Investment Portfolio during times like these

7/4/2008 4:06:34 PM

The answer to that is that savings is a behaviour that will determine your future lifestyle and if you do not save, all you are doing is postponing the financial pain to a later date. So the point I want to make is to urge all our readers to keep their savings plan in tact as far as possible and rather cut on something else in the budget if it possible.

There are numerous research reports that show the impact of starting a savings plan early. The longer you wait the bigger the percentage of income that needs to be saved to ensure that a certain lifestyle can be maintained.

Having a million rand sounds a lot but the interesting thing is that R1 million rand will only provide you with an income of +/- R5000 per month for a period of 25 to 30 years given certain long term growth assumptions. That is if you want to keep the purchasing power of the R5000 per month in tact. This means that the R5000 per month needs to be increased by at least inflation every year.

So let us say you want to save R1 million rand by age 65. How much will you have to save per month dependant on your age and the returns on your investment to achieve the savings target?

Table 1

What table 1 illustrates is that the longer you wait to save the more difficult it becomes to achieve the target. The longer you have before you need the savings the easier it is. Let’s say you earn R5000, to save R96 per month or 1.9% of your earnings is much easier than to save R2413 per month or 48.3% of your monthly income.

The point is that in difficult economic times the first place we cut is on savings but we do not realise what the long term impact is on our future well being.

Very often in difficult economic times people withdraw their savings or surrender their policies to access their policy fund value. Because of compound returns this means that we lose the power of exponential growth in future or the ability of your savings to create returns on returns or interest on interest. It was Isaack Newton that said that compound returns is the biggest discovery of the 20^th century. Because you earn interest on interest it means that the growth on your money increases much more. Let us say you have saved the R1million. If you achieve a growth of 10% it means that without you adding any savings to your portfolio you in effect save R100 000 per year.

If you withdraw your savings early in your savings plan you lose many years’ compound returns in future. The cost of this withdrawal is much worse than you think.

So the point is: Do everything possible to keep on saving and secondly don’t access your savings when the going gets tough. To rebuild your savings is very difficult and no matter what, you will forever lose the future earnings potential of your savings if you withdraw it now.

See your savings as seed. Every seed will in future produce a crop and this crop will not be one additional seed but will be a multiple of seeds. So if you eat the seed now you forever lose the crop. You can either take the pain now or in future when maybe you don’t have the time or the energy to earn and save for your retirement.

Well on this heavy note, keep your head up it will get better. There is always hope!