Financial Literacy for Students in South Africa 2024-2025

The importance of having a firm understanding on how money works cannot be stressed enough, and as a student, it just about the time to learn a rule or two about money, investing, savings, risks and debt. For conventional wisdom tells us that it is not about how much one makes, but rather, how resourceful and ingenious an individual can be with his/her current resources that determines just how high they will rise financially.

On this page we bring to you much of what you need to know about setting financial goals, investing, and risk.

Principle 1: Identifying your saving and investment goal and sticking to your strategy

Developing a strategy that is linked to your investment and savings goal is the first step to building sustainable returns.

Identifying your Savings and Investment Goals

Identifying your savings and investment goals

Any listed company has a strategy outlining where that company wants to go and how and when it is planning to achieve this. The same can be said about an individual looking to achieve long-term financial success. As an investor and saver, you should know where you want to go (identify your goals), how you are going to achieve this (investment and savings strategy), and the time frame associated with those investment and savings goals.

Having a set plan in place can help you stick to your strategy, stay the course during periods of uncertainty and ultimately reach your goals within the desired time frame. The below steps can be used to set up a plan:

1. Define your goals

The first step would naturally be setting your different goals. What are you saving or investing for?

2. Defining a strategy

What amount do you need to put away each month, and into which savings and investment vehicles?

This step will require you to consider your monthly cash flow. Comb through your bank statement and identify what items you don’t need on a monthly basis. Draw up a small cash budget, reduce non-essential expenses and leave yourself a set budget for entertainment purposes.
Build an element of emergency savings into your budget. One thing this pandemic has taught us is the importance of having accessible emergency savings put away. Having three months’ salary put aside will mean not having to withdraw investments early in case of an emergency and allowing your goal-based strategy to play out.

3. Reduce short term debt

Short term debt like credit card expenses should be eliminated as soon as possible, as the high interest rates eat into monthly budgets which can be set aside for saving and investing. Look at ways to eliminate debt exposure by eliminating short term expensive debt first. In the long run this will mean more funds to but away into savings and investments.

4. Find the correct savings and investment vehicles that suit your goals

This will require some reading and research. Never be afraid to ask for help. Asking questions expands your knowledge and no one is going to know your goals better than you do.

5. Set up automatic monthly contributions to your savings and investment accounts

These amounts are calculated when drawing up the budget in step 2.

6. Allow your money to grow over the time frame set from the start

Do not jump in and out of long-term investments and savings. This will increase the fees paid and not allow your money to work over the long term and achieve long-term investment and savings yields.

The last step will allow compounding to take place. Compounding leads to increased returns over the long term as a result of profits and returns being re-invested. By not withdrawing money from your investment, the capital base grows. Returns and profits are higher from a larger capital base, making your goals achievable in a shorter period.

Regardless of your goal, reaching it means aligning a strategy to the objectives of the investment. Once a goal and strategy are defined, selecting the correct investments becomes easier to do. Whether your goal is a 5- or 50-year plan, there is an investment and savings vehicle that will suit your profile and timeline, assisting in making those goals a reality.

For shorter-term goals, the following savings instruments can help achieve goals as well as assist in diversifying portfolio risk:

1. Instant access cash deposits

Instant access cash deposits are perfect for flexible savings, i.e. saving for next year’s school fees or a holiday. Savings Account and Money Maximiser offers the flexibility to contribute amounts as you wish, and you can withdraw the funds should the need arise.

2. Notice deposits

FNB’s 7 Day Notice requires a minimum initial deposit of R20 000, while the 32 Day Flexi Notice deposit allows for a minimum initial investment of R1 000. In general, the longer the notice period, the higher the return.

3. Fixed deposits

FNB’s Fixed Deposit is a good way for the low-risk investor to guarantee a return over a set amount of time between 7 days and 60 months. FNB’s Fixed Deposit locks in your capital for a set period but provides a higher return than the notice accounts. This is an ideal way to earn a fixed return – making budgeting for your goals easier, as returns consist of a set of regular pre-determined interest payments.

Long-term investing requires patience and, by allowing your investments to compound over a long period, goals can be achieved faster. For longer-term goals the below investment vehicles (which should be given enough time to achieve sustainable returns) can be used to compile a balanced portfolio:

4. Exchange-traded funds (ETFs)

An ETF is a passively managed investment that tracks a basket of shares or an index. This is a low-cost option to buy exposure to many shares that make up an index. Investing in ETFs offers flexibility in terms of how much you contribute, the ability to cash out should you choose to do so at any time, and a low initial contribution from as little as R500. ETFs are a good long-term investment vehicle and can be bought and sold through a stockbroker like FNB Share Invest or FNB Stockbroking and Portfolio Management.

5. Unit trusts

Unit trusts allow the investor to get exposure to different asset classes, like cash, bonds, property and equities, with a single investment. FNB offers five funds that have been designed to match your goals and developed to ensure that investors get the maximum benefit during their desired investment period.

6. Tax-free savings account (TFSA)

Investments in ETFs and unit trusts can also be made via an FNB TFSA structure. When using a TFSA both the capital appreciation and income are tax free if you do not exceed the maximum contribution of R36 000 per year and the R500 000 limit over your lifetime. Contributions can be made monthly or in a lump sum and funds can be withdrawn with short notice should they be required (but keep in mind that this affects your contribution limits). Designing your investments through a tax-free structure increases your overall returns due to the tax benefits, accelerating your goal timeline.

7. Retirement annuity fund (RAF)

A retirement annuity fund is a long-term retirement savings and investment vehicle. An RAF allows you to grow your savings tax free like a TFSA with no tax on interest, dividends or capital appreciation. There are a few differences regarding the contributions and withdrawals. When putting money into an RAF, you must wait until you turn 55 years old before converting your contributions into monthly annuities. Should you withdraw funds before that, you will be heavily taxed. Once you have reached 55 years of age, up to one-third of the fund can be cashed out as a lump sum, and the remaining two-thirds will be paid out as a living annuity over the period of retirement. When investing into an RAF your money is tied up; thus, an RAF has been designed specifically with retirement and achieving long-term retirement goals in mind.

Sticking to your Investment Strategy

The rules regarding excess cash

Deploy your excess cash responsibly

Those fortunate enough to have some excess cash on hand are in a unique position within the global context as workers across the world continue to grapple with the economic fallout of Covid-19. While there may be the temptation to utilise excess cash flow on shorter-term expenses, recent events have emphasised the importance of positioning your finances for an uncertain future.

Paying down debt

With the reduction in interest rates, this may be a good time to restructure some your debt. Excess cash can be utilised to eliminate more expensive shorter-term debt. Store and credit card debt is regarded as expensive debt and eliminating amounts owed through these facilities will ensure that less of your money is going towards paying interest.

Taking on debt

The reduction in rates has also meant that consumers can now afford more debt-funded assets. However, one must always keep in mind that increasing debt levels increases risk, regardless of the cost of debt.

Investing

The March 2020 pullback in asset prices has meant that some of your long-term investment goals may have been interrupted. However, it has also presented investors with the opportunity to acquire assets at discounted prices. A major concern for most investors is current market volatility and the market moving against them. However, short-term volatility is not indicative of a long-term trend. Investments held long term can withstand more volatility than investments held over a shorter time frame. Historically, staying invested in the market for the long term has resulted in success.

Savings and building up emergency cash reserves

The importance of having extra funds easily accessible was made clear during the recent lockdown shock. Even if you were not personally affected, at some point in your life you will very likely require some extra cash for an unplanned expense, halt in the economy, or a job change. Having three months of expenses saved in an accessible vehicle means not having to divest from longer-term investment vehicles, which will further enhance your ability to stay the course.

Excess funds present an ideal opportunity to reduce debt, put goals back on track and provide that safety net in emergency savings. Your hard work has resulted in some extra cash, now make that money work for you.

The rules regarding excess cash

Principle 2: Building a core portfolio

Construction of assets in a portfolio

Once the investor’s risk profile, goals and timelines have been established he or she can begin identifying assets that meet those criteria. A key determinant of successful long-term investing is about finding the appropriate assets that match your risk profile and that will place you on a path to achieving your goals, as well as then having the discipline and patience to wait for the strategy to pay off.

Different asset classes

Cash

Cash investments include money in bank accounts, savings accounts and term deposits and can provide stable, low-risk income in the form of regular interest payments.

Shares

Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. Shares also provide returns in the form of capital gains if sold at a higher price than what was originally paid. Shares are one of the most popular asset classes and offer investors direct exposure to company performance.

Bonds

A bond is a debt instrument issued by a government or corporate to support spending and obligations. Essentially an investor is lending money to the government or corporate and in return receiving interest on that loan. This is known as a fixed income instrument as interest payments known as coupons are received by an investor in fixed percentages over the term of the bond. On bond expiration the investor receives his or her capital back. Bonds are generally less volatile than equity but offer higher returns than cash.

Property

Property exposure can be obtained through physically purchasing an investment property, acquiring property company shares on the JSE, or through a real estate investment trust (REIT). A REIT is a company that owns, operates, or finances income-generating real estate. REITs pool the capital of numerous investors and acquire assets in the form of properties. This makes it possible for individual investors to earn dividends from real estate investments without having to buy, manage or finance any properties themselves. The entry cost into a REIT investment is the price of a single share.

Building the correct portfolio

Building a balanced fund means having exposure to these different assets that assist in reducing portfolio risk and as well as allow that investor to achieve his or her goals. The typical asset classes that we will explore in a compilation are shares/equity, bonds, property and cash.

The proportion of assets per profile below are for example purposes only and are to give you an idea of some of the combinations one can use to meet different risk profiles. Please make sure to always consult with an investment professional before making any decisions around final compilation of asset classes.

The short-term investor

Cash

The risk-averse or medium-term investor

The risk-averse investor will be looking at assets with low risk and steady incomes. This will also be true of the medium-term investor since there may not be time to ride out major volatility by the time they aim to reach their goals. The typical compilation will include low exposure to equity and high exposure to fixed income instruments such as bonds or money market accounts offering fixed interest rates.

Shares 20%
Bonds 40%
Cash 40%

The cautious investor (someone close to retirement)

The cautious investor, although sensitive to risk, will be willing to take on more risk than the risk-averse investor above. They would typically look at more exposure to higher-growth assets such as shares and property, but still have most of the portfolio aligned to low-risk investments such as cash and bonds.

Shares 30%
Property 10%
Bonds 30%
Cash 30%

The long-term investor

The long-term investor is someone looking for exposure to multiple assets, willing to take an element of risk but looking to balance his or her portfolio with some cash and bond investments. This investor is looking for an element of growth and has time to make back investments should they depreciate capital levels.

Shares 40%
Property 20%
Bonds 20%
Cash 20%

The high-growth investor

The high-growth investor is someone looking to grow funds aggressively and who has a much higher threshold for risk. This investor understands that capital is being risked and is not investing with money that he or she can’t afford to lose. Most of the portfolio will be high-growth equity and property investments with little to no investments in lower-risk vehicles.

Shares 70%
Property 30%

The above refers to building and constructing a portfolio on your own. An option for investors looking for a balanced fund, is to invest in unit trusts, as unit trusts are compiled with the above asset classes with both goal and risk in mind. By reviewing the fact sheet, investors can understand the risk involved with the fund as well as what the fund sets out to achieve. A unit trust can be a one stop shop for the beginner investor looking for access to the markets in a balanced and diversified manner. For the experienced investor, unit trusts can also be utilized to diversify overall portfolio risk, by incorporating certain unit trusts into their overall investment and savings portfolio.

When balancing a portfolio, its always key to understand both your goals and the risks you are prepared to take on your saving and investing journey.

If you are at all unsure as to how you should compile your investment portfolio, make sure you speak to an investment professional.

Building a portfolio aligned to your goals and risk tolerance

A well-balanced investment portfolio will look different for each investor. Unfortunately, there is no single investor template that can be replicated across the board since each investor has their own goals and risk profile that determine the composition of their portfolio.

Why invest in a range of different assets classes?

Creating a balanced portfolio allows risk to be spread across a range of investments and asset classes, reducing overall portfolio risk. Exposing yourself to a single asset means placing all your eggs in that basket. If that asset performs well it might mean higher returns, but if that asset price falls, there are no other assets to limit portfolio losses.

Investing in a range of assets that align to both goals and risk is the formula to successful long-term investing.

If I am consistently saving and investing, why the need for an emergency fund?

The realisation of having extra funds accessible was made clearer on the back of the global pandemic. At some point in our lives we will need some extra cash for an unplanned expense, halt in the economy or a job change. Having 3 months of savings in an accessible vehicle means not having to divest from longer term savings and investment vehicles. Savings and investments require compounding. Pulling out funds early can cause early withdrawal penalties as well as reduction in compounding. To avoid this, having an emergency fund in a vehicle that can be accessed without causing harm to your nest egg is a vital component of a savings strategy. Emergency funds must be created to ensure goals are not interrupted.

Linking portfolio construction to your goals and time frames

It is easier to plan a journey after choosing the destination. The same can be said about investing. Without a goal in mind there is no purpose to the investments being made, which could hamper your commitment to the investment and its outcomes.

Start by identifying the different long-, medium- and short-term goals. Saving for that vacation in 12 months’ time is a short-term goal, while looking to pay for your child’s education in three years’ time will be a medium-term goal. Long-term goals will typically have a time horizon of five years or longer and normally revolves around retirement investing. Determining the time will help you determine which strategy to follow and what assets to invest in.

Short-term goals will be matched mainly to cash investments, medium-term goals may allow for the inclusion of more, higher-growth volatile asset classes at lower weightings, while long-term goals will mostly be matched with higher weightings in higher- growth but more volatile asset classes. This is because a longer time frame allows for more volatility in a portfolio as the investor will have more time to ride out periods of low returns.

Linking a portfolio to your risk profile

This refers to your willingness and ability to take risks. A risk profile is essential for determining proper investment asset allocation for a portfolio. Investors not willing to risk capital depreciation or with a shorter time frame before having to reach their goal will be considered to have a low risk profile and investors who don’t mind risking capital balances or have sufficient time before having to achieve their goal will have a high-risk profile.

Risk trade-off theory states that the higher the risk, the higher the potential return needs to be to compensate for that risk. That is why investments with little to no risk like a savings account offer much lower returns than stocks where large capital losses can occur, or funds doubled in a few quick trades. Building a balanced fund means fully understanding the objective of your investments and the amount of risk you are willing to take on. Investing without these considerations can result in incorrect asset allocation and disappointing investment outcomes.

Today there are different investments to suit every goal and risk profile. As much as this is a positive, it also means a larger selection of assets, which increases the risk of incorrect selection and allocation. Linking investments back to the objective is one way to understand that investment and whether it ties into both your goal outlook and expected return.

Balancing a portfolio means exposure to a different range of assets, each selected for a specific purpose. Whether it is bonds, shares, unit trusts, ETFs, money market accounts or property, linking these investments to risk, goal and timeline is a solid strategy for sustainable and successful investing.

How to build a share portfolio

Building a balanced and well diversified portfolio is the aim of every long-term investor, but it can be easier said than done. Building a balanced portfolio means having exposure to different types of company shares with varying characteristics such as risk, growth, size, industry, and track record. Building a share portfolio can be likened to building a wardrobe. Building your wardrobe is a far less daunting topic than building a portfolio, however both share similar characteristics. By looking at the share triangle above, we can start building our portfolio:

Basics:

The fashion experts – we are not those – simply enthusiasts, often talk about the concept of a capsule wardrobe. Simple, safe, high-quality pieces in blacks and neutrals. Yes… life would be easier if we made smart purchasing decisions at the core of our wardrobe. Your investment portfolio is no different. Think of those items of clothes that are worn weekly, because they serve as the basics of your outfit. The items you trust most and will turn to when in doubt. Building the foundation of a portfolio means investing in reliable, well-diversified assets that will hold your portfolio in good stead over the duration of your investment journey. ETF’s allow investors to access a wide range of assets through a single investment, spreading risk and increasing the probability of sustainable returns. Cash also plays a vital role in the foundation, as cash investments allow predictable income streams in the form of interest income, and are highly liquid. This means cash can be used when needed so that long term stock positions don’t have to change. Having three months of your monthly salary put away allows you to build a safety net, meaning you can leave your investments untouched and allow compounding to take its magical effect.

Timeless statement pieces:

Like the perfect pair of sneakers or that black dress, you add high quality stocks to your portfolio next. Big companies with good growth potential in industries that will last. Anheuser Busch, Richemont, Anglo America, Shoprite. These stock selections should be based on what YOU know as a human and a consumer. If you find that none of your friends go to Pick n Pay anymore – do you really think they will be able to increase profits? Selecting your timeless stocks should always be linked back to profitability and what big companies have a future in this new world of ours. Blue chip shares form part of the top 40 shares by market capitalisation on the JSE. Building onto your foundation of cash and ETFs through blue chip shares allows a combination of returns in the form of increases in share prices and stable dividend income.

Grudge purchases:

No one ‘wants’ to buy pyjamas or running shoes or a sensible ‘sports hat’. But these are the things that will make you a little more comfortable when you sleep, get fit, or stand around at a sports day. Buying pyjamas and running shoes are not supposed to be easy decisions.

You need to make sure that you sleep comfortably (you spend a quarter of your life doing it) and you don’t want to break your ankle. Midcap investing is similar. This part of the market can be very rewarding – if you make the right choices. Midcap stocks are typically not in the top 40 but can offer a lot of potential. Capitec and Mr Price were midcaps once. Think of the up and coming businesses you frequent and check out who owns them. You may have a love for Steers burgers… did you know you could buy Famous Brands on the stock market? Adding midcap quality stocks to your portfolio allows you to potentially increase returns at a much faster rate than just having exposure to low risk instruments. Remember the higher the risk, the higher the reward and vice versa. Having a balanced portfolio means reducing risk as much as possible but allowing potential upside should these shares perform.

Trends:

Trends tend to last and they tend to be recurring in nature. Think of classic RayBan shape sunglasses, the perfect loafer and floral dresses. These will surely last more than one season. A theme for example is the shared economy where things like Airbnb and Uber become more user friendly than hotel rooms and owning your own car. Now we are also talking about the fourth industrial revolution where computers and digital will change the way we do everything. While not a sure bet – many of the companies in this space end up changing the world and you want to be a part of them. Allocating a small bit of your portfolio to themes is a sure-fire way not to miss out. Tesla was a theme, improving the technology around electric vehicles as well as solar technology, and became a talking point around the world. Although volatile this share is just over 500% up year to date and having exposure, even if small, will increase overall returns in a portfolio.

Imagine you could press the reset button on your wardrobe. Would you do things differently? Would you have all the random bits in pieces you currently own or would you start out more conservatively. Perhaps with safe, high-quality basics and a few statement pieces?

Principle 3: Diversification, asset allocation and risk management

What diversification really means, and how local and offshore asset classes can be used to both diversify and manage risk.

Diversifying your portfolio

Diversifying your portfolio by taking into account asset allocation and risk management

Successful savers and investors do not put all their eggs in one basket. Instead they look for exposure to multiple assets and instruments to reduce risk. When saving or investing through a single asset only, an investor has significant exposure when the price of that asset goes up or down. Yes, if it goes up, he or she might earn a good return, however if the price moves against them so their wealth will fall. Spreading risk across multiple investments and savings vehicles is known as diversification.

Diversification is not an exact science and is something that is unique to each portfolio and and the investor’s or saver’s goals. There is a misconception that diversification means purchasing many assets in a portfolio and the more assets one has the better diversified the portfolio. For example, simply increasing the number of shares in a share-only portfolio does not assist in balancing overall portfolio risk, as increasing shares is only effective to a certain point as seen on the graph below:

Limits of diversification in equity-only portfolio

Source: Rack Education

Of course, by increasing the number of shares in your portfolio you can diversify away company specific risk. But market risk remains regardless of how many shares you invest in.

Tips for diversifying effectively :

1. Invest and save through multiple asset classes

An investor and saver must not invest in only one asset class. Different asset classes respond differently to economic changes and having a healthy balance of asset classes means spreading risk as some will go up and some will go down in certain market events. Investors and savers should look to shares, bonds, money market accounts, commodities, and properties to diversify portfolio risk.

2. Invest and save in different geographic locations

Exposure to different geographic locations through offshore investments must be considered when looking to balance risk in a portfolio. Exposure to a single country makes an investor or saver vulnerable to the economic activities and political risk within that location.

3. Invest in instruments that do not move together

Your different asset classes and instruments in different locations must behave differently to one another. For example, gold tends to move in the opposite direction to the market and can be used effectively to diversify equity risk. Cash investments are linked to the repo rate; a decrease in the rate will impact the cash investment negatively, so look for assets that would do well if a rate cut were to happen like property shares. Likewise, investors based in emerging markets like South Africa will benefit most from a diversification perspective by investing in developed markets such as the US, UK and Europe since sentiment often favours one or the other.

Investing offshore

Investing offshore has become a key talking point on the back of the Covid-19. Although there is no guarantee that investing offshore will yield higher returns than local investments, it is key in achieving a diversified and balanced portfolio. Everyone has heard the saying “Don’t keep all your eggs in one basket” – and the same applies to the geographic spread of your investments. South Africa currently represents less than a percent of the world’s economy so by only investing locally you may be limiting your investment growth potential and missing out on possible growth opportunities elsewhere.

Diversifying a share portfolio geographically has similar benefits to diversifying across asset classes. Should the JSE see a reduction in growth, your investments in international markets might see higher growth and balance your returns out. By limiting your investments to South Africa, all your risk is concentrated in one location. Should anything negative happen in South Africa, it will be reflected in your returns. Investing offshore might be something you have wanted to do but haven’t been able to execute due to the daunting nature of taking money offshore. Questions asked by local investors include, which countries to invest in, which financial assets to select and which currencies to favour. Answering these types of questions can be challenging and put investors off investing offshore before they even start. However, navigating offshore investments can be done and the reward is well worth it. An investor must keep in mind that developed economies such as the USA, UK and Japan might experience slower growth compared to the likes of the JSE during certain economic cycles, but the growth is more consistent and therefore carries lower risk. In rand terms, international markets have performed relatively well during the global shutdown compared to local markets, mainly as a result of the rand depreciation. Investors with geographically diversified portfolios would have been able to counter local pull backs with international growth.

How does one invest offshore?

As a South African there are two clear options.

1. Physically transferring money offshore and buying assets

The first entails a South African going through exchange control and physically transferring their hard currency offshore. This will allow you to move your cash and savings to an international bank account or directly into an investment in your currency of choice. The implications of this method is that the funds are then permanently abroad and never have to return to SA, unless you decide to do so. With this option in mind South African citizens can take a maximum of R10 million a year offshore once SARS has granted a tax clearance certificate.

If this tax clearance certificate has not been issued by SARS, South Africans can still take up to R1 million offshore per year (referred to as your Single Discretionary Allowance). Once the money has cleared, the rands may now be sitting in an international bank account in the currency of the investor’s choice. This investor will now have currency exposure, meaning should that currency strengthen against the rand, there will be a rand gain if brought back to local shores. Should that investor then purchase financial assets such as shares in foreign currency, the investor will now have exposure to international markets as well as foreign currency and has hedged himself or herself against slow financial market growth in South Africa and a depreciating rand.

2. Investing in a foreign fund

This entails investing in a rand-denominated unit trusts or an investment fund such as the Ashburton Global Leaders ZAR Equity Feeder Fund. International funds allow South Africans access to offshore exposure through a rand-based local investment. Here the capital is pooled and invested into a balance of investments and savings assets on your behalf. The fund manager is a professional with a wealth of experience in investing offshore. An investor can also purchase an international Exchange Trader Fund (ETF) that will give him or her exposure to certain international indices. The Ashburton Global 1200 for example is an ETF that tracks the performance of the 1 200 largest companies in the world. Similarly, the Coreshares S&P 500 ETF tracks the performance of the S&P 500 index in the US. The investor, however, must decide on which ETF basket to buy, when to buy and when to sell. Unit trusts, foreign funds and ETFs are easy pathways to international exposure.

Access for all

Both options give South African investors access to international exposure. The investor must decide on which is the best option personally and for the goals associated with offshore exposure. International investing should be seriously considered by all South African investors to ensure well diversified and balanced portfolio risk.

Using a locally listed ETN to get exposure to the top global companies

Investing offshore sounds complicated sometimes it can be. Questions such as how to take Rands overseas, which countries to invest in and which shares and investments to allocate capital to, can scare South African investors from following through. FNBs innovation allows South African investors to gain exposure locally to international companies via listed ETN’s. These inward listed international companies are some of the biggest by market capitalisation in the world and are familiar to most investors due to their sheer presence globally and impact on our daily lives. FNB will also assist with regards to which companies they suggest investing in through their stock picks and educational podcasts, making international diversification that little bit simpler. You can enjoy exposure to these companies by purchasing these ETN’s from as little as R10 which represents the fractional exposure to these companies that can trade in excess of $ 3 000 providing immediate offshore exposure.

What is an ETN?

An Exchange traded note or ETN’s are unsecured debt securities that track an underlying index of securities and trade on a major exchange like a stock. ETNs share similar characteristics to bonds, however, do not have fixed interest payments. Instead, the prices of ETNs fluctuate like stocks and offer similar exposure to buying and holding a company share.

How international exposure is gained:

You can buy these FNB ETN’s listed on the JSE that provide direct exposure to an underlying company like, Tesla, Coke, Facebook and many more. You will have the option of 2 ETN’s:

Amazon (short code – AMAZOQ) – the Q after the company name means the ETN will provide exposure to the company without currency risk
Apple (short code – APPLEC) – the C after the company name means the ETN will provide exposure to the company with currency risk

Deciding on option Q or C, depends on the preference of the investor. Investing in a foreign currency allows hedging against Rand depreciation and the option to further diversify a portfolio.

The importance of Global diversification has been magnified during the global pandemic. South African long-term investors need to align their offshore strategy with their investment goals. The JSE represents less than a percent of the global GDP and investors looking for international exposure need to do so in a manner that helps diversify risk through investments in companies and industries not offered on the JSE.

Investing offshore has been on the lips of most South Africans as of late, as the importance of diversifying risk globally has been magnified during this lockdown period. International markets have performed better than the JSE during the Global pandemic, with US tech stocks rallying, allowing those South African investors who have had exposure the ability to balance below average local performance. Although there is no guarantee that offshore investing will yield higher returns than the JSE, it is key to diversifying and balancing your portfolio risk.

Everyone has heard that saying, “don’t put all your eggs in one basket”, well the same applies to investing internationally. Putting all your eggs in the JSE may be limiting your investment growth potential and missing out on possible international growth opportunities.

Diversifying a share portfolio not only relates to different sectors and asset classes, but geographic locations as well. Should the JSE experience slow growth post the pandemic, investments internationally may balance the overall portfolio performance, allowing returns to be made. Hence the statement balancing your portfolio.

By limiting your investments to South Africa, all your risk is concentrated in one location. Should anything negative happen in South Africa, so your investments will underperform. Investing in different locations through FNB ETNs allows the reduction of concentration risk, meaning sounder investment strategies, allowing the best possible chance of generating sustainable returns in an affordable and efficient manner.

You can invest via the FNB Online Share Trading platform by searching FNB ETN or any other stockbroking platform that offers access to JSE listed instruments.

Principle 4 : Use compounding to your advantage

Reinvesting returns and allowing the magic of compounding to take effect, is a track-proven strategy used by successful savers and investors.

The magic of compounding

Compounding is one of the most important concepts in investing and saving and must be fully understood to ensure high growth and sustainable returns. It sounds very impressive, but what does the term really mean and how does it affect you as an investor and saver?

Simply put, compounding is what happens when you take a number and increase that number repeatedly by a percentage. Each time you increase the number by a percentage, the number is larger because it was previously increased by that percentage. By way of an example, in a savings account if your initial savings amount is R100 and you receive 10% interest or R10.00 in the first year, taking advantage of compounding would mean reinvesting the interest earned so that your R110 earns 10% or R11 in year two. It means you will earn 10% each year on the initial R100 plus on the interest that has accumulated.

Let’s examine this more closely and fully investigate the difference between fixed interest returns and compounding. Let’s say you have R1 000 and will receive a 10% return each year on your money but you decide to withdraw your interest every year.

Fixed return of 10% per year:

Year 0 (when you start): R1 000
Year 1: 1 000 + 100 = R1 100
Year 2: 1 000 + 100 + 100 = R1 200
Year 3: 1 000 + 100 + 100 + 100 = R1 300
Year 4: 1 000 + 100 + 100 + 100 + 100 = R1 400
Year 5: 1 000 + 100 + 100 + 100 + 100 + 100 = R1 500

After five years you would have a total of R1 500 and a total return of R1 500 – R1 000 = R500 or 50%.

If you decide to reinvest the interest you will enjoy the full effect of compounding over the five-year period, keeping in mind that now you won’t just receive 10% based on the original capital amount of R1 000, but you will also earn interest on interest.

Compounding interest at 10% return:

Year 0 (when you start): R1 000
Year 1: 1 000 + (1 000 x 10%) = R1 100
Year 2: 1 100 + (1 100 x 10%) = R1 210
Year 3: 1 210 + (1 210 x 10%) = R1 331
Year 4: 1 331 + (1 331 x 10%) = R1 464
Year 5: 1 464 + (1 464 x 10%) = R1 610

After five years you would have a total of R1 610 and a total return of R1 610 – R1 000 = R610 or 61%. The average return per year is 12.2% and not the 10% interest earned if you were to withdraw the interest. By allowing your money to compound over a five-year period it means that you receive an additional 11% overall and 2.1% per year. The difference in return widens even more over longer periods. This is the magic of compounding, and if you allow this to take effect in your investment portfolio you will increase your total return substantially over a long-term investment period.

For an investor there are two main streams where compounding comes into play:

1. Compound interest

Like the example above, this comes into play when you place your money in a savings account or money market instrument where interest is the return you receive. For compounding to take full effect, all interest returns should be left in the savings account to accumulate over a long period. Interest will be earned on the interest already earned as the capital base becomes bigger. By withdrawing the interest, the potential capital base is reduced, meaning less interest for the saver over time.

2. Compound returns

Compound returns relate to investing and investment returns. Unlike interest, investment returns can be volatile (move up and down). There is a higher element of risk when investing on the market; however, with that risk comes greater potential returns.

Like an interest instrument, an investor receives returns, but from two sources – dividends (the company shares profits) and capital returns (share price increases).

Dividends represent a portion of a company’s profits paid to shareholders. A dividend yield is the dividend received divided by the share price. If a stock has a price of R100.00 and pays a R5.00 dividend the company would have a 5% dividend yield. For compounding to take effect, that dividend of R5.00 must then be reinvested back into your share portfolio, either to buy more of the same share or another share.
Capital returns represent the increase in a company’s share price. If an investor bought a share at R100 and the share price were to increase to R110.00, the return on the share from a capital point of view would be R10.00 or 10%. Selling the stock and removing the R10.00 from your portfolio would eliminate the compounding effect on the R10.00 returns. To take advantage of compounding an investor would either hold on to the stock, or sell the stock at R110.00, realising a R10.00 gain in the portfolio, but then reinvest the full R110 back into another investment.

Both actions will have the impact of widening the investor’s capital base on which he or she can enjoy higher dividends and capital growth.

The bottom line
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Albert Einstein
Nicholas Riemer

Compound interest and investment returns

In traditional savings vehicles interest returns are compounded over time when they are reinvested. For an investor there are two sources from which compounding can take effect – capital returns and dividends (when reinvested).

Compound interest

For long-term savers, compound interest comes into effect when money is placed in a savings account or money market instrument where interest is the return received. For compounding to take full effect, all interest returns should be left in the savings account to accumulate over a long period. Interest will be earned on the interest already earned as the capital base becomes bigger. By withdrawing the interest, the potential capital base is reduced, meaning less interest for the saver over time.

Compound returns

Like an interest instrument, an investor receives returns, but from two sources – dividends (the company shares profits) and capital returns (share price increases).

Dividends represent a portion of a company’s profits paid to shareholders. A dividend yield is the dividend received divided by the share price. If a stock has a price of R100.00 and pays a R5.00 dividend the company would have a 5% dividend yield. For compounding to take effect, that dividend of R5.00 must then be reinvested back into your share portfolio, either to buy more of the same share or another share.
Capital returns represent the increase in a company’s share price. If an investor bought a share at R100 and the share price were to increase to R110.00, the return on the share from a capital point of view would be R10.00 or 10%. Selling the stock and removing the R10.00 from your portfolio would eliminate the compounding effect on the R10.00 returns. To take advantage of compounding an investor would either hold on to the stock, or sell the stock at R110.00, realising a R10.00 gain in the portfolio, but then reinvest the full R110 back into another investment.

Both actions will have the impact of widening the investor’s capital base on which he or she can enjoy higher dividends and capital growth.

The bottom line

Compounding – whether in savings or investment vehicles – is a proven strategy to achieve long-term goals faster. Make sure you are allowing your wealth to compound over the long term by staying the course and remaining committed to your investment strategy.

Principle 5: Protecting what you have worked hard to build

In the early stages of our lives, our investment and savings goals are achieved through hard work and discipline. Once wealth is created, it should be protected. Protecting the wealth, you have created over time is just as important as creating it.

Protecting what you have built

Protecting the wealth, you have created over time is just as important as creating it. In the early stages of our lives, our investment and savings goals are achieved through hard work and discipline. Once wealth is created, it should be protected. Smart planning is essential in ensuring that your assets are protected even when you are no longer around. You may have numerous investments both locally and offshore that need protecting should something happen to you. There are essentially three key steps in protecting what you have built to last beyond your lifetime.

1. Draft a will

The first step in protecting what you have built is to get a valid will in place. Should you already posses a will, it will require regular updates to ensure that all your assets are included. Your will should clearly state who your assets will be left to in the case of your death as well as nominate an executor of the estate. The executor should be an institution or someone that you trust and that has the necessary skills and knowledge to effectively perform the complex estate administration formalities and tasks. FNB offers executorship services through a team of qualified and experienced estate administrators. Although not the nicest thought, proper will planning is essential to ensure your wishes are carried out when you can no longer do so. You can draft a free will via FNB Online Banking, or you can draft a will with one of our specialists at no extra cost.

2. Develop an inventory and asset fact sheet

Developing an asset fact sheet is another important step in protecting wealth, especially if your assets and investments are in multiple geographic locations. Building a detailed spreadsheet with explanations in preparation will assist in ensuring assets are distributed correctly in the event of your death. An asset fact sheet will also assist the executor of the estate in locating all the assets of your estate. Financial institutions, account numbers, locations and certificates of ownership will all be needed by the executor to wind up your estate correctly. Details such as asset values can be left off this list as these can be identified and calculated by the executor when needed and excluding this type of information adds an element of security.

3. Communicate with loved ones

The last step in wealth protection is to let your loved ones know that you have created a will and an accompanying asset fact sheet. Discussions must be had on the location of both the will and fact sheet. Also ensure that your loved ones know who your nominated executor is and who to contact. By taking these essential steps, you ensure that the assets you have built and created over your lifetime will be protected in your preferred manner. Your family will also know what to do should something happen and be able to support themselves knowing that the correct steps have already been taken. Wealth protection is vital, and the relevant documents must be updated regularly.

Protecting your assets through a trust

Trusts remain very popular arrangements through which many South Africans benefit from holding assets without physically owning them, most often with a view to passing the value of those assets on to beneficiaries. A key element in both the popularity and effectiveness of such trust structures is that the founder of the arrangement can appoint one or more trustees who are tasked with administering the trust in the best interests of its nominated beneficiaries.

What is a trust?

Essentially, a trust (sometimes referred to as a trust fund) is a formal transfer of assets via a legal document to a trustee or multiple trustees, with instructions to hold the assets for the benefit of others (beneficiaries). A key element in both the popularity and effectiveness of such trust structures is that the founder can appoint one or more trustees who are tasked with the administration of the trust.

Living trusts

Testamentary trusts/will trusts

This type of trust come into effect after death and is provided for in a will. In most cases the reason for creating such a trust evolves from a need to protect the ultimate beneficiaries, such as minor children, surviving spouse, and children or other dependants who cannot look after their own affairs. The provisions of the trust are set out in the will and, for all intents and purposes, the trustee is legally obliged to enforce these provisions. The provisions will usually provide for the termination of the trust on fulfilment of certain conditions.

Here are some of the reasons for using a trust:

Asset management, protection and estate planning during your lifetime. One of the main reasons for forming an inter vivos Trust is estate planning. Assets are moved into the trust, either by way of a loan or donation. Proper planning and appropriate advice are required.
Protection of minor children or beneficiaries with developmental disabilities. Trusts can be used to protect the interests of children until they are old enough to handle their own financial affairs. A separate trust can be managed for each individual child to avoid unfairly favouring one child over another in respect of funds. The same applies for beneficiaries with developmental disabilities who need assistance in managing their affairs.
Limited financial skills of dependants or beneficiaries. Trusts can be used to protect the interests of dependants or beneficiaries with limited skills in financial matters.
Continuity/perpetual succession. When a person passes away his/her estate might take months to be finalised. Beneficiaries will only be able to access estate assets once the executor has gone through the required process and formalities. A trust, however, is a separate vehicle and will not be affected by the death of the founder; it will continue to operate as before. Furthermore, the will of a deceased person becomes a public document on death, whereas a trust remains a private affair and is not open to public scrutiny.
lnsolvency of beneficiaries/claims by creditors and matrimonial disputes. The trust property does not form part of the personal estate of the beneficiaries until vesting takes place, in other words until the beneficiaries actually receive the property. In a discretionary trust, this only occurs when the trustees exercise the option to distribute assets to beneficiaries. Assets held in trust are therefore protected from the claims of the beneficiaries’ creditors.
Indivisibility of assets. Certain assets, such as farm property or certain business entities, are not always suitable for dividing among beneficiaries. A trust is an ideal vehicle for taking ownership of such assets, keeping the assets intact and allowing the beneficiaries to fully appreciate the benefit of the assets concerned.
Tax implications. In certain circumstances, income from a trust can be split between beneficiaries, thereby reducing tax liability. However, it should be kept in mind that where income is accrued to certain beneficiaries, it could be taxed in the hands of the donor in accordance with Section 7 of the Income Tax Act. It is important to note that trusts should never be created for the sole purpose of deriving tax benefits.

FNB Fiduciary specialises in the formation and administration of a wide variety of trusts. As professional trustees, we are experts in navigating clients, co-trustees, and beneficiaries through the complex trust landscape.

Trusts can be created for a wide range of purposes and objectives. We can assist with creating and administering the following trust solutions:

Family trusts – For asset management and protection, plus estate planning during your lifetime.
Testamentary trusts – For protecting the inheritance of your heirs, including minor children.
Charitable/Philanthropy trusts – Managing and receiving donations to public benefit organisations by individuals or through corporate social investments.
Settlement trusts – Managing funds from court orders or other settlements.
Curatorship – Managing the assets of individuals that have legally been declared incapable of managing their own affairs.
Shari’ah-compliant trusts – Testamentary and living trusts adhering to strict Islamic Shari’ah guidelines.
Trustee secretarial services – Managing the administration of trusts on behalf of trustees.

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