Need to know
- Understand 5 investment concepts that influence wealth growth: time horizon, compound interest, risk tolerance, asset allocation, and diversification, as explained by Andile Jonas of Momentum Savings.
- Long-term savings plans help you grow wealth over time, using structured investing.
- A financial adviser can help you apply these concepts correctly, so your investments match your goals, risk level, and time horizon.
Getting a grip on the investment world can feel incredibly daunting - but you don’t need to work your way through a financial dictionary to start growing your wealth.
By mastering these five concepts, you’ll have the building blocks to understand how long-term savings plans work and how to get the most out of them. Plus, you’ll have some great talking points to impress your mates at your next braai!
1. Time horizon: your financial runway
The first thing is to decide how long you need your money to grow. For retirement money, you want to be in the share and other markets for as long as you can. You must make provision from early on for when you will no longer earn a salary. Even a little money every month will go a long way thanks to compound interest, which we explain below. If your need is more immediate, such as education savings for your child in five years’ time, you’ll have a slightly different approach.
2. Compound interest: the wealth creation engine
The funny term ‘compound interest’ just means you’re adding interest on top of interest. When you invest your money, it grows by a certain percentage each month, and that amount is called your interest. This means every month, your basic amount available for growth is slightly bigger. You have started earning interest not only on your original investment (or capital) but also on your interest. And this is the magic investment gurus refer to, the multiplier effect that over the long term boosts the growth of your investment tremendously.
Looking to accelerate your retirement savings growth? Here are 3 strategies to save more for retirement.
3. Risk tolerance: taking risk on the chin
The amount of risk you can handle is the guardrails of how much hammering your nerves can take. We may be so scared of losing money that we don’t invest at all. This, in itself, is risky, because if you are not invested, your money cannot grow to keep up with inflation, which eats away at your future buying power. Also, if money is invested for the long term, it has time to recover from periods of market volatility. If you invest in the short term, you can be a bit more wary. But there are more or less risky investment options suited for every kind of personality.
Poor risk alignment drives panic-switching and a behavioural tax, eroding long-term growth.
4. Asset allocation: the best spots for your money
The big word ‘asset allocation’ just means you can allocate your money to different kinds of assets. The share markets, where the growth is best, are the most risky, and a bank account, where the growth is very low, is the safest. In between are also options such as property or bonds.
5. Diversification: betting on more than one horse
The tongue twister ‘diversification’ is closely linked to allocating your money to different assets. It means that you should not put all your eggs in one basket. It also means you shouldn’t follow your cousin’s advice to invest all your money in a “hot share”. This is next to Ponzi schemes the easiest way to lose money. Diverse investments mean you spread the risk over various kinds of assets, and when one does better and the other worse, you are not exposed to only the bad performer.
Make smarter savings decisions with expert guidance
A financial adviser is the best person to explain how these terms integrate to create a successful long-term savings strategy. They are best qualified to help you determine how much risk you can handle, how much you need to save, and for how long, to meet your bigger financial goals.
With the right guidance, these five key terms stop being abstract concepts and become practical tools that help you make better financial decisions.
This blog post was adapted from an article seen on FA News.
Get advice
The more you understand investing, the better your financial decisions. A financial adviser can help create a savings plan aligned to your goals and budget. With Momentum Savings, you can start investing from just R500 a month.
About the author
Andile Jonas
Head of Marketing at Momentum Savings
Andile Jonas heads up marketing and brand repositioning for Momentum Savings, Momentum’s long-term savings business. With more than 15 years’ experience across insurance, banking and investments, he has driven a shift toward a client-centred, digitally enabled brand narrative.
Andile is passionate about simplifying complexity, promoting conscious saving and supporting the critical role financial advisers play in shaping better financial outcomes for South Africans.
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