We all hear that we must save and invest money. OK, so you have saved up a nice amount. Now, how to invest it? What type of investment to make? The answers will depend on a number of considerations, the most important being your risk tolerance. This article attempts to shed light on some of the factors to consider when choosing between different investment options.

Factors to consider before making an investment

The first factor to consider when choosing between different types of investment is the principle of risk versus return. Generally, the higher the potential return that you can make on an investment, the higher the risk will be that you can also lose money with that investment. The reverse is also true: the lower the return, the lower the risk and the safer your money will be.

Related to the risk versus return principle is your personal tolerance for risk. If you are risk-averse (i.e. do not like to take chances with your money), you should look at investments with lower risk and settle for lower returns.

If you are comfortable taking risks with your money (i.e. risk-tolerant), investments with higher potential risks and returns can be considered.

The second factor for consideration is your age. If you should lose some or all of your investment, will you have enough time to recover from the loss? The older you are, the less time you will have to recover and you should consider choosing lower-risk investments which give lower but steadier returns than higher-risk investments.

A third factor to consider is how the costs of various investment options will affect the return on each investment. Costs include expenses like transaction fees and tax on investment income (e.g. interest, dividends and rent) you receive. Remember to determine the value of any time and energy you might have to spend to manage the investment, for example, when renting out a property.

Types of investment

The first investment every person should make is to build up a cash emergency fund. The purpose of an emergency fund is to provide cash for unforeseen emergencies so that you don’t have to go into debt to survive. Your emergency fund should not be exposed to any investment risk and must be immediately available because you don’t know when you are going to need it. Any investment returns on an emergency fund, e.g. interest earned, is a bonus.

Other cash investment options are fixed deposits and money market accounts. In these cases immediate accessibility of funds is not that important and you can look at longer investment periods with better returns, compared to your emergency fund. Normally these investments are safe as far as your capital investment is concerned. Due to reduced investment risk, average returns will be lower than on higher risk investments like shares.

There is a lot of scope to play with risk and return when it comes to investment in shares. Share investments are an option for investors at all levels of risk tolerance, as the risk of shares can range from very low to very high, depending on which shares an investor chooses to invest in. Money invested in shares is not accessible at any time. If you want to sell shares, you will want to wait until the share price is high enough to make a good profit. Share investments are generally kept for a longer period than cash investments.

The value of properties and rental income tends to keep track with, and often exceed, inflation. Rental expenses can be deducted against rental income to reduce tax. Just keep in mind that a direct investment in property, e.g. a residential property bought to rent out, might not be a passive investment. You should take into account the time you might have to spend on the management of a rental property.

There is no one-size-fits-all recipe for choosing an investment. As no-one can see into the future, investing is always a bit of a gamble.

Reference List

Accessed on 9 Sep 2015:

• http://aanblog.visitrek.net/wp/2015/10/28/understanding-the-fundamentals-makes-investing-easier/

Accessed on 18 November 2015:

• http://www.absa.co.za/Absacoza/Individual/Saving-%26-Investing/Reaching-your-goals/Emergency-fund
• http://www.absa.co.za/Absacoza/Individual/Saving-%26-Investing/Reaching-your-goals/Wealth-creation

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)