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MONEY CLINIC | I have R1.5 million in capital – what is the safest way to invest my money?

A Fin24 reader who has amassed a capital of R1.5 million wants to know what the best investment decision will be for minimal risk and a healthy margin. He writes:

I am 34 years old and in a dilemma on how I can invest a capital of R1.5 million. I was fortunate to accumulate this kind of money through largely informal trading over a period of five years.

The informal trading side has since taken a dip as the business is not moving forward anymore. A lot of competitors have invaded the space and I would like to try something else that will give me a healthy return and not add too much pressure. My fear is losing all the capital through bad decisions. I’ve considered an import business but I fear that experimenting with my money might have a devastating effect. 

On one hand, I am thinking of buying an apartment in Cape Town or Durban, where I can turn it into short-term rental space and earn income passively while my capital is preserved, but with the Covid-19 pandemic, everything is uncertain as we never know when tourism will be back on its feet again. On the other side, I’ve been thinking of investing in stock. I’ve tried that before with just R10 000, but capital growth on that test was not impressive to me over the last 12 months as I gained a mere 4% average for the three stocks in my portfolio. 

I am employed and I can live through other means without necessarily putting pressure on the capital. All I need is sound investment advice: what can earn me a healthy margin, while being less risky?

Hester van der Merwe, Wealth Manager for Ultima Financial Planner, and Financial Planner of the Year 2020 responds: 

Firstly, I want to congratulate you on amassing such an amount at your age.

Let us compare investing in a rental property to an investment in the equity market by looking at a practical example.

If an investor had invested in a two-bedroom townhouse 20 years ago, they could have received a taxable income from renting the property out. There might have been periods where the property was not rented out and during these periods, they would have been liable to cover any costs themselves (mortgage payments, rates and taxes etc.). 

If the property is situated in a good area, the investor should have had some capital growth on the investment over the period.

However, if the investor decides to sell the property, they will have to find a willing buyer for their preferred price. This might take some time and can pose a problem if he is in a hurry to liquidate the investment. Most importantly, they will still have a two-bedroom townhouse that is now 20 years old. On the emotional side, it would not have been much of a roller coaster ride, since (unless they had reason to obtain a valuation report) they would not really have been aware of fluctuations in the value of their investment. 

This investment can be suited to an investor needing a regular income from their portfolio. 

If they had invested in a diversified share portfolio, they would have received dividends over the period taxed at 20%. (The dividend rate would have depended on the different companies in the portfolio.) Should they need to liquidate the investment, they would have been able to make a partial withdrawal – not triggering capital gains tax on the entire investment. 

The broader diversification possible in the share portfolio also reduces the overall risk of the investment. (The property represents one sector of the investment world, in one geographical area, depending on a single tenant at a time.) On the emotional side, it might have been more challenging since market fluctuations would have caused the value of the investment to rise and fall over this period.

Emotional decision-making (selling when markets have dropped and buying again after the recovery) could have had an extremely damaging effect on such a portfolio.

Lastly, it is important to note that the investor will now own shares in companies that grew and developed over this period without any further capital layout on the investor’s side.

So, let us apply the above to your situation. 

You do not need an income from your investment; your objective is capital growth, but you do not wish to take on high risk in the portfolio. I would therefore recommend that you consider a unit trust portfolio. 

This will enable you have proper diversification in the portfolio whilst managing the level of risk. However, it is so important to note that there are a huge number of funds out there and you have to ensure that the funds included in your portfolio are aligned to your investment objective, risk appetite and investment term. 

Consequently, I strongly recommend that you partner with a Certified Financial Planner to assist you with investing your hard-earned capital in a portfolio suited to your needs. 

*Questions may be edited for brevity and clarity.

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