This is the transcript of a talk that I am giving to the staff of various organisations and groups of individuals and the topic is “Why you need to start investing now”.
I am incredibly grateful that I have had an interest in investing from a very early part of my adulthood, both in seeking knowledge so that I could do well in my career as well as in investing in the financial markets to build wealth. So, I hope that today’s talk inspires you to also start investing or if you’re already doing so, to be encouraged to continue to hone your investing skills so that each one of you can truly build wealth for your and your families’ benefit.
I want to premise my talk on the following:
Rapid technological change is making life better for all in the long term, but it has serious implications for individuals and families in the short-term.
So what do I mean by that.
Well, let’s face it, if we compare humankind to a century ago or even half a century ago, almost all of humankind is living under better conditions – most have a roof over their heads, access to running water, better sanitation, and better access to healthcare, better access to education, to information, to transportation… We are living longer, infant mortality has reduced, more people are attending universities, eating out, having access to entertainment in our homes, etc.
So, whilst it may not seem like we are having a good time, because of issues like high levels of inequality, crime, unemployment, migration from war-torn or poverty-stricken countries, life has actually gotten much better for most of us.
Now one of the reasons for that I believe is that mankind will always seek ways to improve their lives and this means embracing new technologies whether it is better transportation, better communication tools, more efficient farming methods or more efficient production or service methods. So it is human nature to seek changes that improve our lives, yet most of us are resistant to change or ill-prepared for change.
We know that everyone benefits in the long-term, i.e. over generations; but how can we benefit more directly; whether we are government, businesses, families or individuals? I believe that these benefits can be gained by making conscious investment decisions.
As I am talking to a group of individuals, I want to talk to you about how you go about making investments decisions and how this can positively impact not only you, but also those around you and society as a whole. How do you go about building your personal value: #MyPersonalValue. You can broadly do this by doing 2 things, firstly you should keep on developing your skills to be relevant for the changing environment and secondly you should be consciously investing to secure your financial future. You have to do both, but I will focus today’s discussion on the latter, i.e. securing your financial future and building wealth.
I’ll relate this as a story. The story begins in a South African township around the late 1970’s. A group of high school kids get together every weekend and do what teenagers do. Look for the next party, find some good stuff to make them happy, whatever … Now these are not kids coming out of wealthy environments, most would get some pocket money which would really be for their school lunch and some would supplement this by doing odd jobs on a Saturday morning or Friday afternoon.
One of the bright sparks, suggests that each of the Group of around 10, should give him R20 per month, and he will then save this in a call account which can be used in the future, for whatever purposes, even if just to give back everyone their contribution plus the interest that was earned. Now in my book this is a stokvel. After many fits and starts, with a few members dropping off along the way and then a few joining later on. I was one of those that joined in 1994. Today, this group of individuals is worth approximately R17m and that is only their pooled investments that started with a humble R20 per month.
The lesson and maybe the target I want to you to set for yourself is to be a millionaire, whether it is a Rand, Dollar Euro or Pound millionaire. You have seen that it is possible even if you start with very humble plans.
So how did the growth in the investment club come about? Let’s put some of the facts on the table:
- This wasn’t a smooth journey, It’s not like 10 guys get together, decide to contribute R20 per month, adjust for inflation each year, invest in various assets and voila they are now worth R17m;
- There were fits and starts, contributions stopped, some people pulled out, others were invited in, contributions started again, and eventually stopped about 4 years ago;
- So we don’t have a monthly contribution any longer;
- There was a discipline that was established, pay monthly, pool the money, and find ways to invest that money wisely.
The starting point is to start somewhere (Sounds like a Yogi Berry quote). Laozi, a famous Chinese philosopher said: “The journey of a thousand miles begins with a single step”.
You have to consciously start saving some money (however little), every month. It means that you have to spend less than you earn. It means every month, when you get your salary paid into your account, you have to pay yourself first. As a rule of thumb, I recommend that you save approximately 20-25% of your monthly income if you want to be financially free and live a reasonable lifestyle in your retirement days. Now, I know that not everyone can save that much, but start somewhere and target to get to that savings rate as soon as possible.
Remember, if you are in formal employment, you already have an obligatory retirement savings plan. That is already part of your contribution into the 20-25% savings that I recommend that you target. So, if you are contributing 12% say to your retirement savings, then you only have another 12-odd % to save.
Practical Step One: So a practical first step would be to open up a savings account or a unit trust account. If you haven’t already taken advantage of the Tax Free Savings Account – open one up now, before the end of the tax year. Then commit a monthly amount to invest.
The second part of your journey, is to do something with your savings. In fact, I like to call that process, the process from saving to investing.
Saving is generally a very passive process. You decide how much to save and then you set up a monthly debit order, and your money goes into a call account. You earn monthly interest, SARS (South African Revenue Service) takes a healthy portion of your interest earned and basically you are left with a return that is below inflation. So in fact every year you are losing money in real terms, i.e. inflation is eating into your nest egg. Whilst this is better than not saving at all, it still does not bode well for your future. Now there is a role in call accounts in any financial planning process, but its role is very specific, to give you access to cash during desperate times or to park your money whilst you assess where to invest.
So if saving through call accounts ultimately yield a negative growth in real terms, it thus becomes your duty to educate yourself about investing for your future, and dare I say for the future of this country. Where could you possibly invest?
Now, you can see from this, there are many different areas in which you can invest. It can also be very complex to understand. But to secure your financial future, you do need to start learning about this and investing in investments that will give you a better return than just cash.
You can learn by reading, checking the myriad of information on the web or by talking to experts like a financial adviser. With this knowledge you can arm yourself to make some decisions, so that a portion or all of your monthly savings will now be directed to investing in these investments that over the long term will give you a better return.
Take a look at the Chart below that I got from Old Mutual.
Now this shows you what you will miss out on if you do not make some sharp investment decisions. Let’s assume that you have a 30-year working career. If you invested R1000 per month in real terms and you got the average returns that we showed earlier, then the difference between investing in SA Equities and Cash is that after 30 years you will have is R1,4m versus R400,000 for equities versus cash. You would have invested R360,000. And remember that this is today’s value, as these are real rates of return, i.e. they have been adjusted for inflation. Now here’s some magic: R2000 per month = R2.8m; R10,000 per month = R14m. You’re already a Dollar millionaire.
You can also see from this that the impact of compounding has a very dramatic impact on your wealth over the long-term. So, if you want to build wealth for yourself, you have start improving your knowledge and go up the investment curve.
Going back to the township kids, they figured out, or at least those that stayed with the stokvel, that they needed to go up the knowledge curve and up the investment curve. So, their R20 per month is now valued at approximately R17m. This was achieved through a growth rate of 20.4% per annum, after tax and expenses; but includes inflation of probably around 7-odd percent. So their real rate of return is around 13%, better than the average painted above. They went a long way in building their Personal Value. Over the last 21 years, since they have kept performance records; if they invested R1000 per month without stop, they would in fact have achieved a value today of R4m for a contribution of R360,000. There’s a lesson for them here too.
Now, I’m not suggesting that you rush out and go and buy equities, but what I am saying is that you owe it to yourself, your family and the country to begin learning about investing and then consciously investing for your future. But remember the first step – start saving more money NOW.
Then, with your financial adviser and your own learning and growth, you can start investing in other asset classes.
Practical Step Two: With your own learning and the help of an expert, make a monthly investment in a balanced unit trust or a low-cost index tracking fund. This takes away the risk of investing a lump sum when the markets are high, and similarly you have the benefit of diversification. I also strongly suggest that you take an active interest in how your investment is doing. Don’t also forget to check out how your retirement fund/pension fund is doing. Many of these retirement plans give you a choice of where to invest and you need to know why you have chosen a particular investment strategy.
Naturally, if you are already investing, then that is great. I encourage you to keep on investing not only financially but also in your knowledge and education. And, I’m sure that some of you will become great investors and give advice to many others.
To complete the story of the stokvel, the members invest directly via the JSE on the stock market. They have toyed with investing with derivatives as well as investing offshore. And, because they have been at it for a long time, they have a better understanding of the gyrations of the market and can live with levels of volatility. Over the 21 years of measuring performance, they have had 2 negative years. And as I indicated earlier, have far beaten inflation as well as cash by far. Many of these members also invest in their own capacities, because the investment club allowed them to learn from each other. Also, if the club does not buy a share that one of the members may have a strong view on, she can buy it in her own capacity.
This is the compounded effect of increasing your knowledge base and making it work for you in your investment decisions.
Practical Step Three: As your knowledge grows, increase your risk profile. Ultimately, you want to be investing in the stock market as you saw from the Old Mutual and the Investment Club data. This will require you to open up a stock broking account. Here again you will use your own knowledge and that of your stockbroker to make decisions on which stocks to invest in.
This journey of learning and taking practical steps in investing will set you well on you way to building wealth for yourself (#MyPersonalValue) and your family. Ultimately, you will also be helping our country too.
I want to end of the talk, by referring you to an article that I read in the Moneyweb, dated 27 January 2016, titled ‘Higher household savings could transform SA’s economic growth’. Dr Adrian Saville, puts forward that South Africa’s savings rate is approximately 16.3% per annum and this increases to 18.7%pa if you include the effect of foreigners saving in SA. This translates into a GDP growth rate of 2% pa and this is nowhere enough for us to absorb new job seekers in the economy and to improve the living conditions of the general population. We know our unemployment rate is very high.
His analysis indicates that we need to save at a rate of 28.3%pa to be able to generate GDP growth rates of 5%, which is what we need to be able to create prosperity for the general population. This is determined by looking at those countries that have sustainably grown at 7%pa plus over a long period. These ‘rock-star countries’ national savings rate averages 28.3%. I am also pleased that the Gordon Institute of Business (GIBS) has launched the Investec GIBS Savings Index to try and stem the tide of our poor savings record.
What that means is that each of us have to make our contribution. We should all target to save at least 10% more per annum. This will result in investments in the productive sectors of our economy and generate more long-term and sustainable growth for all of us. We have as important a role to play in the growth of this country as does government and business as well. Rather than moaning about what government and business should do, let’s do what we can control ourselves and benefit personally as a result anyway.
Remember what I said earlier, technological advancements improve humankind’s lot over the long-term. So, we must be investing in the development of these technologies, through making choices by where we invest our savings. This results in a higher educated work force as well as better returns for investors. I also said that the other side of that coin is that the impact of technology also results in job losses. So, if you do invest wisely, and if you do get impacted by restructuring, then you can be much more prepared for that. Your investments can provide a cushion and allow you to re-educate yourself or perhaps even to become an entrepreneur and run your own business.
Start Investing NOW to build your personal value (#MyPersonalValue)! It is for your own good, for the good of your family, your community and for the country.
Remember the practical steps that I laid out for you:
- Open up a savings account or a tax free savings account now and commit to saving an amount every month;
- With the help of an expert and with your own knowledge, invest in a unit trust or a low cost exchange traded fund;
- As your knowledge grows, open a stock broking account and invest directly in the stock market.
Your journey of wealth building has begun.
Should any of you wish to start this conversation started in your organisations, please let me know if I can be of any assistance to you. You can contact me at my email address: [email protected].