Money talks – the investment returns on a project will determine the success thereof. But do higher returns really mean more money?
South African investors have so much to choose from. Commodities, equity, offshore and the list keeps growing. The only thing that matters in the end, is whether that investment brings home the bacon.
The question now looms. Which investment will suit your need the best? The natural inclination of any investor would be to choose the investments with high returns. The investments with low returns at a glance would be overlooked. The issue with such a strategy is as follows. If you never look at the cost of an investment you might end up with less financial gain because of the continuous expenses incurred by this investment.
What does that mean?
Let Fincheck explain. The power of compound interest comes into play here. Investments grow with an exponential growth curve. This means that as the investment matures it will see vast amounts of increase of growth in later years.
So a small change now means a big effect 20 to 40 years down the line.
10X, an authorised Financial Services Provider, and licensed Retirement Fund Administrator and Investment Manager, challenge in this article the idea that high return investments outperform low return investments.
Why?
What you need to remember is that each time your money is transferred or managed it will require a type of management or admin fee. When transactions take place, more costs are incurred. That is what can happen in the case of high return investments. Your investment needs regular attendance and, therefore, results in an accumulation of high fees. All these yearly fees mean that small amounts of money are taken directly from the investment each year. These amounts that are withdrawn reduce your investment’s momentum so to speak. And if we think of the power of compound interest we know that the small amounts deducted now will mean a significant loss of growth 20 to 40 years later.
Low return investments typically make use of investments with a lower level of maintenance and risk involved. This means that a lower interest rate will be charged on the investment. This, at a glance, looks like a less favourable option compared to an investment with higher returns. But because the time spent managing these low return investments is less, it will ultimately lead to an investment with less fees deductable from the return on investment. The lower rate of deductions means greater growth in the value of the investment in its maturing years (the years before the investment pays out).
Choose smartly
We're not saying this is the only way forward, but we are saying you should think before you act. Choosing the right investment for your needs may take time. Use that time to wean out the options with high costs. Choose investments that don't reduce its own value with high-cost structures. The tortoise beat the hare in the old folklore. It could be that the low return investment might beat the high return investment over time – it will come down to the cost structuring of fees.
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