BOITUMELO NTSOKO: Saving and investing are often referred to as the twins of the financial world, but sometimes one twin can be confused for the other which may lead to different financial outcomes. Do you know whether you’re a saver or an investor?
Hi, I’m Boitumelo and in this episode I’m joined by Richus Nel, who is a certified financial planner at PSG Wealth. He’ll talk us through the differing mindsets of savers and investors, as well as give us an example of the kind of growth each can expect from their portfolios. Welcome, Richus.
RICHUS NEL: Hello Tumi, and thank you for having me.
BOITUMELO NTSOKO: Richus, how does one determine whether they’re saver versus an investor?
RICHUS NEL: Tumi, in preparation for this discussion one very pertinent question came up to me – and obviously, we are professionals in the investment industry – this question that cropped up was quite outlying in saying that everyone should ask themselves why they are saving. There has to be a very specific reason why someone would choose to save versus choosing to invest. The only conclusion I can get to as to why someone would choose to save would be the right answer to the reasons to save.
If you have a time span or time horizon of less than two years, you’ve got no price movement, appetite or volatility appetite for that savings amount. If you’ve got a fixed obligation that you need to settle within that two years, maybe a car, you want to [pay for] a wedding or [buy] a house, obviously the most important [reason] has to be in the back of everyone’s mind.
If you save, you have to be happy with a sub-inflation – meaning a lower than inflation – return outcome.
If none of those four items are anywhere on your radar, you are not a saver.
BOITUMELO NTSOKO: Could you maybe go into more detail regarding the difference in mindset between savers and investors, and the behavioural biases each typically exhibits?
RICHUS NEL: Right. I think those are two completely different mindsets, and I’ll go through the thinking differences between the two because, as I say, they’ve got completely different focuses and objectives. Secondly, which is very important to me to actually [stress] during this conversation, is that …
The mindset of an individual shouldn’t change because of market conditions. It should only change when the objectives of that individual change.
You talk about the behavioural bias, mindsets. Let’s start with the thinking, because I think the thinking translates into some actions, and those actions obviously translate into investor experiences and outcomes. So, if we can start with the thinking, I think there’s a big difference in terms of thinking to consume something that already exists, versus creating something for consumption. So the savings mindset in my mind has got a mindset of consuming something that already exists. It’s not [for] multiplying something. It might side-pocket something and put money aside, but it’s definitely not multiplying it for consumption.
The other one is obviously the risk approach. The risk approach of a saver is that when risks increase they want to get out of financial markets. The typical investor mindset says when risks are high prices [adapt] to those risk metrics and prices drop, and it’s a good time to actually enter into markets.
The other one, which is quite pertinent to me, is how savers think about how they sort of go about their affairs. It’s a much more black-and-white sort of decision, a binary scenario. The market is either going to crash or it’s going to shoot the moon, but there’s no scenario in that mindset that things will just muddle through or improve over time, or things can be okay, versus a very much more diversified mindset from an investor’s mindset.
Now, if we take any sort of investment tycoon, mostly [Warren] Buffett, [who] normally hits the radar, but you can take any other successful investor as an example, I can’t say you would not ever get any of these tycoons who sold all their business interests due to market volatility or market risks. They might increase their cash portions, but they would never sell out of all their business interests. I think that’s what I want to stress in terms of the diversification.
Somehow the message gets skewed to investors out there, saying ‘when a recession is sort of approaching, sell all your business interests and flee back to cash’.
Referring to the control-versus-trust mindset perhaps for investors, they are happy to trust advisors and to get advice and delegate control to those managers, whereas a saver I think to a large extent wants to remain in full control of their own affairs.
The last point I want to take up is a top- or a bottom-line focus. For a savings mindset, in my mind that individual is focusing on the top line. In essence, they are disregarding the inflation impact on that top line, and they are disregarding the tax implication on that top line. An investor most definitely focuses more on the bottom-line result of their investment decisions.
BOITUMELO NTSOKO: Richus, would you say that a saver is more conservative than an investor, and that’s how it affects the management of their portfolios?
RICHUS NEL: They are most definitely more conservative. As I say, it’s perhaps to an extent also a personal trait.
If I can go back to the control matter that I talked about, if you take someone who is farming with sheep, obviously everyone is a lot more comfortable when all their sheep are in their shelter; but the investor knows that the sheep can’t remain in the shelter. They will actually starve there, and that’s not the place where they multiply and thrive. So they have to go out in the field and go and multiply to create a sustainable farm.
So I think most definitely there are more risks that someone who is investing is more comfortable to take on board than someone with a savings mindset.
BOITUMELO NTSOKO: Which financial products do investors and savers employ to achieve their goals?
RICHUS NEL: In essence, if we talk about financial products, in my mind it’s the investment vehicle which can range from tax-free savings accounts to normal voluntary discretionary investments. We can talk about retirement annuities, living annuities, etc. In all of them you are able to include both scenarios. You can have a savings focus in any of those vehicles, or you can have an investment focus.
Obviously, the savings mindset doesn’t really fit into that investment vehicle very well, because the returns are too low to really absorb the investment-fee structure. [With] the products I’ve mentioned you can obviously include underneath there something of an asset class, which relates to cash, which relates to listed bonds, and relates to listed property or listed equity. So the whole array of instruments is available.
In my area there’s very little we can offer someone who really competes just [with] retail bank cash solutions, because that’s their bread and butter. That is what they do, that’s what they specialise in, and they obviously run a [much] lower fee structure because there is not necessarily something like an advice component in there.
So from a savings mindset I would suggest it’s much better speaking to a retail bank than to a financial advisor.
BOITUMELO NTSOKO: How does one move from being a saver to an investor?
I think a saver becomes an investor once that individual is willing to be a business owner. I think very few people think about investment into listed properties or listed equities – which are considered risk assets – as proportionate ownership into those businesses.
But in essence, if you just take it technically, you become a business owner, even if it’s just proportionally in that business. Those businesses are businesses with real products, real services. They’ve got real expenses, they’ve got real clients, they’ve got real challenges, they pay their taxes. All of a sudden there’s a lot more variables which kind of determine whether that business is successful or not.
So, to answer your question, it is in that momentum where a saver takes their capital and says, guys, this return outcome from a bank savings account or fixed deposit is undesirable, and I’m actually willing to take this capital and invest it into real businesses as being the proportional business owner of that business.
BOITUMELO NTSOKO: And Richus, in a high-inflation environment where interest rates are also increasing, how can [one] both protect their funds or portfolios?
RICHUS NEL: Tumi, a very clear distinction here is what you are trying to protect yourself against.
There are two protections in my mind that people need. One is the protection against inflation, which you refer to, because over the long term there is a very interesting phenomenon which they call ‘the 72 rule’ in our industry. What the 72 rule means is that if you take 72 and you divide it [by] the existing inflation rate, it shows you over how many years your investment capital will halve. So if you look at that number, and let’s work at a 6% inflation, if you divide 72 [by] 6%, your investment capital halves over 12 years; this is an approximate. That is without taking any funds out of that savings account. So that’s the one protection that someone needs.
If you’re not going to protect yourself against inflation over the long term, you are going to spend your old age in poverty.
The second part that needs protection is the protection against fluctuations. And that you can do by getting the right asset-class selection for the appropriate time horizon that you actually need an outcome from.
And the last protection you need, and actually the phenomenon that you need to avoid at all costs, is where you avoid the permanent loss of capital. In that sense, by making use of reputable advice [on] product solutions and asset classes, which by far predominantly are located in the listed-instrument environment, [that] gives you the best probability to multiply your capital first of all in a risk environment, and to not lose capital permanently.
BOITUMELO NTSOKO: Could you maybe give us an example of how much growth an investor would get versus a saver on let’s say R100 000 over a fixed time period?
RICHUS NEL: We talked about the savings outcome, which I regard over the long term. There might be exceptions over the short term as interest rates spike, etc, or inflation comes down, etc. But over the long term, you should be happy with a lower-than-inflation outcome after taxes from a savings solution.
If you start looking at an investment solution, and you start including asset classes like listed bonds and other cash instruments, you can look at inflation-plus-1% to 3% above inflation, which again is a pre-tax scenario.
There are exceptions to that at the moment because of different sort of credit ratings assumed with certain investment products – South African government bonds, etc, which over the short term can have a higher interest rate than I mentioned. But over the long term these are the margins we are working with.
If you look at the listed property or listed equity space, again you’re looking at something like inflation plus 6% after fees, which you can see is in absolute contrast in terms of the outcome versus the saving solution.
BOITUMELO NTSOKO: All right. Thank you so much. That was Richus Nel, who is a certified financial planner at PSG Wealth.