Investment best option to save
A cut in the repo rate is the perfect opportunity to move from being a saver to an investor, if you aren't already one.
While a reduction in the prime interest rate is good for the economy, it isn't great for South Africans saving money in a bank account, says Elize Botha, the managing director of Old Mutual Unit Trusts.
When interest rates fall, consumers with savings in interest-bearing vehicles earn a lower return on their hard-earned cash.
Another thing working against those who keep their savings in cash, instead of investing it, is inflation.
Inflation erodes the value of your cash over time.
Long-term data from Old Mutual Investment Group shows that if you were to leave your money in cash, it will take 92 years to double the real value of your cash, ("real"
value means after inflation).
However, if you invested in equities (shares in companies listed in the stock exchange), it would take just nine years for you to double your money.
Yet, according to the 2017 Old Mutual Savings and Investment Monitor, only 2% of South Africans are investing their money in an equity-based investment vehicle.
"Cash is good for short-term needs and provides relative stability, but cash saved in a bank account or fixed deposit is seldom able to deliver real growth over the long term, as opposed to equities, which have proven to outpace inflation," Botha said.
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman," former US president Ronald Reagan is famously quoted as saying.
Many investors don't notice how destructive inflation can be over time. For example, a mid-sized family sedan that costs about R270 000 today will cost you about R480 000 in 10 years' time and more than R1.1-million 25 years from now. According to Old Mutual Investment Group, the average "vehicle inflation rate" has been about 5.8% since 1990.
The education inflation rate is higher, at about 9.2% a year. This means that one year's
tuition and boarding at a top Cape Town private school, which cost R215000 last year, would cost you R518000 in 10 years and R1.9-million in 25 years. Medical inflation is even higher at about 10.1% (which has been the average since 1990).
Kidney dialysis at a private hospital cost R192 000 last year. But in 10 years' time it will cost R502 000 for a year's treatment, and in 25 years' time it will cost more than R2- million for a year's treatment.
To beat inflation, your money needs to be invested in investments that grow after inflation, such as equities and listed property.
Equity, real estate and multi-asset unit trusts offer you an easy way to invest in the stock market and get exposure to asset classes that grow at a rate higher than inflation.
Unit trusts are transparent, highly regulated and relatively safe investment vehicles, and investors have easy access to their money, unlike money in a fixed deposit account.
They are managed by professionals who have experience in picking the shares, bonds or listed property in which to invest and they offer you exposure to a range of these securities for low-investment amounts.
This means you enjoy some protection from the ups and downs of, for example, a single share, because you will enjoy a range of returns across the shares you own.