A balancing act: Navigating the Savings, Investments and Speculation triangle

By: Renzi Thirumalai, FNB Investment Head 

The word “investment” is often used to describe any return-based activity, however, there is value in drawing clear distinctions in this regard to ensure one’s personal finances are appropriately structured. 

Savings are short-term in nature and involve the safekeeping or storage of money towards either a specific end goal or emergency funding. Capital risk is very low but returns (or yield) will also be low as the investor would require immediate access to the money. 

Investments are better viewed as a long-term endeavor where an appropriate amount of risk is taken to generate the required return profile. Examples would be investing for retirement, kids’ education or perhaps a lavish family holiday in a few years’ time. 

Speculation involves a much higher risk profile, a lot less certainty around the fundamentals of the relevant asset, and the primary objective is usually a pure profit motive, devoid of any other discernible traditional “goal”. The time horizon will therefore most likely be shorter than a traditional investment. 

Converting goals to strategy 

Once an investor has mapped out a set of goals, developing investment strategies to meet those goals is the next logical step. Your short-term goals like saving for an emergency can involve saving money in a bank product that allows immediate access and provides a reasonable yield. 

The longer-term goals like a kids’ education will need to be invested in assets that can keep up with the relevant inflation (education inflation for instance).  The assets chosen will be a mix of yield-based instruments, like cash or bonds, and growth assets like equity and property. The longer the term of the goal the more growth assets, and vice versa – with the guiding principle being to invest in a blend of assets that gives the highest likelihood of matching your inflation-beating objective. The decision around the choice of style, asset allocation and geographical exposure is best left to investment professionals, but more sophisticated and experienced retail investors can take ownership of that decision layer. 

Having clear goals is key as it allows the assessment of each investment strategy to be viewed in the appropriate context, making for sensible decision making along the investment journey. 

Industry Trends 

Key recent trends in the investment industry: 

1. Increasing dominance of passive, or indexation products 
2. Scrutiny on fees (related to (1) above) leading to a decline in product fees across the spectrum 
3. Digitizing the investor experience, and widening the opportunity set e.g., Alternative assets 

Any current investment solution would likely draw on these trends, with advisors and fund managers increasingly putting client needs at the forefront in solution design. A demarcation between the investment manager and investment advisor is perhaps useful – an investment/fund manager manages the assets while an investment advisor manages the client. The fund manager makes decisions related to the purchase and sale of assets to produce the required outcome e.g., a return of CPI +5% over rolling 7 years with a drawdown of less than 25%. The investment advisor assists the client in drawing up their financial plan, mapping out all their relevant financial goals and then choosing the funds/investment vehicles most suited to their objectives. 

Importantly, the investment advisor must also manage client expectations. Clients should be fully apprised of the risk profile and return signature of their various investments, which will – along with guidance from an advisor –limit knee jerk responses to market conditions that can damage return outcomes. 

Aligning your chosen investment strategies to your financial goals, in the right proportion, will assist in a balanced response to market events. Having a reasonable amount in savings, the majority in investments and possibly a minority in speculative assets would broadly speaking, be a suitable outcome for most investors. 

Conclusion 

Investors should clearly map out their financial goals and relevant time horizons. Having an appreciation for the distinction between different activities like savings, investments and speculation is critical to making appropriate financial choices. 

Consulting a qualified investment advisor, one can then choose investment strategies in the right proportions to meet the identified goals. Staying the course is a key principle in an investment journey, and ensuring one consults an investment advisor at critical decision junctures will help limit decision risk. Awareness of key trends like passive products, lower fees and alternative asset classes will help investors ensure their chosen solutions are well balanced and aligned to their goals. A final word on the matter, there is no better time than the present to begin your investment journey.