Now that the National Budget Speech and the President’s SONA has been delivered, many of us are left wondering how to plan for the future. Eskom remains power constrained, a Moody’s ratings downgrade seems inevitable, and COVID-19 threatens to destabilise the financial markets even further as major institutions cut their forecasts for the global economy.
In times like these, it’s easy to panic and make poor financial decisions based on a media headline instead of evaluating your financial life rationally.
Sue McLennan, Financial Planner at BDO, unpacks three of the most common excuses we hear for not planning financially for the future.
#1: There’s no point investing: our economy is in recession, we’ll probably be downgraded and the value of the rand will fall
It’s important to know that a negative GDP doesn’t mean negative market returns.
As for the rand, remember that any floating currency is by nature unstable. It rises and falls based on speculation, rumours, natural disasters and everyday supply and demand. A Moody’s downgrade would certainly mean lost investment opportunities, and we’d also see an increase in capital outflows. But that doesn’t mean rand-based investments have no value. More than 50% of South African companies listed on the JSE are multinationals, so you will automatically have exposure to international markets. In fact, there’s currently strong demand on the global market for SA Government bonds, which are giving investors good returns.
If you want to hedge your risks, consider a foreign-denominated currency product as part of your overall investment strategy. It’s important to understand that more than 50% of South African companies listed on the JSE are multinationals, so you will automatically have exposure to international markets anyway.
#2 The markets are too volatile right now. I’d rather hang on to my cash
There’s nothing wrong with having cash reserves. Perhaps you need them in an easy-access account for emergencies. Or perhaps you want a fixed deposit with your local bank. But don’t discount market investments during periods of intense volatility, as you may be able to enter the market relatively cheaply with good prospects for long-term returns. It’s like buying good quality items on a sale instead of waiting for the full priced item.
#3 I can barely make ends meet. How am I supposed to start investing?
Most people struggle to save, irrespective of what they earn. Somehow, lifestyle gobbles it up.
Before you decide you don’t have enough money to invest, ask yourself whether you’re falling prey to distractions:
- Advertising – don’t be swayed to buy things you don’t need and that won’t actually make you happy. Unlike the latest fad, long-term financial security will bring you peace of mind.
- Fear of missing out – are all your friends investing in the latest “hot stock” and encouraging you to join? Be wary of spur-of-the-moment schemes that look too good to be true.
- Putting appearance before common sense – don’t spend more than you can afford just to keep up with friends and neighbours. Be very wary of buying too many things on credit.
- Online shopping – the internet has made it so easy to buy things on a whim. Have you considered how much money goes to online purchases that you wouldn’t ordinarily spend?
- Subconscious biases – we all have biases; the key is to be aware of them so you can moderate your own decisions. For example, the recency bias says that humans tend to feel the pain of loss more than the joy of gain. Therefore, we often make decisions driven by negative market performance in the short term instead of realising that it could be part of a longer-term cycle.
We like to advise people to treat themselves as their own dependant: “pay yourself first”. That means, see investing as a ‘reward for effort’ and make sure that your debit order for your investments is paid before any expenses are deducted. This debit order should have an inflationary increase and be reviewed each year. Remember: compound interest will help you achieve growth on growth. It’s never too late to start saving.
Stick to your long-term life goals and investment planning objectives and do not let all the noise and hype about what is going on around you change this. Take advantage of the tax breaks on offer, like retirement annuities and tax-free investments, and make sure you have an annual wealth check-up with your financial adviser to see how you measure up against your lifestyle objectives.
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