Thank you for your questions.
I want to put aside R250 000 into an ’emergency fund’ in case I lose my job or have some kind of unexpected expense. That means it needs to be available at fairly short notice. Where can I earn a reasonable return on this money? The 3% interest rate from my bank is really unappealing and below inflation.
With the lockdowns now exceeding 15 months, and unemployment at record highs, the general recommendation of having six months of expenses saved as an emergency fund has proved to be useful for those who have been unable to work, those who have lost their jobs, or those whose income has reduced due to the current economic environment. An emergency fund has provided a cushion to those that have experienced a reduction of income but may not have been enough for those that have lost their jobs and were unable to find new employment.
Your R250 000 emergency fund is relative to your financial position, and I assume that you have had a look at your income versus expenses to use this amount.
With the low interest rates, the bank interest rates have reduced and are currently around 2.5% to 3.5% depending on the institution, which you correctly have noted is below inflation, as well as considering taxation, you are losing the value of your capital in real terms.
In the chase for higher-yielding assets, you would be taking on slightly more risk than having your money ‘sitting in the bank’ – by using a unit trust and access multi-asset income funds, that can be accessed within 48-72 hours and would provide you with a higher yield, but also increase the risk slightly.
Multi-asset income funds – depending on their mandate and benchmarks as not all are structured the same – are built with various bonds (fixed rate, floating rate, inflation-linked, and offshore bonds), cash, property and equity. These generally provide a higher yield than the bank and have a recommended holding period of 12-36 months due to the fluctuations that can put your capital at risk.
You will note most fund fact sheets in these types of funds, with fund values dropping from the first week of March 2020 to the end of March 2020, due to market uncertainty, and then sharply recovering in April, May and June. If your capital was invested at the beginning of March 2020 and you needed the capital two weeks later, you would have lost some of your initial capital (*underlying investment fund dependent).
The idea of an emergency fund should be that it’s available when you need it, and so I would recommend that you do some cash flow modelling with your Certified Financial Planner to determine the amount you possibly could place in these types of investment funds to plan for that emergency correctly.
I’d like to invest the balance in a long term (7-10 years) investment, but not in SA or rands as I’m looking for international exposure. Is the Vanguard S&P 500 ETF the simplest and easiest way to put this money to work? Or is this silly? Low fees, and good exposure to the US seems like a good investment to me. I already have a brokerage account to do this.
The Vanguard S&P 500 ETF (VOO) has delivered a 17.13% annual return as of May 31 2021 over the last five years.
Its 10 largest holdings – Apple, Microsoft, Alphabet, Amazon, Facebook, Berkshire Hathaway, JPMorgan, Tesla, Johnson & Johnson, and Nvidia – make up 27.3% of the ETF.
Markets move in cycles, and the S&P 500 Index has benefitted from a growth cycle, with growth stocks providing high returns over the last decade – of the top 10 holdings only Berkshire Hathaway, JPMorgan and Johnson & Johnson make up the Vanguard S&P 500 Value ETF (VOOV), where the index focuses value investing. The value investment style is looking at the company’s fundamentals and ignores the hype stocks like Tesla, which trades at 598 times earnings for example. The Value ETF has given a return of 12.85% over the last five years, over 4% less than the regular S&P500.
Many market commentators and fund managers believe the market is overpriced and will correct, and the value investments will be better placed; however, knowing exactly when this will happen is for those who have a crystal ball.
An experienced investor would recommend a diversified investment portfolio that calculates market risk, equity risk, currency risk as well as concentration risk. Then again there are those that will HODL no matter what.
* All values mentioned are correct at the time of submission. This article does not constitute investment or financial advice. The author recommends that you take particular care to consider whether any information contained in this article is appropriate given your objectives, financial situation, and particular needs. A risk profile and a financial needs analysis is recommended with a Certified Financial Planner CFP® before any investment decision is made.