Basics of investing – The building blocks of your investment options

Have you ever sat in a meeting with your Financial Advisor, and they are explaining this technical detail versus that technical detail and the market share of that portfolio? Instead of listening you have a mantra in your head that shouts, “I have no idea what this person is talking about”. As soon as that mantra starts you will make one of two choses, either you will just sign on the dotted line without fully understanding what you’re signing for, or you will not sign at all and then probably not save the funds you need to. Neither option is a good one for you.

This blog will help shed light on the fundamentals of what you need to understand to make smart investment decisions. We will not be discussing any retirement type of investments, just your everyday investing.

First thing you need to understand, all investments are built from one of two types of investments. You will either invest in a unit trust or an endowment. You will be dazzled by the fancy names that investment houses name their many investment products, however, remember they will all be based on the principals of these two types of investments.

That leads us to the second thing you need to know and that is - What is the difference between a unit trust and an endowment?

1. Endowment: Minimum 5-year plan, can have a beneficiary, taxed within the fund, but it’s set at 30% tax, if you stop contributions or withdraw in first 5 years there are penalties and restrictions.
2. Unit trust: flexible, can put money in and stop debits, start it up again or withdraw at any time, taxed in your hand (Based on your income tax table), no beneficiary can be assigned. No penalties.

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Third you need to understand when will you need to use which investment?

?A unit trust is applicable to use when you have a short-term time horizon for your money, if you think about using your money anytime from 3 months to 3 years, use a unit trust. This is an excellent type of investment to build your emergency fund in. Remember it doesn’t have a beneficiary, so make sure your will is up to date. If you have a low-income tax bracket, and by low, I mean below 30% it’s a good space for your funds, even if you want to invest for a decade.

An endowment is appropriate if you are in a high-income tax bracket, by high I mean 30% and above. If you have a long-term investment objective such as investing for a child’s education that is needed in eight years, or big anniversary in five years, then this type of investment vehicle is a good option for you. If you’re investing for a child education for example, with this investment you have the option to make that person you’re investing for the beneficiary for the funds. Again, just remember leaving a whole lot of cash to a three-year-old is not advisable, so make sure your will is structured correctly so that the trust for your minors is structured the way you need it to be.

?Lastly when the advisor starts talking about portfolios and markets you’ve probably already blanked out and can’t remember this boring conversation. Within the investment the funds need to be allocated to a portfolio. The portfolio is where your money is being invested, so a very important conversation you probably can’t remember.

We are all surrounded by technology, so we have an inkling of what is going on in the world around us, use the information you already know in this conversation. Ask how will the Russia Ukraine situation will impact this investment or Covid lock downs? If global events have a high impact, then the funds are all over the world, and you need to know and understand that the money needs time to recover if something happens, so it’s for long term investments. If it has low impact, ask a question closer to home, how the interest rate hike will affect this investment. The higher the interest rate - the higher the return on the investment, that is normally a low risk and short-term type of portfolio. Ask how everyday occurrences will impact the return and decide if your happy with that impact or not.

Conclusion

When deciding to invest, determine what you want to invest, why do you want to invest it and how long do you want to invest for. If you can answer that for yourself, you already know before the meeting with your financial advisor if you want a unit trust type of investment or endowment type of investment. If you know that; the rest is just the icing on the cake. With understanding the essence of where you are investing, that will empower you as an investor; knowing that you understand where your money is going and what you are allowed to do or can’t do in the future.

Are you up for the challenge of staying present when speaking about investing money?

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Author:

Mariska van Wyk de Vries – Financial Advisor and proud IWCP tribe member.

Disclaimer

The information contained in this document does not constitute advice by IWCP. Any legal, technical or product information contained in this document is subject to change from time to time. If there are any discrepancies between this document and the contractual terms and conditions, the contractual terms and conditions will prevail. Any recommendations made by an adviser or broker must take into consideration your specific needs and unique circumstances.

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