THE first step to creating wealth is to commit to the habit of saving.
Jan van der Merwe, head of actuarial and products at PSG Wealth, said that there are a number of ideas to consider when deciding to save.
What is your goal?
Can you save for a retirement annuity, an endowment, a voluntary investment product or a tax-free savings account?
Are there any other goals you want to include under your major saving goal? If so, what other sub-investments do you want included? Again, there is a range of possible choices, like share portfolios, exchange traded funds or unit trusts.
Choose a service
Investors often focus first on trying to choose the best performing fund but they should be looking for an investment service that suits their goals. There are many possible options when it comes to an investment such as unit trusts, money market funds, shares, exchange traded funds and index tracker funds.
What to consider before investing
What is your attitude to risk? Understanding your own risk profile is not a quick and fixed result. It needs to be flexible to change.
- Risk required: What is the risk of the investment? The higher the risk of the investment means a higher dividend if it’s successful.
For example, if a higher investment return is required, this normally implies that you need to choose a riskier asset class.
- Risk capacity: What can you afford to lose? This is your risk capacity? Every investment can collapse and lose all the invested money.
This is why you should never put all your money in a single investment but put it in a range of investments in case one is destroyed horribly.
Risk tolerance:This is your own feelings about taking risks. Humans are risk averse but in the wrong way. We are unwilling to invest in safer, low-yield markets because immediate gains of putting money in a long-term investment because we do not see immediate results.
We’ll pay hundreds on a pile of tickets every week because millions are promised to the winner on the same day in spite of the fact that the chances of winning the lottery are so small, it’s like waking up tomorrow to find 20 million South Africans had decided to queue outside your door to each give you one rand.
How long do you have?
How long can you wait before you want your investment to be paid out?
A longer investment pays more money so it’s a balance of time waited versus what are you willing to risk.
- Allowing for costs: The only part of the future we can predict is that inflation will go up and will have an impact on our investment. It will be worth less than if it matured now.
