South Africa’s household savings rate is very low. As a percentage of gross domestic product (GDP) it is sitting at just 16%. According to the latest statistics from the National Credit Regulator (NCR), there are 25-million credit-active people in South Africa. Of that, 15.2-million, or more than 60% of consumers, are in good standing with their credit providers, meaning that they are able to fulfil their financial obligations every month. This is a positive indication as more people who have credit are able to pay their required monthly premiums than those who cannot.
However, 9.8-million consumers had bad credit records at the end of September 2017, which is 39% of the total number of credit-active consumers. For these consumers, things are not looking positive as their accounts may be three months or longer in arrears, there may be a judgment against a consumer, or he/she may be blacklisted.
Research shows that only 6% of South Africans can retire comfortably. Moreover, due to high levels of indebtedness, most people aren’t even able to contribute to a savings vehicle, thereby perpetuating a myth that investments are only for the wealthy. While a reasonable degree of income is required to save and invest for the future, investors need not be wealthy to start.
"It is not about timing the market; it is about time in the market."
The research findings of the 2017 Old Mutual Savings and Investment Monitor shows that despite the increasing financial pressures experienced by South Africa’s working metropolitan population, there has been a slight improvement in South Africans’ confidence in their own ability to make responsible financial decisions.
“There is a very likely link between this small shift in mindset and the encouraging decrease in income-to-debt ratio recently reported by the South African Reserve Bank, as well as some of the debt- and loan-related findings in our research,” says Lynette Nicholson, a research manager at Old Mutual.
When it comes to preparing for retirement, Nicholson points out that South African working metropolitan households still suffer from a lack of long-term planning. An alarming 40% of respondents said they have no form of formal retirement savings at all, including pension/provident funds or retirement annuities.
“The harsh reality of this scenario is that if South Africans think they are feeling the financial squeeze now, they are in for a major future shock unless they remedy the situation,” Nicholson warns.
“The one resounding message that emerges from our research each year is that we are not saving enough: as individuals and as a nation. The reality is that we all need to accept that we must reduce our spending today to make provision for tomorrow. Yes, there are small signs of improvement, but as individuals we need to urgently take more drastic steps if we are to have any hope of building a financially secure future,” Nicholson concludes.
What to consider before you start investing
Dr Adrian Saville, founder and chief executive of Cannon Asset Managers, says that the primary consideration for any investor is "How long do I have to save?" "The time you have available to invest has an important influence on your asset allocation, which could be in bonds, property, equities or cash. For example, a 25-year-old would be best served by allocating money to a venture capital fund, private equity fund, or small cap stocks that might be very volatile but over a long time will grow quickly. That’s where a 25-year-old should be,” says Saville. “A 75-year-old may not have the same long runway and they are probably drawn down on the capital that they would have accumulated over time in their lives. In that context, their primary objective is stability."
According to Saville, there are two primary considerations in determining where to start. “The first one is how long do I have and the second is what do I need. Do I need capital growth or do I need income? A 25-year-old needs capital growth while the 75-year-old needs income, not necessarily capital growth, but capital protection.”
The impact of life expectancy on your investment decisions
In South Africa, many people retire at the age of 60 or 65. “For an investor in their 40s, it might seem that retirement is now starting to loom, but actually, life expectancy is steadily climbing. Sixty-five might be the age you stop working, but you are likely to live beyond 65. In Japan, for example, life expectancy is 82 years. If you retire at 65, it’s not just about, 'How do I live off the portfolio I have or the capital I have accumulated?’, but you actually start to introduce a different risk, which is, 'Could I outlive my capital?' If you’re 46 and have access to advanced medicine and are in good health, then your life expectancy is probably another 30 years. That means you should be allocating to risky asset classes that have a lot of growth in them. At that age, you should have as much risk in your portfolio as a 25-year-old,” he argues.
The relevance of pension/provident funds and retirement annuities
Very often, investors are not sure whether pension and provident funds are still relevant mechanisms to save money. “What these instruments do, is to establish a habit of saving,"argues Saville. "When you look at an individual’s saving behaviour, there is some fascinating evidence that demonstrates a direct link between an individual’s current monthly saving with the amount of savings that they invested last month. The biggest explanation for how much they save this month is how much they saved last month. In other words, saving is a habit – it is a behaviour. If you start allocating capital on a monthly basis to a pension fund or a retirement annuity, it establishes and entrenches the behaviour of saving. The earlier you start, the better,” he adds.
Demystifying the perception that investments are for the wealthy
“There’s a widely held perception that in order to save money you have to be a high-income earner. But have a look at countries like India, China in the 1980s, South Korea in the 1960s, Japan in the 1950s … at the time all of those countries were low-income countries. But they had savings rates of 30% to 40%, compared to South Africa’s 15%. The inference is that high income isn’t the basis for saving,” says Saville, adding that, “Discipline and habit are the basis for saving. In a low-saving country, it is often the case that if there are income increases, people don’t save more, in fact, people spend more.”
Some insights to get you started
A simple place to start is income investing, which means selecting investments that are designed to deliver income gradually over a period of time. Saville stresses that “there’s no such thing in the investment world as ‘the solution’. Each person has a unique circumstance and an individual problem. I think investing always has to start with the individual and then the asset class, not the other way around.”
A few tips to get you going
- Consider your options – different people at different age groups have different options. For example, you may choose to delay your retirement age from 55 to 60 to buy more time.
- Don’t rush into anything – just because markets have fallen doesn’t mean that they are cheap. Often markets fall for a reason.
- Markets aren’t as inefficient as people think (buying when shares are under-priced and selling when they are overpriced). If a share looks cheap, the chances are there are reasons why it is cheap. In addition, if it is cheap, there are probably other risks that many other investors are not willing to take.
- Obtain professional financial advice.
- Evaluate all investment opportunities against a standard set of criteria.
- If you’ve lost money, it’s already lost – getting out of the market might help you not to lose more money, but it is surely not going to help you recoup the money you have already lost.
- In any market there will always be opportunities. The only way to identify an opportunity is to have a relevant predetermined set of criteria against which you evaluate the opportunity presented by any investment. Remember if a promise made by an investment product provider seems too good to be true, it probably is.
- If you follow a disciplined strategy and have enough time to follow it through, chances are that you will still be able to make money out of your investment. You need to be more patient.
- If you have outstanding debt, such as credit card debt, pay that off. Settle your short-term debt first. People generally have little spare cash, but those who do should look for savings opportunities which depend on their circumstances and the amount of investment they wish to make. There are numerous investment vehicles you can use for saving in the retail market. When investing in retail products, you must take into account the cost of investing in the product. You need to look at your time horizon and determine which is the most appropriate asset class. Try to get the most cost-effective solution possible.
- There are a number of instruments you can employ for income investments: equities or stocks, bonds, mutual funds, alternative investments (e.g. fine art, J12), property, cash, annuities.
- Choose the best funds and vehicles – diversify broadly. Make sure you have in place the highest set of criteria when determining the best funds or vehicles within your requirements. Diversification is always key, but determine what represents quality, value and appropriateness and apply evenly.
- You should start by reading and researching more about the above instruments and how they work. There’s no substitute for doing research. Read investment and personal financial planning articles, listen to business radio, attend the right investment forums.
- The key is to first get into the habit and the behaviour of saving. The earlier you start the wealthier you will retire.