Where must a 21-year old invest?

Q: I recently turned 21 and have been working full-time for the last seven months. I am still living with my parents so am in the fortunate position of having very low monthly costs and being able to save 50% of my salary. I understand that this is not a long-term arrangement, but I am making the most of it while I still can.

The first R20 000 that I saved I converted into Euros and sent to a foreign account (I have a German passport). I have now saved another R20 000 which I would like to put into a more fruitful mid-term investment.

Initially, I considered putting the money into a local ETF through a tax-free investment account, but have recently also thought of buying gold in Krugerrands. The appeal of high liquidity and a form of hedging against the rand make gold seem the better option to me.

Am I right in my line of thinking, or should I consider other investments? I am adamant that I want to learn how to invest directly rather than using firms that charge fees that will eat into my interest.

Before I answer your question, you make a number of observations that are worth highlighting to a wider audience:

1. Intentionality – If you do not take charge of your own savings, no one else will.
2. Start early – Since time is the biggest factor in compounding any form of investment the sooner you start the better!
3. Cost is important – The cost of investing takes away from the real return (the return after inflation). This means that cost is a big percentage of the actual result.
4. Saving is a habit – many people fail to save because they perceive that what they have to save is too small. This ignores that saving is a habit that needs to be created and then will become easier over time.

I am sure that you will feel very satisfied that you moved your first R20 000 offshore given the weakness in the local currency. However, it is still worth noting a point of caution:

The rand’s major fall in December was very much about political action. The falls up to the end of November 2015, and again in early January, however, were not.

South Africa is an emerging market economy and major exporter of commodities. With the slow-down in China this has placed all such countries in a similar position.

Secondly the US Fed’s clear intention to raise interest rates and the uncertainty as to the trajectory of the increase has created a flight to the dollar and created dollar strength on a broad front. The combination of these two factors has created a perfect storm for the rand. Mr Zuma then punched a hole in the bottom of a boat that was already taking on water.

If you believe that this can never be reversed, then you need to reconsider the history of the rand between 2000 and 2010 and link that to commodity prices. This is not to say that the rand is going to return to R6 to the Greenback. The level it goes to is way less important than the level you get in at. Diversify by all means, but understand the risk.

To answer your question specifically, gold is a difficult subject. South Africa is full of gold bulls for various reasons and I have met many who swear by it.

However the dollar gold price and the US dollar have a largely inverse relationship. In dollar terms you would have lost money in gold over the last five years. This means that this becomes a rand bet.

The problem is that if commodities run, the dollar weakens, the rand strengthens (by implication) and the gold price rises. That means that you are in a net neutral position.

The other issue with gold is the lack of compounding. Gold produces no income (like dividends or interest), which means you are purely buying price action.

The question then is, can gold form part of a diversified portfolio? It can, but I certainly wouldn’t make it too big a percentage.

Finally, I do not think any young person could fail by investing in a tax-free savings account (TFSA). The benefits are substantial and if well planned it could become the jewel in a future retirement portfolio.

The key for young people using a TFSA is to invest for growth (don’t worry too much about volatility), don’t steal from the kitty, and as best as possible, use your R30 000 per annum contribution limit. The benefits of being able to convert a growth investment into an income investment in 30 or 40 years time that attracts no capital gains tax liability and produces tax-free income will be invaluable.

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