We all know that to be able to retire one day we need to save part of our income and not spend it all. The word “save” means different things to different people so you should be clear on what it means to you. We prefer to use the word invest, as save in our world conjures a picture of a saving or money market account whereas invest implies looking long term and investing in the great companies of the world, the stock market, equities.
We also understand that to most people cash sounds safe while equities sound risky, the reality is that the exact opposite is true. This is the main reason why most people are not financially independent at retirement. To retire comfortably we need to be able to control our emotions around investing.
If we put money away on a consistent basis into a simple diversified investment, success is guaranteed. This sounds like an oversimplification, but it is doing the simple things consistently that leads to success.
Let’s consider a very simple example. Wanda Retirewell is a 26-year-old female who has just started her first job. Her parents are still working because they failed to plan their retirement. This has led Wanda to make sure that she does not end up in the same situation. She gets advice and starts saving from her first paycheck. She saves 10% of her income every month until her retirement at 65. She invests these savings into a balanced investment fund targeting CPI+5%. She keeps the funds invested in the same fund once retired. Sticking to this strategy means Wanda can retain her same standard of living until the age of 100.
This may sound to good to be true, but the math works. However, if Wanda had made 1 small change to this investment strategy and instead of investing into a balanced equity fund, she saved into a savings account, her picture would be completely different. Saving into cash would mean that Wanda would run out of money at the age of 73 and have to go back to work or rely on family.
We understand that investing is scary for most people and also that the financial services industry does not do itself or their clients any favours by complicating things and making investing sound sophisticated. It’s not.
The graphic below shows the return various asset classes have delivered over a 20 year period and in orange one can see that actual return that the average investor achieved. This paints a sorry picture and is the result of investors not having and sticking to a long-term investment strategy that is personal to them and the life they want to lead.
Cash is not an investment, have your emergency fund but place the rest of whatever you can save into an investment strategy that you together with your Lifestyle financial planner, have determined will allow you to achieve your dream life.
Work with a planner who focuses on you and not just your money, one who will hold your hand when markets go through their temporary downs and long-term permanent highs. Have a plan and stick to it.
Dirk Groeneveld, Certified Financial Planner
t. 083 261 9287
Client Care Lifestyle Financial Planning
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