Investing is an important aspect of your financial growth and sustainability. But if you’re not familiar with the market or have industry experience on your side it can be overwhelming. This is especially the case during a pandemic where the market may be extremely fragile and volatile.
So, where do you start?
In this part of our Covid-19 Content series we chat to industry experts to understand how best to invest during such a time.
Tip: Start small and invest in a unit trust today by clicking here.
“As part of your financial planning, you may be thinking about what you should and shouldn’t do, and how a pandemic could impact your investments," says FNB CEO, Jacques Celliers.
"On the one hand now more than ever you want to ensure that you’re making wise financial decisions and making provision for your financial future, while on the other hand you want to ensure that the investment vehicle you choose is best suited to you,” he adds.
This is increasingly the case as Thursday 21 May saw the Monetary Policy Committee (MPC) announcing yet another interest rate cut by 50 basis points. This is the fourth rate cut since the start of 2020.
“Lower interest rates can be thought of as a lifejacket for indebted businesses and consumers who must continue to make interest payments despite a lower stream of income. It’s a necessary policy response to support an economy in recession. Unfortunately, for net savers who are invested in cash proxies, such as money market funds, lower rates decrease their future return opportunities.
“For this reason, it may be time to consider adding exposure to other asset classes. This is hard to do, especially in current times, and more volatile assets don’t suit everyone. But investors with reasonable time frames should benefit from owning bond and equity assets at current prices,” says Mark Dunley-Owen, portfolio manager at Allan Gray.
Current market breakdown
According to Dunley-Owen, the yield on the FTSE/JSE All Bond Index (ALBI) has increased to 9.5% while the yield on money market instruments has fallen to around 4.5%. The yield differential, or pricing disparity, between medium-risk assets, such as bonds, and low-risk assets, such as cash, has seldom been higher.
Put differently, probable returns from riskier assets, such as bonds, appear attractive in absolute terms, and especially attractive relative to lower returns from cash proxies, he adds.
“It’s a similar story for South African equities. The dividend yield on the FTSE/JSE All Share Index (ALSI) is now about 4%, similar to short-term cash rates. Think about that for a moment. One can earn a similar yield from holding equities, where earnings and dividends grow over time, as holding cash, the return from which is static," says Dunley-Owen.
"While equity dividends are volatile, and will likely fall in the short term as companies adjust to current difficulties, it is probable that they’ll grow over the next five years. For context, ALSI dividends have grown more than 250% over the last 10 years,” he further explains.
First-time investors
It’s important to choose an investment manager you can trust and whose investment philosophy and approach resonates with you.
“They should also have a proven track record. The investments that you choose should align with your investment objectives, goals and timeframes. Equities, for example, are higher risk and are generally more suited to investors who are investing for five years or more. This is because they’re highly volatile, but this smooths out over time.
“Cash, on the other hand, is very low risk, but may lose value over time by not keeping up with inflation. An independent financial adviser can help you make choices that are right for your circumstances,” Dunley-Owen says.
He further advises that first-time investors align their goals with their product choices. If they’re saving for retirement, they could consider a retirement annuity. But they should be aware they will only be able to access their investment at retirement.
“Other investment options include unit trusts and tax-free investment (TFI) accounts. Both of these are good options, but it’s important to familiarise oneself with the benefits and restrictions. TFIs offer great tax benefits, but you’re limited in the amount you can contribute; unit trusts have no contribution limits, but there are tax implications when you withdraw,” explains Dunley-Owen.
The Covid-19 crisis has clearly indicated the importance of being crisis ready. If you only have long-term investments in your portfolio and need access to cash, you run the risk of having to withdraw at an inopportune time, locking in losses.
“History has shown that a recovery tends to follow a downturn, so if you can remain invested, you give yourself the opportunity to earn returns when they come,” he concludes.
To access the rest of our Covid-19 Content Series, click here.