If you’re in the early stages of your working career, you probably know that you should be investing some of your money, even if you’ve adopted the “soft saving” approach taken by many young people. It’s a methodology which prioritises immediate experiences, like holidays, over long-term goals, like retirement. But as Harry Scherzer, CEO of international money transfer fintech Future Forex, points out, a sound investment strategy is still important regardless of your goals.
“Whether you want enough money for a three-month sabbatical or long-term financial freedom, you must ensure that every rand you put away is working as hard as possible,” he says. “Of course, knowing that you need to invest is very different from knowing where to invest, especially for young people just starting their financial journeys. With a little bit of basic knowledge, however, you can ensure that you have the best start possible.”
Scherzer is well-placed to provide some of that knowledge, as well as a few tips for budding investors. Not only is he a business leader in the financial space, he’s also a qualified actuary and, at 30, is young enough to know how many career-starters feel about investing. With that in mind, here are his top six tips for young investors.
Avoid leaving money in the bank and opt for equities instead
While most parents start their children’s saving and investment journeys off by opening a bank account for them, Scherzer believes that traditional bank accounts are best kept for transactional purposes only.
“With inflation eroding the purchasing power of money over time, keeping it in a low-interest savings account can cause your wealth to stagnate or even decline,” he says. “Consider investment opportunities with the potential for growth to stay ahead of inflation.”
Instead, as the Future Forex CEO points out, young investors should put their money into equities, which tend to provide better long-term returns compared to cash or bank accounts.
“If you’re unsure about which equities to choose, consider using a fund manager or investing in an index fund, such as the JSE All Share Index, so that the whole South African market is included in your portfolio,” he says. “It can also be valuable to pay for the services of an independent financial advisor or investment professional to help you navigate complex financial decisions, create a personalised investment strategy, and provide insights you might not have considered.”
Consider dollar equities/offshore investments
Once a young person has decided to invest in equities, Herzer suggests that they look at options beyond South Africa, with a particular focus on US-based equities. That makes a great deal of sense when you consider that those stocks frequently outperform local ones. In the nine months between January and September 2023, for instance, R1 000 invested in the S&P 500 would have grown to R1 291. The same R1 000 invested in the JSE All Share Index would have shrunk to R991.
“Investing in dollar-denominated equities offers global security and protection against local currency risks,” says Scherzer. “Over the long term, equity markets generally rise faster than interest-bearing accounts. While equities can be unpredictable in the short term, they typically grow at a faster rate over the long term.”
“Investing in dollars instead of local currency (like rands) can protect against local currency devaluation,” he adds.
Start early and let compound interest work its magic
While the oft-repeated quote about Einstein declaring compound interest to be the most powerful force in the universe is undoubtedly apocryphal, it is an incredibly powerful phenomenon. But it’s only powerful over time.
“The earlier you start investing, the more you can benefit from compound interest,” says Scherzer. “Keeping your investments in equities over many years allows compound interest to significantly grow your savings. Even modest investments can grow into substantial wealth over time. Don't wait.”
To illustrate the power of compound interest over time, let’s consider R500 invested over 20 years at an annual interest rate of five percent. At the end of those 20 years, you come out with R1 326.65. By comparison, if you invested R1000 at the same annual interest rate over five years, you’d come out with R1 276.28.
Diversify your investments
While there are outliers on social media who insist you should put all your money into the latest hot meme stock, Scherzer points out that the traditional strategy of a well-diversified portfolio is still the best way to balance risk and reward in investing.
“Don’t put all your money into one or two stocks,” he says. “Diversify your portfolio by investing in a variety of stocks or through index funds or asset managers. Diversification helps mitigate the impact of a single stock's poor performance on your overall portfolio.”
Avoid playing the market
As tempting as it may be to think that you can accelerate your portfolio’s growth by playing the market, Scherzer says, you can’t.
“Trying to time the market by trading in and out of stocks is generally not successful,” he says. “The costs and the difficulty of perfect timing usually result in lower overall returns. Holding stocks or a bundle of stocks for the long term is a more effective strategy.”
That’s even true for professionals, with active funds having less than a coin’s flip chance of outperforming passive funds in 2023
Consider special opportunities for investing
As important an investment vehicle as equities are, Scherzer encourages young investors to ensure that they’re looking out for other investment opportunities too.
“While focusing on equities, also be open to special investment opportunities that offer potential outperformance compared to traditional bank investments,” he says. “These should be evaluated carefully to ensure they align with your overall investment strategy.”
No need to sacrifice short-term joy for long-term gains
Ultimately, Scherzer says, there’s no reason why young investors shouldn’t be able to balance investing for short-term goals like holidays and sabbaticals while also working toward long-term financial freedom. Importantly, he says, they should view investing as something to be excited about rather than something done grudgingly.
“Once you have a basic understanding of investing, a lot of the mystery falls away,” he says. “That helps remove any fears investors may have and ensures that they can enjoy watching their money grow to the point where they can achieve their financial goals.”
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