Wendy Myers, Head of Securities at PSG Wealth
In the same way as you think about the physical health and wellbeing of your loved ones, you also need to consider their financial security. Simply put, family investing is strategic planning to ensure financial peace of mind for generations. Shares can be used as a way to support this.
It is important to know what to consider when investing in shares, understand how trading can help build a legacy of financial freedom and intergenerational wealth, have an understanding of factors to consider when selecting an appropriate investment vehicle, and be aware of the need to manage a share portfolio as needs and goals change (and the benefits of being able to do so).
What to consider when investing in shares
When planning for your family’s financial future, a long-term view is essential. Your focus should be on long-term investing and minimising risk. In the context of family investing, volatility is not your friend, and the goal shouldn’t be ‘scoring fast’. Rather, the focus should be on growing and protecting wealth. This will help you realise objectives such as taking care of yourself and your spouse in retirement, supporting your children as they begin their adult lives, and protecting the wealth of your extended family.
How trading can help build a legacy of financial freedom and intergenerational wealth
The growth potential of shares means that a share portfolio can be a valuable tool in helping to build a legacy of financial freedom. However, investors must ensure they understand the concept of market risk before placing their hard-earned savings into the market.
Factors to consider when selecting an appropriate vehicle
There are various investment vehicles available to investors focused on intergenerational wealth creation. More information on each of these is provided below.
You can invest in unit trusts for most of your financial goals – from saving for longer-term needs to meeting shorter-term objectives. Unit trusts are collective investments made up of a variety of underlying investments that typically include shares, cash and bonds. Investors can select unit trusts appropriate to their individual risk profile and review the fund’s expenses on the applicable minimum disclosure documents (previously known as ‘fund factsheets’).
Exchange traded funds (ETFs)
ETFs are similar to unit trusts but they are listed on a local or offshore exchange. ETFs offer similar benefits to unit trusts except that being listed on an exchange means they are more liquid and easily traded. Unlike unit trusts however, ETFs are passively managed, which means no active investment decisions are made.
These products are designed to help you invest for retirement, and typically fall into three broad categories, namely pension funds, provident funds and retirement annuity funds. All three have some form of tax benefit and can (with limited exceptions) only be accessed at retirement, so they should be considered as long-term investments. All retirement products are subject to Regulation 28 of the Pension Funds Act which places various limits on exposure to the major asset classes, most notably a limit of 75% that can be invested in listed shares.
Tax-Free Savings Accounts (TFSAs)
As suggested by their name, funds invested into TFSAs are exempt from tax, including income tax, dividend withholding tax and capital gains tax on investment growth. You can contribute a maximum of R36 000 to this product per tax year, and there is a lifetime contribution limit of R500 000 per investor.
There are several options available to those wanting to invest offshore. The first option is to invest directly offshore in foreign-domiciled funds. To invest in such funds, you will first need to convert your local currency (rands) into your chosen foreign currency. To take the money offshore, you will need to either use your annual discretionary allowance or apply for tax clearance for an amount of up to R10 million. Once your money is offshore, and in your chosen foreign currency, you can use it to invest in foreign-domiciled funds.
The second option is to invest offshore indirectly by way of rand-denominated offshore funds. These funds have mandates to invest in foreign assets. You invest in rands, which the unit trust management company converts into foreign currency using its foreign exchange capacity which it then invests in offshore assets. All rand-denominated funds are priced in rands.
Other options for investing offshore include investing in offshore share portfolios that are managed and reported on locally or investing offshore via endowments.
Property can include both physical buildings and listed entities. Buying into property goes much further than just bricks and mortar. You can invest in real estate ETFs or unit trust funds, put your money into real estate investment trusts (REITs) or buy shares in a property-focused company which can deliver steady returns over time.
Managing a share portfolio as needs and goals change
There are a wide range of options available to investors who wish to realise the goal of financial freedom for their families. It is equally important to recognise that your investment goals and needs may change over time. The more material and complex your investment portfolio becomes, the greater the importance of seeking guidance from a qualified financial adviser to assist you in structuring your portfolio optimally in order to reach your family investment goals and ensure that these financial goals remain aligned with your investment timelines and risk profile.