There has been a trend in recent years with more and more Millennials and Generation Z individuals (current ages roughly between 18 – 43), utilising a concept of micro-investing to either get started in the world of investing or consider themselves DIY investors and want to actively manage their own investments.
Before we get into what micro-investing is and the sustainability of utlising this method for long term savings objectives, it must be said that it is a very encouring to see younger Gen Z individuals starting to save early, given the poor savings culture in South Africa. As of March 2024, South Africa’s Gross Savings Rate was measured at 12.7%, which is significantly lower than our emerging economy counterparts . This has a knock-on effect on the overall economy as poor savings result in low investment spending and ultimately low economc growth.
Micro-investing is an innovative way to access the market by investing small amounts of money into financial instruments such as shares, bonds and exchange-traded funds (ETFs). There are no minimum investments amounts, hence it is very accessible and the low barrier to entry makes it attractive to begginer savers. Contributing small amounts regularly allows for flexibilty, and the most commonly used funds are passive index-tracking funds.
The best way to maximise your net returns is to buy your financial instrument in a tax free investment, as the compounded growth within the investment vehicle is completely tax-free. There are various reputable micro-investment platforms available in South Africa, many of which are accessible via a mobile app that makes them user friendly to manage. Micro-investing seems to be easy way to start building your wealth with manageable downside risk, and with innovation in the Fintech industry, the promise of further enhacement seems likley.
The questions is though, is micro-investing sustainable for long-term savings such as retirement savings, and is DIY investing the way to go as you enter your wealth accumulation phase of your life?
The risk of DIY investing is that there could be a clear lack of financial planning expertise, which could result in a mismatch between aligning your investments with specific goals you have idenitfied. Having investment portfolios based on your risk tolerance, matched with your goals, is key to achieving them.
Diversification is also important to ensure that your risk is reduced by investing across asset classes that are not highly correlated. Investors also tend to have emotional biases that can often lead to poor financial decisions. Having a financial planner guide you through market cylces can be very valuable when navigating your financial future. Tax and regulatory complexities are also key to choosing the right investment vehicle for your savings objective.
Annually reviewing and adjusting your financial plan as circumstances change ensures that investment strategies remain relevant and effective within the macro-economic outlook.
Therefore, while micro-investing is a great way for savers to start, it would be advisable to seek professional advice when planning for retirement and estate plannning.