The line between short-term investments and long-term investments can be a bit blurry at times. When customers sign up on the Franc app, we ask you what you’re investing towards and if you have a specific time frame for their investment. If you need to withdraw your money in 3 years or less, we consider the most appropriate place for your investment to be somewhere where the risk of losing money is almost zero, but where the chance of earning a return that keeps up with or beats inflation is very high: a money market fund.
Why Should You Consider Short-Term Investments?
Short-term investments are most appropriate for things like your emergency fund, a holiday fund or saving up for a large purchase. Why is this? Well, let’s consider the alternative: longer-term investments like the stock market are longer term for a reason. They can go up or down over a day, week, month, year or even for a few years. However, history has shown us that the longer you are invested in a diversified basket of shares, the better your chance of earning a good return (and also the lower the probability of losing money).
Imagine you started investing R2,000 a month from January for your ke-Dezemba holiday fund into the stock market (R24,000 in total). Your investment could be worth anything from R21,000 to R27,000 given what the stock market did over the year. It would be great if it was R27,000, but a bit depressing if it was less than what you put in. Come December, you want to withdraw that money – you can't wait for the stock market to turn. That is why it is safer and more appropriate to put this money into a product like a money market fund where you can earn a decent return, have very little chance of losing anything and also have quick access to your funds. At an 8% annual return, your money could be worth just under R25,000 in December, so you would have what you put in plus another R1,000 or so.
A similar example: let’s say you have R100,000 now and know you will need to use that money in a year's time. Should you rather put that money into a money market fund where your balance would be R108,000 after a year, or into the stock market where it could only be worth R80,000 if the stock market dropped 20% during the 12 months? You are giving up potential upside, sure, but you are ensuring you have earned a decent return without much risk of losing money.
Invest In the Stock Market for Long-Term Goals
That’s not to say you should avoid the stock market! That’s how you build wealth, after all. The benefits of the right type of short-term investment have been outlined above. However they do have some drawbacks. Investing in a money market product is not really suitable for longer term periods. You may keep up with inflation (so your money keeps its value), but you’re not building real wealth. If you invest in the stock market over a long period of time, your chances of the REAL value of your money increasing over time increases substantially.
Put another way: if you put R10,000 into a money market fund and left it for 10 years, after those 10 years you could probably buy with your money (R21,600 at an 8% annual return) roughly what you could have bought 10 years ago – the value of your money is the same. That would definitely be better than leaving it in a bank account! But if you managed to earn 12% in a longer-term investment, your money could be worth R31,000. You could buy a lot more than what you could have before – your money is now worth more than what you started with. This is how you build wealth, but your potential need for the money needs to be much more flexible. So if the stock market is in a bit of trouble, you have the luxury of time on your side so you can ride out the bumps.
You just need to make sure your different goals have the most appropriate investment strategies. Franc has recently introduced the ability for customers to set up an additional goal on the app with a different investment strategy. So through the app you can invest towards a holiday goal (short-term investment), as well as for retirement (long-term investment).
What to look out for
Like with most things, make sure you do your homework. Anyone who offers high returns (relative to what a money market fund is offering) and says you always have access to your money needs to be treated with a level of suspicion. Many people get caught out because they are chasing high returns from unscrupulous entities. Always check if the investment provider is a registered FSP – if they are then it is more likely they are legit.