YOUR MONEY: Sound tips for a rookie investor

Question:

I have three questions. First, how do I start investing, and what are the best options for beginners? What are the potential pitfalls to avoid when managing my finances? And what resources or tools are available to help me better manage my finances?

— Tshitso M

Answer: 

Starting off your investment portfolio is one of the life phases you want to navigate well, as this will play a central role in your future wealth creation.

We live in a time when information is readily available, and doing your research has never been easier. I always recommend working with an independent adviser and globally recognised firms such as PSG, Ninety One and Allan Gray. You can also access multiple information platforms to upskill yourself, for instance Moneyweb, Bloomberg, Seeking Alpha, CNBC and Financial Times.

Here are a few pointers to navigate this journey:

First, ensure you are optimising your annual tax benefits. You are allowed to invest R36,000 a year in a tax-free investment, up to a maximum of R500,000 in your lifetime (limits are on contributions, not growth). You can invest up to 27.5% of your taxable income in retirement products and claim these contributions back from the South African Revenue Service.

If you invest over and above your annual 27.5%, these contributions are collected in a “disallowed contributions pool”, which can be offset against your income tax later in life, essentially creating a tax-free retirement for a few years.

Review your investment strategy from the get-go. Ensure you define your short- and longer-term (retirement) goals and set out a strategy with your adviser on how you will reach them.

Analyse your risk portfolio. As your income increases and your family and commitments expand, your protection needs to be adjusted as well. Ensure you have sufficient life cover, severe illness and disability cover, and income protection.

Ensure you do one holistic review of your estate planning and that you have an updated will in place (and make sure it is signed). Not only can unwanted taxes be avoided by improving structures within the portfolio, but you can ensure your family is taken care of by not having to wait for an estate to be wound up over 12-24 months, if not longer.

Find out what your benefits at work entail. Many of us start off at a new company with the lowest contribution to a retirement fund (for example 5%) and never review this again; ensure you are saving enough.

Nominate your beneficiaries — and keep them updated, especially after any life event.

Ensure your medical aid plan accommodates your needs. If needed, a lower-cost plan can be considered with gap cover. I recommend that you obtain expert advice if you have any chronic medication requirements.

Understand that offshore exposure is not everything, and that it carries its own risk and volatility. If you were to remove the “magnificent seven” from the S&P 500 in 2023, the double-digit returns we enjoyed would quickly become a single digit. Approach offshore diversification with caution and with strategy in mind.

Structure an emergency fund, something purely for short-term needs. You don’t want to dip into your savings every time an unforeseen expense occurs.

Involve your spouse/partner in your financial planning discussions. One of the greatest struggles we deal with as advisers is when a spouse falls ill or passes away, and the remaining family is left with no idea of what portfolio was in place — or not.

Review your budget. It’s easy from the advisory side to recommend a higher savings percentage. But in a high inflation, high interest rate environment this is sometimes not possible. We need to revisit what we are spending where. We tend to overspend on housing, vehicles and debt, and underspend on future planning.

Start saving for your child’s education early on. It’s much easier investing a mere R500 a month when you have 18 years to do so than playing catch-up with a 16-year-old.

Give equal priority to your home loan and your investment portfolio. It won’t help much reaching retirement without any debt, but not having a substantial portfolio to live off. Make sure you know what you will need to replace your income — it’s more than you think, if you address inflation and tax.

Plan your year. If you plan for holidays and unexpected life events, you can save for them as well. Holiday planning can form part of the planning in your portfolio.

Don’t overexpose to any one thing — not one country, one currency or one share.

There are no quick fixes with investment portfolios. Stay away from products or schemes that seem to be too good to be true — they are. As Paul Samuelson said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

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