contributions and more from growth.”
The earlier you begin contributing to your wealth, the more significant these deposits will be later, as your money has much longer to grow. You’ll also be able to contribute less as retirement age approaches.
But what happens if you didn’t save and invest right from when you received your first salary in your teens or twenties?
What can I do if I am only starting to invest in my 30s?
More than half of us only start saving at age 28, instead of when we start working, according to Discovery Invest. And many more adults only consider investing in their 30s, with a large number starting only when they hit 40.
Catching up on the compounded returns you could’ve accrued over the last five, 10 or 15 years becomes much more difficult with the added expenses of a typical 30-something-year-old. Major life events such as buying a home, getting married, having children and starting to save for their education can be expensive when you’re also investing in your future.
So, how do you overcome these major life events while still investing for the future? According America’s Millennial Money Expert, Robert Farrington: “The goal is financial balance. You can do both – save for the present and save for the future. But it requires a little more thought and effort.”
- Determine your investment choices based on your personal goals and risk tolerance
- The best way to build wealth in your thirties is still through saving, so select a portfolio allocation that matches your risk appetite
- Maintain a diversified portfolio of low cost ETFs.
What can I do if I am only starting to invest in my 40s?
If you’re 40 and over, your main financial focus should getting out of any debt you may still have. “Becoming debt-free and then you should focus on taking your savings to the next level,” says Schalk Louw, portfolio manager at PSG Wealth.
He advises you put any additional income – salary increases and bonuses – towards higher pension fund contributions, savings or paying off your debt. “While my preference for long-term savings will always be a share portfolio, those who find its risks too high, can always consider a savings account,” says Louw.
What should you start investing in?
So, now that you’ve established that you’re ready to invest, you should be considering your options. First, let’s look at the basic investments to start with:
1. Investment accounts
If you’re looking to save towards long-term financial goals, this is the type of account you should consider opening.
This investment can be used, for example, to supplement your pension or other income upon retirement, an investment account is an ideal way to maintain a good standard of living. An investment account is designed to set aside assets like stocks and bonds as income during retirement, to save money for your child’s education, or to put down a deposit for your first home.
Buying shares or equities gives you ownership of a certain percentage of a company. As a shareholder, you’re paid dividends – a portion of the companies’ profits. Shares are a risky, but beneficial form of investment. On the one hand, a decline in share price reduces the value of your investment, while the benefit of dividends is that they attract less tax compared to the other sources of investment returns.
Shares may take a significant amount of time before yielding dividends, but for long-term success, when your dividends pay out, they can be used either as income or as a reinvestment into your share portfolio.
“The combination of dividends and the growth in capital market value of your shares over time is the total return for your investment,” according to Discovery Invest. “It therefore gives you the best chance of beating inflation.”
Some of the pitfalls of equity investment, says Craig Hutchison, CEO Engel & Völkers Southern Africa, include:
- Share prices for a company can fall dramatically
- If the company goes broke, you are the last in line to be paid, so you may not get your money back
- The value of your shares will go up and down from month-to-month and the dividend may vary.
Reduce your risk by investing in various sectors and shares.
3. Unit trusts
If you’re seeking an investment that provides you with easy and affordable access to financial markets, unit trusts are an option. Not only is this a smart way to save, while beating inflation, but a unit trust offers you exposure to a range of assets, explains Hutchison.
“Your money is combined with the money of other investors who have similar investment goals,” explains Ngwane. “Our investment managers use the pool of money to buy underlying investments to build a portfolio that is then split into equal portions called ‘units’. Units are allocated to you according to the amount of money you invest and the price of the units on the day you buy them.”
Hutchison notes the following disadvantages you should be aware of before investing in unit trusts:
- There are costs over and above those you’d pay if you were investing directly
- Unit trusts may not be as liquid as some other investments
- Reliance on managers to select the best appropriate funds.
How can you continue to grow your portfolio?
More complicated investment options
Investing in the JSE
When buying shares, there are three crucial considerations to be made: Which company’s shares to buy, the number of shares you want and how much you’re willing to pay for them.
The next step is an online, in-person, or telephonic discussion with your broker who’ll then forward your request to the JSE. Thereafter, your bid joins other requests to buy or sell shares on a central order book.
Finally, should the price you’re offering match with a seller at the same price, the JSE will ensure the transaction takes place, making you the new owner of the shares you requested.
Be aware of the risks
You could lose everything if you invest in one share and that company goes bankrupt. “You can diversify by buying into many different shares. An easy way to do this is to invest in something like an exchange-traded fund (ETF),” suggest experts from the JSE. “An ETF is essentially a basket of shares. You buy the basket and get anywhere from 10 to 600 different shares in that basket, reducing the amount you would lose if one company were to go bankrupt.”
Online share trading
As a potential first-time online investor, you may begin your journey by surfing a number of online share trading websites either those offered by all the major banks, or other providers.
“The biggest investment you make at this stage is in time,” says Brett Duncan, head of Standard Bank Online Share Trading. “You need to spend at least seven hours a week educating yourself – either studying newspapers or financial magazines, or tracking your portfolio.”
Be aware of the risks
According to PSG Online, no one should trade shares unless they have instituted risk control measures such as putting ‘stop loss’ controls in place. Share trading requires a high appetite for risk, time to watch the markets and an expert knowledge of the markets and trading process.
Darren Cohen, head of marketing at PSG Wealth, explains: “Making an informed financial decision is key to mitigating risk where one has considered the options that would best suit their personal needs. It‘s for this reason that client education is imperative to PSG Online’s mission of creating wealth for our clients.”
This type of investment affords you two options, says Maarten Ackerman, chief economist and advisory partner at Citadel: You can either take money out of the country by converting it into hard currency and investing it overseas, or you can choose a rand-denominated investment via a South African unit trust.
Should you select the second option, your money is consigned in a rand-denominated asset-swap fund, and the unit trust uses that money to invest offshore. When the money is eventually repatriated, it will be paid out in rands.
“Politically risk-averse investors will prefer to make use of direct offshore investing, as with this option the investor never has to repatriate or convert their investment back to rands,” says Magnus de Wet, director of Vista Wealth Management. “With a weakening rand, direct offshore investing would be the preferred investment approach.”
Be aware of the risks
Investing in any type of commodity involves potential loss. Two of the measures you can take to reduce risk are:
- Investing in low risk commodities, for example, a fixed deposit with an offshore bank
- Diversifying your offshore investment portfolio adequately to balance out high risk offshore investments with more conservative, secure investments?
As a newbie to investing you be risk averse, so high-performance offshore investments, although brimming with the promise of very high returns, are not recommended until you know your way around turnovers and returns.
How to make money investing
Contrary to popular belief, you don’t need (a lot of) money to make money. Wealth isn’t a prerequisite for investing. You can take advantage of investing over time, if you start sooner rather than later. While this means you’ll have to wait a little longer before quitting your job in favour of early retirement and living off your dividends, the long-term rewards are lucrative.
Remember these crucial pieces of advice before making your investment decisions:
- Diversify your portfolio, so you never have all of your money invested in one account, venture or business. The best way you can manage risk is by not putting all your eggs in one basket
- “Be careful who you trust with your money, make sure you invest your money with a reliable and established company with a solid history and reputation, do your research and do not be afraid to ask questions,” advises Craig Hutchison, CEO Engel & Völkers Southern Africa
- You can achieve a great deal by simply investing or saving portion of your salary every month
- Know the difference between investing and saving. “Saving is storing your money, while investing is growing your money,” he says. “One of the significant differences between the wealthy and not-so-wealthy is that wealthy individuals earn interest while everyone else pays interest.”
- “The way that the prosperous continue to build their wealth isn’t really a secret – they spend less than they earn, save the difference, and let the potential of compound interest make their riches grow,” says Hutchison.
“Financial wellbeing is a long-term commitment, but with the right guidance, discipline and savvy decision-making, you may achieve your goal sooner than you think. It is never too late to start investing in your financial well-being,” he concludes.
Investing In Wealth-Generating Assets
With returns of between 10% and 16%*, impact investing offers more than just the chance to do good.
Through a combination of innovation and technology, investors are finally in a position to own a stake in lucrative farming operations without high cost barriers, while at the same time having a positive impact on the environment.
Global trends, local applicability
There has been a recent trend towards socially conscious investing, known as impact investing, which has gained significant traction in first-world markets. Younger investors in particular want their money to do good in the world, but still expect a good return on their investment.
This trend, combined with the desire of many entrepreneurs to own a viable side-hustle, provided the impetus behind the creation of Impact Farming by Fedgroup.
Impact Farming differs from conventional impact investments in a number of ways. Other impact investment products usually consist of portfolios that offer access to shares in companies that meet certain social and environmental criteria. South Africa’s leading independent financial services provider, Fedgroup, in contrast, believes that investing directly in ventures is a smarter alternative.
The perfect side-hustle
That’s because investing in shares and funds can be unnecessarily complex and often diminishes returns through hidden costs. In addition, barriers to entry can be prohibitive. Fedgroup has therefore leveraged the ubiquitous nature of mobile to deliver a fast, lucrative way for investors to directly own assets in high-yield farming ventures. It’s the perfect side-hustle, without the hassle.
Fedgroup’s Impact Farming investment platform offers investors access to a growing network of local crowd-funded farming ventures that generate solid profits to deliver competitive returns. From as little as R300, investors can own assets across three different ventures, blueberry, sustainable honey and urban solar farms.
Investors buy assets at one of Fedgroup’s approved sites, forming a venture network that is managed by farming experts.
Tax benefits and passive incomes
Investors get paid in regular cycles for the yields their assets produce once they are harvested and sold to Fedgroup’s contracted customers. This money can then be enjoyed as passive income or reinvested to benefit from compounded growth. Impact Farming assets also qualify for a tax benefit associated with renewable energy and sustainable farming.
Not only does this model significantly lower the barriers to entry inherent in traditional fund investing, but it also allows socially conscious investors to make a big impact with their money, regardless of the amount invested.
And there’s also less risk compared to various traditional investments thanks to the innovative approach. Extensive due diligence is performed on every product line to ensure its viability before it is brought to market. The company then carefully vets and selects Impact Farming ventures for both the financial impact they have on investor wealth creation, and the positive impact they have on the world.
Fedgroup also built market-tested financial models that were deliberately designed to be conservative when forecasting returns. However, as the profits from investor assets are pooled, so too are the yields, which mitigates the risk of individual assets underperforming. And with service level agreements in place with providers, Fedgroup ensures that assets continue to perform in line with projections, unlike the unpredictable nature of company shares.
The assets are also insured, the cost of which is included in the purchase price. Therefore, if an investor’s asset is ever destroyed in a natural disaster, Fedgroup replaces it. This asset class also runs counter to market cycles and therefore offers diversification that is virtually unmatched.
Fedgroup’s Impact Farming platform offers a unique wealth creation tool for a new breed of investor.
* The projected returns of between 10% and 16% per year are the asset owner’s internal rate of return (IRR). This is the rate of return after the initial purchase price has been subtracted, and which also takes into account the time value of money. For instance, a R4 000 beehive is projected to produce a total income in excess of R9 000 over its 10-year term, which represents an average return of 23% per year. If the IRR calculation is applied, it provides the projected IRR of 15% p.a.
What Is Genuine Wealth?
Genuine wealth accounts for what we value most and allows us to objectively assess our real assets (our strengths) and opportunities for developing our real wealth potential.
So often we toss certain common words around – like the words ‘genuine’ and ‘wealth’ – as if we fully understand what they mean. But, do we actually and fully understand the original, deeper meaning of these significant words? Maybe it would be wise and worthy to explore for just a moment what the two words ‘genuine’ and ‘wealth’ might have originally meant or at least could mean to us today. The word ‘genuine’ comes from the Latin word ‘genuinus’ which means ‘innate’ (true, actual or sincere). And the word ‘wealth’ comes from the Old English words ‘weal’ (well-being or whole-being) and ‘th’ (condition), which taken together means ‘the condition of well-being or wholeness’.
Of course, when the two terms are combined, ‘genuine wealth’ could now be perceived as relative, and as having widely different applications. Originally, genuine wealth signified real or sincere well-being and was applied to eternal spiritual as well as temporal material welfare. Later wealth was used in the sense of large material possessions, or of what seemed large to those who had little. It has been stated, ‘without ambition, without aspirations, life is not worth living’. The noblest of all ambitions is liberation or freedom from physical or social bondage, slavery and constraint and this independence demands genuine wealth or the empowerment of all areas and aspects of our lives.
Genuine wealth is a vital force, one of the greatest of forces for the enfoldment of culture and the birthing of liberty. Genuine wealth dominates everywhere, exercising its forceful influence on both spirit (the liberated or inspired mind) and physical resources, or matter. In the genuine wealth of the world is the accumulated power of civilisation. Genuine wealth is the measure of human progress and possibility. Where there are no storehouses of genuine wealth, there can be no storehouses of fulfillment, nor inspired beings or great knowledge. And where there is no learning, there can be no individual or social progress. The existence of culture, whether it is part of a nation, or now a global society, begins with the creation of genuine wealth, i.e. individual and even cultural wholeness.
Genuine wealth represents the people, places, things, ideas, actions and events that make life worthwhile or valuable. It is the experience of a life worth living and one that is aligned with our true, highest and most meaningful values and/or principles; not only as individuals, but also collectively as families, communities, cities, states, nations and someday worlds. It is the actual condition of our collective well-being (spiritually, mentally, vocationally, financially, socially and physically) that make up true and genuine wealth.
Genuine wealth is measured and assessed by the conditions of all things that make life collectively valuable and meaningful and it implies total or whole life wealth. Many people are accustomed to looking at wealth strictly in financial terms or earthly property and physical possessions and yes, this too is also essential for individual and social development and progress, but genuine wealth is much more than that and we know it intuitively. It can include inspiring ideas or causes, intellectual properties, business ventures and assets, financial investments, family relations and possessions, social influences and causes and physical talents or even beauty.
Conventional economics and business indicators of prosperity like GDP (gross domestic product), stock market indices and other economic indicators are important and certainly contribute to one facet of wealth, but they all make up only a part of what could be properly defined as genuine wealth.
Genuine wealth involves real value, which represents the diversity of words that make our lives admirable and merited and truly worth living. Where we spend our money discloses our true values and what we hold to be important. Genuine wealth represents all the things that make our lives meaningful, that resonate with our truest nature and more holistic being centred within our hearts. Genuine wealth is an accounting of life; like a window onto our souls, or a mirror image of our genuine selves. Genuine wealth emerges when we are being in touch with our highest core values, our complete life assets and our full awareness and potential. Genuine wealth includes all assets that contribute to our complete and balanced state of living and being. Genuine wealth accounts for what we value most and allows us to objectively assess our real assets (our strengths) and opportunities for developing our real wealth potential.
For more information on Dr John Demartini visit www.drdemartini.com
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