The difference between saving and investing

 

Saving and investing. The two words are often juxtaposed in everyday speech, but the savvy investor is able to tell the difference between the two.

Saving is the simple act of postponing spending. For example, you decide you want to spend R10 000 on a holiday and to make this possible, you save R1 000 a month for 10 months. At the end of the period, you have exactly R10 000 – your money has earned little to no interest during this time but you have set aside enough to meet your savings target.

Investing is when you use the money you are saving to earn a return, for example, by investing directly in equities on the stock market via a unit trust fund or by investing in bonds or listed property. The key difference is that if you left your savings untouched for a year, you would still have the same or a similar amount of savings a year later. However, an investment left alone for a year, is likely to have generated a return depending on interest rates and market returns.

One of the easiest ways to save your money is by keeping it in a bank account. While you will earn some interest, this is usually much lower than the return you could earn by investing your money in a low-risk unit trust fund.

Aligning your savings or investment goals with the correct investment fund

As you progress through life, there are various events or occasions which will require you to set funds aside. These include:

  • A deposit on a car or a house.
  • An annual holiday.
  • Fees for secondary private school.
  • Tertiary education.
  • A financial legacy for your heirs.

These goals will each have their own savings or investment timeline, which will help you determine what is the best investment fund for you. The good news is that unit trust funds can be used for all of the above goals. However, you could choose different types of funds, depending on your goals and timelines.

For example, saving for an annual holiday could mean a 12-month timeline. In this case, you would be looking for a lower-risk fund, such as the Discovery Diversifed Income Fund, which invests in a combination of local and international government bonds, corporate bonds, listed property assets and other securities that offer a high income yield. This fund is risk-averse and suitable for investors looking for a low-risk fund that could potentially provide a better return than a money market fund. The Discovery Diversified Income Fund has outperformed its benchmark, the Stefi, over all periods since inception, giving investors returns of 8.62% over the year to end June 2018 against a benchmark return of 7.33% for the same period.

Investing in the other asset classes such as equities, listed property and bonds, carries higher risk than investing in cash or a money market fund. The key here is that you would need to have a longer timeline over which to recoup any short-term paper losses. The investment is higher risk than saving in that your capital amount is not guaranteed, but over the long-term the returns you earn are typically higher than the interest you would earn from simply saving. For example, although it is quite common to hear people talk about “saving for retirement”, they are likely to be investing for their retirement, either via a compulsory retirement product through their employer or via a voluntary contribution to a retirement annuity fund. An appropriate fund when saving for retirement would be the Discovery Balanced Fund, which is a high equity fund with a more aggressive strategy best suited to investors with a longer investment timeline. The Discovery Balanced Fund is benchmarked against its peer group average. It has given investors annualised returns of 10.76% over 10 years to end June 2018 against a benchmark return of 6.2% for the same period. If you had invested in this fund from inception in November 2007, you would have earned a cumulative return of 166.8% to the end of June 2018 against a cumulative benchmark return of 89.84% for the same period.

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