Five questions you should ask about investing

By Staff Writer

With July being savings month, it’s a good time to think about investing. Rob Formby, director of retail operations at Allan Gray, suggests five questions you should ask about your current and future investments.

1. Do you know what you want to achieve?

There are many reasons to invest.  You could be saving for retirement or for your child’s education.  You could be building up capital to buy a business, or developing an inheritance for future generations. If you’re clear about your purpose, it’s easier to decide on your time horizon, return objectives and your ability to tolerate uncertainty. Being clear about your objectives allows you to plan - without a plan you’re less likely to achieve your long-term purpose.

2. Are you invested in the right product?

Different investment products fulfil different needs:

•  A unit trust lets you use a relatively small amount of money to buy units of a fund that invests in assets such as shares, bonds, and property.   You can access your money at any time.
•  A retirement annuity (RA) allows you to save for retirement in a tax-efficient manner.
• A preservation fund allows you to preserve and grow your existing retirement benefits.
•  A living annuity (LA) lets you draw an income from your investment after you retire
•  An endowment offers wealthy individuals tax efficient growth but restricts withdrawals and additional contributions (there’s a minimum investment period of 5 years). 

Retirement annuities, living annuities, preservation funds and endowments are essentially product wrappers.  Each provides certain tax and other benefits and carries certain conditions. But they all invest your money in assets – sometimes directly into the market, and sometimes through unit trusts.  Often legislation limits your choice of product. For example, if you want to preserve your retirement savings when you leave your employer, you may only transfer your money to an RA or a preservation fund.

3. Does your investment adequately balance risk and return?

Investors often focus on potential returns, and give less thought to risk. But what if your investment loses value? What if the returns you envisage don’t materialise? Would a loss affect you dramatically?  Will you need to withdraw money in the short term, or can you ride out any temporary loss until your investment recovers its value?  Appropriate balancing of risk and return takes these aspects into account, potentially sacrificing the possibility of higher returns in favour of security of achieving returns or avoiding capital loss.

4. Are you too focused on South Africa?

Being fully invested in South Africa subjects your investments to the effects of fluctuations in the rand. In addition, the JSE only accounts for approximately 1.3% of the total world stock market capitalisation, which offers little protection when global sentiment towards our market changes.  Investing offshore lets you diversify this risk.

5. Are you using the right investment manage?

Different investment managers have different ways of investing.  If you understand and buy into a certain approach to managing money your investing behaviour is more likely to be aligned with your manager, and your trust in that manager is likely to be higher. You are less likely to detract from returns through your own behaviour, thereby improving your chances of achieving investment success.
Finally, if you’re unclear about any of the questions above; if you lack the knowledge or confidence to manage your investments; if you lack the discipline to save; or if you’d like to explore alternatives to the way you currently invest, consider seeking independent financial advice.  Independent advisers can assist you in making investment decisions, with planning your investments and making some of the choices mentioned above.

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