Think twice before heeding financial ‘advice’ from family and friends
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By Dominique Bowen
“You can’t go wrong with buying a property.” “You’re young! Cash in those savings and take yourself to Thailand!” “You never know what tomorrow holds. Rather invest conservatively.”
It’s easy to take heed of these well-intended quips we hear from moms, dads, aunts, uncles … even colleagues and friends. And why wouldn’t it be? After all, you trust them, and can rationalise the choice to follow this ‘advice’ because the people around you want what’s best for you. But wanting what’s best for you and knowing what’s best for you are different things.
“Your friends may want to impart the same pearl of wisdom they followed that found them reap rewards, but the reality is our financial decisions are rooted in our upbringing, our own biases and personal financial situations,” says Ricardo Teixeira, a Certified Financial Planner (CFP) and chief operating officer of BDO Wealth Advisers in Cape Town. “Financial advice is best taken from a licensed financial planner who will provide an objective opinion and guidance relative to your situation and circumstances.”
Instead of following the crowd for a one-size-fits-all solution, it’s more rewarding (not to mention financially sound) to etch out the right financial path for yourself with the help of a professional planner.
“You can always bank on property”
Many young adults look at where their older relatives channelled their money and see property as a natural investment choice. It’s tangible. It’s bound to appreciate in value if bought or built in the right location. And it can provide a passive income … Or can it?
On the spectrum of passive incomes, property takes a bit more of a runaround before you can enjoy the benefits of rental income, as Kobus Kleyn, a CFP, shares: “There is the cost of maintenance, finance fees and estate agent fees to consider.”
Even if your property is ready, there’s little passive about finding the right tenants and even chasing for rent due.
The market also has its ebbs and flows; you could get lucky by investing in a buyer’s market, and then watching as property values potentially soar … but they could also plummet. And with a fixed asset like a property, selling under pressure further undermines the power you have in setting your asking price. With all that said, property does suit some. Just invest with your eyes wide open.
“Your employee pension fund is enough”
“Generally, company pension funds provide around 70% of your gross income at retirement. This means you are already 30% under the amount needed, assuming you will be working for one company over your lifetime or preserving your savings every time you change companies,” says Kleyn. “You also risk defaulting to the trustees’ fund selection, and the growth may not give you the result you’re after.”
It’s easy to leave your fate in strangers’ hands when you’re asked to simply check the contribution-amount box on your retirement fund forms, but rather take a moment to speak to someone who knows the risk of saving too little. If you opt for a lower contribution through your employer, look at tax-efficient savings vehicle options that can be used to supplement your savings. Remember: you have an annual allowable tax deduction of up to 27.5% of your income, to a maximum of R350 000.
“Get in on the crypto game”
“Cryptocurrency was designed as a currency, and the Bitcoin white paper was clear on its use. It is, however, being abused as a crypto asset, and therein lies the fault line,” says Kleyn. If your eyes grow wide and you begin to salivate as friends share stories of the earth-shattering returns they achieved on their crypto trades, be happy for them, but understand all risks involved before following suit.
“Herd mentality is fuelled by fear and greed. We tend to get greedy when we see the value of an investment increase, and then the fear of missing out sets in, so we invest more,” says TeIxeira. Suffice it to say, with “speculative investment” such as cryptocurrency, you need to be willing to lose, and lose big, if you want some skin in the game. “If you have spare funds, stick to a maximum of 5% exposure,” suggests Kleyn.
“Investing conservatively is your best bet”
We’ve seen how market plummets can impact stock values, but looking at the bigger picture, it’s important to be reminded that staying invested can have its rewards, too. Investing too conservatively won’t give you exposure to the benefits of growth assets, while putting all your eggs in a high-risk basket is just asking to dice with disaster. Balance in the form of a diversified portfolio is key to making a success of investing.
“Equities, property, bonds and cash are four of the most common listed asset classes for investing, and they all respond differently to economic changes,” says TeIxeira. “Being invested in all four asset classes gives you the best chance of ‘winning’ regardless of what happens in the economy. That’s the benefit of diversification.”