Wealth generation has become a common buzzword in the 21st century. This is partly due to the high standard of living as well as the fact that individuals have unlimited needs and wants, for which a basic salary or wage, cannot keep up with. Thus, individuals often seek other means of generating income such as part-time jobs, starting a business or investing in growth assets. Knowledge of the different ways of generating and sustaining wealth has thus become crucial. To invest, however, one needs to expect a behaviour change. As Warren Buffet puts it “learn to spend what is left from saving”. In this post, we focus on the most basic asset classes which an ordinary citizen can invest in.
The most common and basic asset class is cash. Cash investments, which include among others, fixed bank deposits, call accounts, cash management trusts and notice deposits, usually come with low risk and return. They are tailored for the ordinary citizen who would like to put money aside for an emergency, a future purchase or to realize steady growth. The deposit rate (usually in nominal terms[1]) varies with the state of the economy and term of the investment. The better the state of the economy and the longer the term of investment, the higher the deposit rate or rate of return. For example, during the Covid19 pandemic, most bank deposit rates were ranging between 2% – 4% due to the poor state of the economy whereas, before the Covid19 pandemic, most bank deposit rates were ranging between 4% and 8%.
These rates of return, however, do not compare favourably with the returns offered by other asset classes. Ordinary citizens can apply for such investments either online or manually at an authorised retail bank or asset management firm of their choice with the necessary documents and sum of money. On average, the minimum amount to save/invest is R250. The downside of cash investments is that they usually fail to keep up with inflation in the long term. As a result, the invested money might lose value in the long-term.
The second asset class is government bonds. Government bonds are considered as low to medium risk assets and usually offer market-related returns. In South Africa, two types of government bonds are offered to the public through the RSA Retail Savings Bonds facility, which includes fixed interest rate bonds and inflation-linked bonds. The term of investment ranges between 2 years and 5 years for fixed-rate bonds and between 3 years and 10 years for inflation-linked bonds. Just like cash investments, the interest rate offered for government bonds depends on the term of investment and state of the economy. Currently, the interest rate offered for all types of government bonds ranges between 3.5% and 7.75%.
The fixed interest bonds have a fixed interest rate while the inflation-linked bonds have an inflation-adjusted interest rate. All individuals who are citizens or permanent residents of the Republic of South Africa and in possession of a valid South African identity number, and who have a bank account with any financial institutions in the Republic, are eligible to purchase government bonds. The minimum investment amount is R1000 and the bonds can be purchased on the Retail Savings Bonds website (online), telephonically or at the National Treasury premises.
The third asset class is property investment. However, because investing in physical property has some degree of complexity, we narrow our discussion to investing in property shares. One of the South African brokers “Easy Equities” has made investing in property more fashionable and less complex through the Easy Properties platform. Ordinary South African citizens, regardless of income or net worth, can invest in property shares for as little as R1 depending on the property share price. Investors receive a cash dividend depending on their investment holding. Investment in property is still considered a good investment, offering a wide range of long-term rewards. On average, the rate of return in the property market can amount to 10% per annum. Ordinary citizens can visit Easy Properties or any other accredited broker to invest in property shares.
The fourth basic asset classes are equities or shares as some put it. Equities are considered high-risk assets as there is no guarantee that you will get any returns let alone your capital back. However, due to the high-risk nature of the stock market, the returns are usually higher than most asset classes. On average, the returns in the stock market can amount to 12% per annum. For more information on shares, please read the article on the “The Ins and Outs of Buying Shares”.
[1] Nominal interest rates are rates that have not been adjusted for inflation. Thus, the real return on investment will be the nominal interest rate less the prevailing inflation rate.
NB: Please note this article does not constitute financial advice
