The good, bad and ugly of different investments
Retirement annuities (RAs)
Think of a retirement annuity as a pension fund. It is an investment plan structured to give you a certain amount of income from the time you retire until you die.
- You have a guaranteed regular income for the rest of your life. Even if you live longer than they expected, the insurance company has to pay.
- The earlier you start saving, the more money you will have in your retirement fund at the end as your money earns interest on its interest (i.e, compound interest).
- You can’t access your RA until you’re 55 which means you can’t change your mind about saving for retirement.
- If you die earlier than the insurance company expects, they keep all the money, although you can add death cover to your RA to ensure a payout to your heirs.
- The monthly amount you are paid is fixed – as time passes, it may not be enough to maintain your lifestyle. The earlier you start an annuity and the more you pay into it, the more likely it is to keep up with inflation. Also, you can index link it to offer a degree of protection against inflation.
Stocks and shares
Public companies, i.e, those listed on the stock exchange, are owned by all the people who have bought a share in them, which could be you and me. Shares are also known as stocks or bonds. Listed companies are governed by strict rules and their job is to make money for their shareholders.
- Investing in the stock market is a long-term strategy – it’s not about getting rich quickly.
- If you know what you’re doing, you can create a wealth-building portfolio over time.
- There are two simple rules to obey always: buy low and sell high, and diversify, i.e., buy shares in more than one industry and business type.
- Trading in stocks and shares is risky. You have no control over how stocks rise and fall and you can lose money just as easily as you can make it.
- You have to be really well informed and do your homework before you invest – while this shouldn’t be a problem, be prepared for it to be time-consuming.
- You can’t be emotional about it. If you lose on a particular share, you have to take the hit and learn from it.
- There is a cost attached to buying shares. Investing this way costs money and you need to factor these costs in to your investment and be aware of the size of return you need to break even.
Unit trusts are an investment device developed specifically to make investment in stocks and shares accessible to everybody.
- Usually only the very wealthiest individuals can invest in blue chip shares – because they make high returns they’re very much in demand so they’re expensive to buy. However, unit trusts are investments made in blue chip shares, unlocking this exclusive type of investment for even modest investors.
- Because they invest in stable blue chip shares, unit trusts tend not to fluctuate as much as other share investments.
- You have direct access to your unit trusts so you can repurchase them pretty much any time, helpful in an emergency (you do have to retain a certain level of investment to keep your unit trust account open).
- There is no contract committing you to invest for a set period so you can easily scrap this investment and never go back to it – this can be a disadvantage as unit trusts are one of the best investment options on the market and quitting will erode your investment portfolio.
There are different types of bank account such as home loans, current accounts, and a range of saving accounts. South Africa has a particularly well regulated banking industry which is sophisticated even by world standards. There is very little risk attached to bank savings.
- PRO: You can usually withdraw your money within 24 hours.
- CON: Interest rates fluctuate and can go up or down.
- PRO: Interest rates on fixed deposits are usually higher than on call deposits and the longer a savings term you agree to, the term the higher the interest rate you will get.
- CON: Your money is tied up for a pre-agreed length of time, which could be anything from one month to five years.
- PRO: Your money is usually invested indefinitely and interest rates are generally higher than for call account. You get a higher interest rate if you opt for a longer notice period.
- CON: No matter what sort of emergency you’re facing, you will only be able to draw your money after an agreed notice period – the minimum is usually 32 days.