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Use shares as savings

Having recently addressed a group of people on this topic, I once again pointed out the shocking underlying truths surrounding the fact that South Africans simply do not save anymore.

In the early 1980s, personal savings as a percentage of personal income was around 8%. Barely 30 years down the line, we are faced with a negative savings rate, and personal debt can definitely be pointed out as one of the main culprits. Over the same period, the percentage of income that is used to pay off debt has increased from 42% to a whopping 77%.  

One person commented that now certainly has to be the worst time to start saving. Firstly, because markets currently pose extremely high risks and secondly, because people simply don’t have the capacity to save in such turbulent times.   

My response to the first part of his comment was that I absolutely agree with him about markets posing high risks at the moment, but that it has nothing to do with the issue of saving.

Unless someone possesses a crystal ball that can predict future share prices, no one really knows what these risks will ultimately do to share prices. Another mistake that investors often make is to think that the stock market behaves in a way that can be predicted, conventionalised or even understood.   

Let’s take a look at a few factors that have heavily influenced the South African stock market since the beginning of 2014:  

  • The prime interest rate has been increased six times so far, from 8.5% to 10.5%;
    By the end of 2014, inflation clocked in at 5.4%. In 2016, it’s been an uphill battle to fall below 6%;
  • Although the rand is doing better this year, it is still 30% weaker compared to the dollar at the beginning of 2014;
  • We have seen several geopolitical events, including the most recent Brexit saga;
    Stock market valuation levels are still extremely overvalued; and
  • Local politics has also taken a turn towards more uncomfortable levels since 2014, with the upcoming municipal elections in August causing a tremendous amount of uncertainty.  

These are only a few factors that can be highlighted, and these alone would definitely put the investor who is waiting for the right time to save, off the idea completely. These events are quite depressing, after all.

If investors had to make a prediction regarding prospective growth with only this data at their disposal, they probably would have had quite a negative outlook. Facts, however, have proven that despite all these and more uncertainties, the market has grown by 22% up to the end of June. But how?  

The answer lies in the fact that shares remain an excellent investment vehicle for saving over the long term. Yes, the risks are higher, but over time, it has been the asset class that has delivered the best growth. Lately, however, people have been warned against investing in shares, which makes the hesitant saver’s concerns worthwhile.

I have also issued several warnings against higher-risk investments in my finweek articles lately, but not because I’m trying to talk investors out of investing in shares or out of saving. I have issued these warnings against overweight positions in investment portfolios. Always remember that too much of a good thing is never a good thing at all.  

Most of these concerns can be laid to rest, however, by conducting a proper financial analysis. You can always consult a professional to assist you with this process and the planning surrounding it, if you’re not quite sure how to go about it.  

To the second part of the commentator's argument, I simply said that it is always a good time to start saving. In fact, saving should always form part of your monthly financial planning process, and not only when you think the investment world looks safe enough.

Saving is a lot like a good diet: maintaining good health involves sacrificing certain treats over the short term, so you can enjoy the benefits of good health over the longer term. People will always find some excuse for why they can’t save right now, and before they know it, it will be too late. The longer you can remain invested in shares, the better your chances of generating excellent returns on your investment.  

With July being National Savings Month, my advice is short and sweet – start today, and remember, even a 1 000km walk starts with your very first step.

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 21 July edition of finweek. Buy and download the magazine here.

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