BUSINESS NEWS - Investing is often presented as something complicated. Trying to make sense of the range of products available, the different asset classes, and the relationship between risk and return can be daunting to a lot of people.
In reality, however, the basic principles are extremely simple:
Start as early as possible. Save as much as you can. Be patient, and let time work in your favour.
To illustrate this, Morningstar put together some data on what it takes to save your way to R1 million. Using different monthly contributions and rates of return, it calculated how long it would take an investor to become a millionaire.
Show me the money
“The analysis used a range of return outcomes varying from the current return investors can achieve by putting their money in a bank account up to a maximum of 17% per annum,” explains Victoria Reuvers, senior portfolio manager at Morningstar Investment Management.
“Realistically, many investments can deliver higher returns in short periods of time, but 17% per annum was considered a large annual return and a prudent maximum, as delivering such a strong outcome would require some meaningful risk-taking.”
The findings are presented in the table below.
The first thing to note from this analysis is that even at just R200 a month, and at the lowest rate of return, it is possible to become a millionaire within the average South African’s lifespan. It would take just under 63 years to get there, which is almost exactly equivalent to the country’s current life expectancy.
These numbers are even more powerful if one uses the return an investor could reasonably expect from a local balanced fund. It is fair to assume that these unit trusts can deliver a 10% return per year over the long term.
If someone contributes just R500 per month and receives that rate of return, it would take less than 30 years for them to become a millionaire. That is well within a normal working lifetime.
This shows that at an undemanding monthly contribution and at an extremely realistic potential rate of return, becoming a millionaire is simply a matter of time. If an investor keeps up the monthly contributions and shows the necessary patience, it is well within reach.
Size matters
The second observation is perhaps even more powerful. It is illustrated by the column furthest to the right, which considers what happens when an investor makes contributions of R10 000 per month.
At this contribution rate, it would take just seven years to reach R1 million, even at the measly return of just 5%. But more significant than that is that the higher rates of return do not get you to R1 million exponentially faster.
Doubling the rate of return from 5% to 10% only shaves nine and a half months off the time it takes to become a millionaire. Tripling it to 15% speeds up the process by just one and a half years.
This is something that a lot of investors fail to appreciate. Almost always, the main focus in any investment discussion is on the return. That is what leads to extreme views such as thinking that you have to take all your money offshore, or you should invest in a particular stock or sector because it is the next ‘big thing’.
However, the return you are able to get on your investment is not the most important factor when determining whether or not you reach your goals. If you want to get to R1 million, the surest way of speeding up that process is to save more.
Read: How much you save is more important than the return you get
“Yes, performance is important, particularly when monthly contributions are small,” Reuvers notes. “But what this exercise shows is that, more important than performance, is a consistent contribution and the size of the monthly contribution.”
