5 steps to start investing
Now that you have an idea of the best ways to invest your money, here’s how to start in South Africa.
1. Identify your goals, time frame and risk tolerance
- Time horizon: Your time frame dictates your risk. The sooner you’ll need the funds, the more liquid you want to keep them. This way, a dip in the market (which always recovers, but we don’t know how long it will take) won’t destroy the retirement fund you’ll need in a year.
- If you’re nearing retirement, typically a low-risk investment, such as bonds, is the way to go. You would earn less, but the risk is minimal compared to stocks or crypto.
- If you’re younger, you have a long way to go before retirement so you might want to consider setting aside some funds for riskier investment options (like more speculative stocks or crypto).
- Risk: Be honest with yourself about how much risk you can reasonably tolerate. If it is going to be impossible for you to watch your portfolio drop in a downturn, you’ll want to use a robo-advisor (which is immune to emotional investing!) or invest in lower-volatility assets like bonds. Remember, an easy way to hedge risk is through diversification — investing in different assets so that your entire portfolio doesn’t depend on the success of one investment.
- Goals: Do you want to be highly involved in picking stocks? Are there some industries you aren’t comfortable investing in? Is your goal retirement or do you have other shorter terms goals? The answers to these questions, as well as those above, will dictate the best way to invest your money.
2. Decide how much help you need
Investors in South Africa who are just starting out or those who never had the chance to manage their portfolio may consider using a robo-advisor or consulting an expert. Investors who want to try their luck can always start by themselves, as many platforms have research tools and low barriers to entry. Make sure you use money that won’t impact your life if you lose it.
3. Choose your account type
Depending on your goals and investment time frame, you can choose several types of accounts:
- RRSP. Retirement annuities, or RA, are pension plans that build your capital on a tax-free basis while any contributions you make can be deducted from your taxable income. Typically, RAs are an accompaniment to your employer’s retirement fund that you might likely have joined at the beginning of your job.
- TFSA. You can open a tax-free savings account (TFSA) with many banks and financial institutions. A TFSA lets you grow your money tax-free. Contributions to a TFSA are not tax-deductible and you aren’t taxed on withdrawals. There is an annual contribution limit of R36 000 and some regulations around withdrawing.
- Individual non-registered accounts. This is the most common type of account you can open with any broker and start investing your money as soon as your funds land. This account has no limits to depositing and withdrawing but gains are taxable.
4. Open your investment account
Depending on who manages your account, there are 2 types of investments accounts to choose from:
- Standard account with an online broker. This is the most common option for those in South Africa who want to place their own trades and choose their investments. You will need to open a stock trading account, which is easy and usually free.
- Robo-advisor. This option is for those who want an algorithm to manage their account based on parameters set by the investor.
5. Deposit and invest
Once you open and fund your account, it’s time to put your money to work. Make sure to choose the best way to invest, depending on your financial situation and goals.
