Your investment, debt and financial questions answered

IOL News

26-04-2025

How can understanding the difference between risk appetite and risk tolerance help me develop my financial strategy? Shreekanth Sing, Wealth Adviser, PSG Wealth, Northcliff, Johannesburg
When developing a financial strategy, a key element is understanding the required level of risk you need to take to achieve your objectives.
Risk appetite refers to the level and type of risk an investor is willing to take in pursuit of their financial goals. It is a strategic, forward-looking concept that reflects the investor's desired level of risk exposure based on their objectives and preferences.
Risk appetite helps determine the types of investments a person chooses, such as an equity-focused long-term growth portfolio or lower-risk conservative portfolios that focus on cash and bonds. For example, someone with a high-risk appetite may allocate more funds with more equity exposure matched with a long-term investment horizon.
Risk tolerance is the investor's emotional and psychological comfort with uncertainty and potential losses. It reflects how much risk they can handle without becoming overly stressed or making impulsive decisions. For instance, a person with low risk tolerance may prefer low-risk assets like cash bonds over stocks.
This preference doesn't mean that it is the right solution to achieve your objective.
The main distinction is that risk appetite focuses on what risks an investor wants to take. Risk tolerance focuses on what risks an investor can emotionally endure.
Both concepts are crucial for building a portfolio that aligns with an investor's goals while minimising emotional stress during market fluctuations. People typically make poor decisions when faced with market turmoil, like what's been experienced over the last month.
It's important to work with a qualified financial adviser who can assist you with managing your investments and help ensure you achieve your financial goals and not destroy your wealth by making knee-jerk decisions.
I recently started a new job and I am now earning R5,000 more. I would like to maintain my existing lifestyle so that I can use this money effectively. What investment vehicles would you suggest I look at? Chrisley Botha, Wealth Adviser at PSG Wealth
Congratulations on your new job and the salary increase — using the additional R5,000 wisely can make a real difference over time. Before investing, make sure you have a solid financial foundation. This includes:
Emergency savings
– ideally three to six months' worth of expenses in a money market or high-interest savings account. No high-interest debt
– if you have credit card or personal loan debt, consider settling this first.
Once that's in place, here are a few investment vehicles to consider:
Tax-Free Savings Account (TFSA):
You can invest up to R36,000 per year (R500,000 over your lifetime) without paying tax on the growth or withdrawals. It's flexible and ideal for medium- to long-term goals. Retirement Annuity (RA):
A great way to boost your long-term retirement savings. Contributions are tax-deductible, which can reduce your taxable income — a smart move for future you. Unit trusts or Exchange-Traded Funds (ETFs):
These are suitable for long-term growth and offer access to local and offshore markets. ETFs, in particular, are low-cost and well-diversified. Fixed products or goal-based investment:
If you have specific goals (like a deposit on a home or future travel), consider a separate investment account aligned to your timeline and risk profile.
The key is consistency. Investing even R5,000 a month can grow significantly due to compound interest. A financial adviser can help you align your choices with your personal goals and risk tolerance.
I just started working and would like advice on how to effectively budget. How do I cover my monthly expenses, save, and pay off my student loan? Bianca van Niekerk, Wealth Adviser, Vanderbijlpark Financial Planning
Congratulations on your first job! Budgeting is a crucial skill, especially when starting your career. While financial institutions may tempt you with credit cards or overdrafts, avoid them — high-interest debt can spiral quickly.
A budget is simply an estimate of your income and expenses over a set period. To start, create a spreadsheet with monthly tabs. First, list your net income - the amount deposited into your account after deductions. Next, track fixed expenses like car payments, insurance, and medical contributions. Subtract these from your income to find your remaining balance.
Then, outline variable expenses, including transport, groceries, and personal care. These fluctuate monthly, but tracking them will help you stay in control. After deducting these, you'll see what's left —this is where luxuries come in. Items like gifts, beauty treatment, and shopping should be added cautiously since they aren't necessities. If your budget doesn't balance, this is where you should cut back.
Consider allocating extra funds to your student loan or any high-interest debt, but don't overcommit. If you find yourself short on money, you might feel pressured to take on more debt, creating a dangerous cycle. While some debt, like a car or home loan, can be beneficial, reckless borrowing leads to financial instability.
Start planning for the future early. Opening a Tax-Free Savings Account allows you to invest without tax levies (provided you contribute within the prescribed maximums). This ensures financial security while keeping funds accessible for emergencies. This is just the beginning — your financial journey will evolve with time.
Taking charge of your finances now sets you up for long-term success. Stay disciplined, make informed choices, and enjoy the rewards of financial independence.
Given the economic climate locally and internationally, how can I protect my assets from unexpected events or market volatility? Richus Nel, Financial Adviser at PSG Wealth, Old Oak
Financial markets may not favour short-term investors. It does, however, mostly reward the long-term investor despite short-term valuation disparities. Since we cannot know the short-term outcome with certainty, being a disciplined investor is the best strategy.
Short-term
There is a clear distinction between saving and investing.
Saving is normally restricted to cash and cash-like instruments, earning a pedestrian interest rate return (considering inflation and tax). With no value fluctuation, ideally, a 'parking' facility.
Investing is utilising asset classes that can appreciate (and drop) in value, depending on the economic environment. Investors focus on achieving marginal capital appreciation 'over and above' the interest or income earned from that instrument.
Well-run money market, bond or diversified income unit trust solutions (at the most extreme) are useful investment tools for short-term savings and investing. Investors should stick to a low equity exposure of 20-30% and be content with the inflation +1%, -2% return. The main aim here is short-focused 'inflation-like returns' for stability and certainty.
During times of volatility, short-term investors can re-evaluate their investment strategy with a financial adviser, as such times could offer the opportunity to realign with risk assets.
The above options are only appropriate if your investment focus is shorter than 3 years.
Long-term
Short-term savings and conservative investments are not suitable over the long term due to inflation. A long-term investment requires appropriate exposure to equity and should be well-diversified. During market turmoil, like we are currently experiencing, greater buying opportunities present themselves. These opportunities only exist due to short-term market fear.
Volatility can work for you in the long run when partnering with the right investment managers who know when to take advantage of investment opportunities.
Successful investing is a science, but it's easy to achieve if you stick to your investment plan with a financial adviser.
Kidnappings for ransom have been steadily increasing globally and in South Africa over the past few years. What cover is available for this type of event? Ryno de Kock, Head: Distribution at PSG Insure
There are different types of kidnappings to be aware of. Recently, we have seen a surge in express kidnappings in South Africa in which kidnappers will demand you log on to your banking app and process transactions into their accounts or take you to an ATM to withdraw cash. These values are normally much lower than larger organised syndicates, but happen frequently. Wealthy individuals, tourists and owners of cash-based businesses are generally targeted by more sophisticated criminals. Beyond financial protection, kidnap for ransom cover also includes access to a range of support, such as hostage negotiators, specialist investigators, and security experts to help secure the release of the kidnapped individual in a safe and effective manner.
To learn more about this policy and what else it covers, please reach out to one of our qualified advisers for more information.
PERSONAL FINANCE