Making your first contribution into a unit trust, be it a lump sum or monthly debit order, is a commendable first step on your investment journey, but there needs to be follow through. Chris Tisdall, Head of direct and private clients, discusses the next steps young investors can take to achieve positive long-term investment outcomes.
One of the hot topics discussed every year in July during National Savings Month is the importance of taking the first step on your investment journey, and simply getting started. While this is most certainly positive, it is also critical to take the next steps to ensure you build momentum.
Managing your personal finances means you have to be actively engaged to make your money work harder for you. It is a good idea to draw up and implement a plan that sets out clear short- and long-term investment goals, and measure your success annually and make adjustments if necessary. If needs be, seek the help of a good independent financial adviser.
Unit trusts: An easy way to get started
South Africa’s young adults are among the thousands of investors who choose unit trusts as their ‘go to’ product each year. Unit trusts offer many benefits including ease of access to financial markets, diverse asset class exposure and are suitable for a range of investment objectives and timeframes. Importantly, unit trusts are managed by investment experts so that you do not have to.
These products are ideal to help you achieve your goals, provided you avoid the many behaviour-linked pitfalls that young investors face. When it comes to investing, we are often our own worst enemy. Below are five tips to help young investors avoid these common traps.
- The debit order is a tool to achieve positive long-term outcomes. The best way to establish discipline is to decide how much you need to invest and then set up a debit order to your preferred product. You should do this as soon as you start earning a consistent income. It is critical that you adjust your debit order regularly to account for the impact of inflation on your money, and as you step up in life.
- Investing every month is a great start - but build on it. Once you are over the hurdle of starting, keep taking steps that will increase your chances of achieving a meaningful result. Draw up a plan, if you haven’t already done so and revisit this plan from time to time, making changes if your goals or circumstances change.
- Increase your debit order when you can. Consumer price inflation wreaks havoc on our monthly expenses; but few young investors realise that they should account for inflation when they review their monthly investment debit orders. If inflation is sitting at 6%, then you should consider increasing your debit order by the same amount to offset the negative impact.
- Your annual increase is not an invitation to spend more. A disciplined approach to monthly household spending will help you to make the right decisions when you receive a salary increase or an unexpected financial windfall. Try redirect at least a portion of this to your investments.
- Let your goals dictate your debit order; don’t anchor on the minimums. The minimum monthly or once-off investment limits that apply to unit trusts are not a guide to how much you should be investing. You should be investing the amount necessary to achieve your financial objectives within your monthly budget.
Starting a basic unit trust or tax-free investment
This Savings Month, consider taking the first step on your investment journey by committing to regular monthly contributions to a unit trust or tax-free investment, and to advance to the next level of financial wellbeing by making decisions in line with your financial goals.
Reaching the next level requires regularly revisiting your plan to see that you are tracking to your goals; increasing your debit orders to adjust for inflation; and adding to your investments after financial windfalls.