"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Monday, 25 March 2013

Plant small financial seeds today

This is a favorite saying of mine. "Plant small financial seeds today, so that you may reap the rewards & sit in the shade tomorrow." By this I simply mean that by committing yourself to saving small amounts of money today, you will find that over time it will gradually compound & grow to bear a larger sum of money in the future.

Some people believe that you need to have lots of money to start investing, but just investing R300 a month can add up to a significant lump sum. 

Around nine years ago I started saving a tiny amount of R300 a month in Satrix 40 index (www.satrix.co.za)  which simply tracks the performance of the 40 largest South African companies.
Today that investment is worth R55 000 and growing!
You do not have to start off with a large amount of money. Satrix allows one to begin with a minimum debit order of R300 per month or a minimum lump sum of R1000.
Over time shares in listed companies on the Johannesburg Stock Exchange outperform cash. 

Certainly if I had invested the money in a bank account it would be nowhere near the same value that it is today. However the value of the investment has had to ride out big moves in the stock market as we went through the 2008-2009 financial crisis. 

Despite one of the biggest market collapses in history the returns have still been significant.
You need to understand the nature of the market and not become concerned with short-term falls in value.

As a young person wanting to invest each month you should invest in growth assets that can outperform cash. As mentioned, in the short-term (up to two to three years) the stock market can be volatile and the value of your money can fall if there is a market crash.
However if you are investing each month this can actually be to your benefit as you are able to buy more shares with the same amount of money.

A good starting point is to invest in a basket of quality listed companies either through a unit trust or through an exchange traded fund (ETF) offered by companies such as Satrix www.satrix.co.za and Absa http://etf.absacapital.com. ETFs are low-cost investments that track the performance of the stock market. Satrix presents itself as the cheapest way to get exposure to shares.

You will need to check the minimum investment amounts as they usually start at R300 per month however there are several unit trust funds that offer investment amounts for R200 per month which include Sanlam, Absa and Stanlib.
However, check the fees first as some of them charge an upfront fee of 5% even if you do not use a financial adviser.
Fees have a bigger effect on your total return than the fund manager’s performance so they do matter.

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