As it is Youth month we find it fitting that we talk about starting your investment portfolio. With many of the obstacles facing youth in today’s day and age, let alone even thinking about saving or investing, there is the insurmountable task of trying to save together R15 000 to R20 000 to meet the minimum for a lump sum investment.
There is an ideal opportunity to start your investments as various investment companies have reduce their minimums to R500 for debit order investments.
Debit orders make investing a habit
Setting up a debit order can have an initial shock on your finances, but it forms part of the other debit orders for expenses which are essentially the most important contributions each month. Overtime investing will become a habit and you will find yourself adjusting your budget accordingly.
A debit order simplifies investing – you won’t have to keep thinking about how much you will be able to save this month, and you won’t have to start the contribution process again each time you want to invest.
You are invested earlier, maximising return
Many investors will try accumulating savings in their bank account before they eventually invest. By having a debit order, you remove the emotion and temptation of spending your savings. Most importantly you will be invested from the outset giving your portfolio a chance to grow. Whereas it could take you over 3 years to accumulate some of the minimum lump sum amounts saving R500 a month.
Average costs and avoid timing risk
An investment fund is made up of individual units, when you invest you buy these units at a certain price. Many investors fall into the trap of trying to time the price at which they invest. Trying to invest when the market is performing the best. The markets are impossible to predict and often you miss out on returns when trying to invest at the perfect time or invest all your money at the wrong time. Either way as you invest a lump-sum you are locked-in to that price.
A debit order averages your costs each month, as some months you invest when prices are relatively low as other months you invest when prices are relatively high. Over the long-term your average cost of your investment will be lower than if you had to invest a lump-sum at the end of each year.
Beware of inflation
One of the biggest setbacks to your investment returns is inflation. Therefore, it is always a good idea to include a small escalation into your debit order. Start with an annual escalation of 5%, or by how much you expect your salary to increase each year. You will be able to protect yourself against inflation and have a steady increase in your contributions for the foreseeable future.