Have spare cash? This is what to do with it

Recently I have been banging the “saving” drum, because of the uncertainty of the immediate future.

But let’s suppose you have been fortunate enough to save. What should you be doing with your savings?

That question is not as simple to answer as you might think.

One thing all investors have in common is that they want as little risk for as much return as possible.

Unfortunately, gains are directly correlated to the amount of risk taken.

It’s about knowing yourself and having realistic expectations.

Are you conservative and looking to protect your cash, or are you looking for slow but steady growth?

Perhaps you consider yourself a “cowboy”, looking for massive returns and are prepared to lose it all to make big money.

You must consider two things when investing: risk appetite and time.

This week’s piece is aimed at those of you who have savings of around R30 000.

There are many products to choose from in this bracket, but the most innovative product over the last couple of years is the tax-free savings account.

All banks offer them (in their simplest form) and most reputable brokers who offer share trading accounts offer them and variations of them, too.

What makes them an awesome investment vehicle is that they are very low cost in terms of fees and any gains you make are exempt from tax.

The only limitation on these accounts is that you are capped at R30 000.

The best way to take advantage of a tax-free savings account is to do a lump sum deposit of R30 000 and get fully invested from the start.

Do not invest more than R30 000 into this account.

You will be taxed at the maximum.

These accounts typically have different risk profiles; namely, conservative, moderate and aggressive.

They usually offer estimate returns based on inflation, which makes sense – the whole purpose of investing is to beat inflation (price of money).

These fund managers then invest your cash for you and split the investment according to risk appetite.

A typical “moderate” portfolio would be invested near 40 per cent in shares and the rest will be placed in inflation-linked and “cash-like” investments.

Conservative accounts would obviously be less exposed to shares and aggressive ones would be more exposed.

These accounts typically offer benchmarks of Consumer Price Index (CPI) (inflation 6.1 per cent) plus a percentage return.

On average, a conservative portfolio offers CPI plus 3 per cent, moderate CPI plus 5 per cent and aggressive around CPI plus 7 per cent.

While I do like this product, you need to be aware that all tax-free savings accounts are not created equal, because different fund managers have different investment styles.

It is important to know how your cash is being invested, so my advice is to understand the product before you choose.

You did well to save it, the least you can do is to invest it wisely.

Next week I’ll be discussing available options if you have a little more to invest.

Have a question for Robby P? Email to benonicitytimes@caxton.co.za

Also read:

There’s a trading lesson to be learned from Portugal’s Euro 2016 win

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