Paul Menge, Actuarial Team Leader at Momentum Savings, contemplates a ‘bachelor’ investment.
It seems like many people don’t regard marriage as the happy institution it used to be. According to a 2022 report by Statistics South Africa, the number of civil marriages recorded between 2013 and 2022 has declined by 29,5%.
This means there must be more people out there who are happy, or at least content, to be on their own.
Regarding investments, people often wonder whether it is better to “marry” their investments, lumping them together. Will that increase their power to grow?
We may know the magic of compound growth: When you receive interest on your investment, plus you receive interest on your interest. Is the power of compound growth bigger on one investment of R2 000 than on two investments of R1000 each?
Let’s first look at various aspects of the argument of lumping investments together.
How often people invest
Some people prefer to invest regularly from their regular income, say monthly or quarterly, and the industry calls this “recurring” contributions. Others prefer to invest when a once-off amount comes their way, and this is called “once-off” or “single” contributions. Neither way of investing beats the other – it’s personal choice and availability that determine the way of investing.
Spreading the risk
We may have all heard that it is good to spread your investments – don’t put all the apples in one basket. This is sound thinking. Investing in distinct types of assets, also called diversification, is a safer way to invest. One type of investment or so-called asset class may do well while another is suffering. For instance, property may do well while the investment markets like the JSE are taking a hammering.
It is also an accepted investment argument that taking more risk improves your chances of higher growth. Shares, for instance, will in the long term perform better than a money market investment. A money market fund is quite safe, but its growth doesn’t usually shoot the lights out. Some people may prefer to keep their higher-risk and lower-risk investments separate.
The counterargument is that if your investment contribution is large enough, you can invest in two or three different funds within the same investment product or contract. This will be spreading your risk well enough.
Benefit from lower fees
Sometimes a financial services company will reward you if you have more than one product with them, or more money in one product. The fees may be lower the more money you have. Often, having more money in a product doesn’t make an enormous difference to your growth. It is however something you can look at, just to make sure.
Specific goal
If you are saving for a couple of goals at the same time, you may prefer to keep each goal separate. How well is your savings for the special anniversary holiday growing? Is the education fund doing better than the growing-my-home-loan-deposit one? These are housekeeping decisions one can make for oneself.
Sometimes, people will also “stagger” their investments – especially retirement products like retirement annuities. Instead of taking out only one, they prefer three. The reasoning is that they can then access the retirement money at three different ages, say 55, 60 and 65. This means if they don’t need an income from all three immediately, the money that stays invested for longer can grow more. Any loyalty bonus will also increase.
That brings us back to our original question: If I have two investments of R1 000 each and one of R2 000, and they are all invested in the same fund, will the bigger investment grow faster than the smaller ones? The answer is generally no. The same underlying funds will generate the same growth, regardless of the size of the investment. However, the fees on the product can influence your outcome.
In the end, what matters more than investing regularly or once-off, or lumping investments together or not, is the duration of your investment. We also call it “time in the market”. Because your money can grow only if it is invested, and the longer it is invested for, the more it can grow.
Let’s look at this in terms of a once-off or single investment.
If you get a windfall of R50 000, this is how well it will do for you over a period of 10, 20 or 30 years. We assume that the money will grow at 12% per year, and round off the numbers.
Term (years) |
Future value |
Real value* |
10 |
R155 000 |
R87 000 |
20 |
R482 000 |
R150 000 |
30 |
R1 498 000 |
R261 000 |
* Real value is a way to see how your saved money would look today, even if we look at it years from now.
So, if you stick to it for long enough, even a mere R50 000 can increase to thirty times its value over thirty years. Your R50 000 can balloon to R1,5 million.
This shows that even a single investment is in a way like a good marriage – the longer it lasts, the better it gets. With time on your hands and the power of compound growth in your back pocket, you will hear joyous bells ringing even if you never tie the knot.
And if you want to hear a whole chorus of bells, invest your windfall or bonus or other extra money on top of your existing retirement savings or retirement annuity. With the tax rebate that government will give you for your effort, your cheeks will hurt from smiling at the outcome.
Boilerplate:
Momentum Savings (formerly Momentum Investo) is a tailored, long-term savings business unit within the Momentum stable. It offers uncomplicated savings solutions for young or new-to-savings clients, or those at any point on their savings and investment journey. With over R58 billion in savings entrusted to us, and more than 320 000 clients, Momentum Savings has a proven track record of expertise, with value-added features to encourage clients to reach their long-term savings goals consciously and reward them if they do. Our drive is to make saving easier through customised solutions and digital interactions. We offer retirement annuities and other savings solutions for long-term goals such as education, a deposit on a home loan or a holiday of a lifetime. Our offerings include lower minimum investment amounts, can be tailored to individual needs, and help clients stay focused on reaching their wealth-building goals.