Choosing the right investment starts with understanding what you want to achieve, so ask the questions that will shape a sound financial plan.
An investment strategy is not a once-off decision, it should evolve with changing markets and your personal circumstances while guiding how you can respond when markets become uncomfortable.
Investing remains one of the most effective ways to build long-term wealth, but successful investing is not simply about choosing a fund, product or platform.
A sound strategy starts with understanding why you are investing, what the money needs to achieve, when you are likely to need it, how much risk you can afford to take, and how the investment fits into your broader financial plan.
Too often, investors begin with the product rather than the plan.
They hear about a top-performing fund, respond to a tax incentive, follow a market trend, or invest because they feel they should be doing something with their money.
While taking action is important, investing without context can result in poor product selection, inappropriate risk exposure, unnecessary tax and investor behaviour that undermines the strategy over time.
Why are you investing?
At the outset, be clear about your motivation. Are you wanting to build long-term wealth, fund retirement, save for a specific future expense, create financial independence, or find a home for surplus income?
Or are you being influenced by market noise, social media or a fear of missing out?
Your reason for investing should shape the strategy. Someone investing for retirement in 20 years’ time should approach investing very differently from someone who needs capital protection over the next 18 months.
The clearer you are about what your wealth is intended to achieve, the easier it becomes to invest with purpose.
What must the money do?
Every investment should have a job. Are you saving for a property deposit, your child’s tertiary education, an overseas trip, retirement, a future business venture, or general wealth creation?
Each objective has a different time horizon, liquidity requirement, tax treatment and suitable investment structure.
A retirement annuity may be appropriate for long-term retirement funding because of the tax advantages it offers, while a tax-free savings account can be powerful for long-term discretionary investing where the investor has time to benefit from tax-free compounding.
A discretionary unit trust portfolio can work well where access to capital may be required, while a money market fund may be better suited to short-term capital. Problems arise when one investment is expected to serve several goals with different time frames.
When will you need the money?
Your investment time horizon is one of the most important drivers of strategy. The longer your time horizon, the more risk you can generally afford to take because you have more time to ride out short-term volatility.
Where capital is needed in the short term, capital protection should take priority over return-seeking. Equities and listed property can be volatile over the short term, but they are generally better suited to long-term wealth creation because of their ability to produce inflation-beating returns over time.
On the other hand, cash provides stability and liquidity but is unlikely to build meaningful long-term wealth after inflation and tax.
Could you need access sooner?
Even where an investment has a clear purpose, consider whether you may need access to the capital earlier than planned – bearing in mind that retrenchment, medical expenses, family responsibilities, home repairs or business cash flow pressure can all create unexpected liquidity needs.
This is why an emergency fund remains a critical foundation before investing aggressively.
Without accessible cash reserves, you may be forced to disinvest from a long-term portfolio at the wrong time, locking in losses and interrupting the compounding process.
As a general rule, money that may be needed in the short term should not be exposed to material investment risk.
Are your debt and cash reserves under control?
Before investing surplus income, be sure to assess your balance sheet. If you are carrying expensive short-term debt, credit card debt or personal loans, reducing these liabilities may provide a better outcome than investing – keeping in mind that the after-tax return required to outperform the interest charged on unsecured debt is often unrealistic.
Ideally, you should have a clear debt repayment plan, adequate cash reserves, appropriate risk cover and a realistic understanding of your monthly affordability before investing.
How accessible should the money be?
Liquidity is often overlooked when choosing an investment vehicle, especially when it comes to retirement funds. While retirement funds offer significant tax advantages, note that they are not designed to provide unrestricted access to capital.
Following the introduction of the two-pot retirement system, contributions are broadly split between a savings component and a retirement component, with the savings component allowing limited access before retirement.
However, it’s important to know that withdrawals are taxed and can materially reduce your eventual retirement outcome.
For this reason, it is generally not advisable to place all surplus capital into compulsory structures if you may need access to funds in the short or medium term.
A balanced approach may include retirement funding for long-term tax efficiency, a tax-free savings account for long-term discretionary growth, and a discretionary portfolio or cash reserve for flexibility.
Have you considered the tax implications?
While tax should never be the only reason to invest, it remains an important consideration. Retirement funds offer tax efficiency because qualifying contributions are tax-deductible within prescribed limits, and no income tax, dividends tax or capital gains tax is payable on growth within the fund.
Tax-free savings accounts work differently in that contributions are made with after-tax money, but all growth within the structure is tax-free.
It is also important to understand how withdrawals will be taxed. Retirement fund lump sums taken at retirement are taxed according to the retirement lump sum tax table, with the first R550 000 currently tax-free, although this amount applies cumulatively across retirement fund lump sums and qualifying severance benefits.
In discretionary investments, interest, dividends and capital gains may all carry tax consequences, meaning withdrawals should be planned carefully.
What level of risk is appropriate?
Every investor has a different relationship with risk. Some understand that short-term volatility is the price paid for long-term growth, while others become anxious when markets fall and may be tempted to disinvest at the worst possible time.
But, while understanding your risk tolerance is important, remember that it is only part of the equation. You also need to understand your risk capacity, being the degree of risk you can afford to take given your time horizon, income needs, assets, liabilities and overall financial position.
What will it cost and how will it be managed?
Fees matter because they compound over time in the same way that returns do. Platform fees, fund management fees, advice fees and product costs all reduce your net return, so it is important to understand what you are paying for and whether you are receiving value.
Remember also that the cheapest option is not always the best option – and that appropriate advice, disciplined rebalancing and good investor behaviour can add significant value over time.
An investment strategy is not a once-off decision. Markets move, legislation changes, personal circumstances evolve, and portfolios drift from their original allocations.
Over time, your portfolio may need to be rebalanced, your contributions adjusted, your risk exposure reviewed and your structures reconsidered. As such, a sound strategy should guide not only what you invest in, but also how you behave when markets become uncomfortable.
How does this fit into your broader financial plan?
No investment should be viewed in isolation. Your investment strategy should be considered alongside your retirement plan, estate plan, tax position, risk cover, debt, cash reserves, business interests and family responsibilities.
For example, an investor with sufficient retirement funding may be better served by building discretionary capital for flexibility, while someone underfunded for retirement may need to prioritise retirement contributions.
Ultimately, successful investing is not about timing the market, chasing returns or finding the next best fund – it is about clarity, structure and discipline. Our advice, therefore, is to ask the right questions before investing, as the answers will determine not only where you invest, but how likely you are to remain committed when markets test your resolve.
– Hannah Myburgh is an experienced certified financial planner at Crue Invest (Pty) Ltd where she has also been instrumental in spearheading the information technology and customer relationship management advancements of the practice.
