Moneybetter

What does South Africa’s grey listing mean for you?

moneybetter — Thu, 27 Apr 2023 11:03:56 +0000

What does South Africa’s grey listing mean for you?

What does the grey listing of South Africa mean for me?

It would have been hard to miss the articles in February this year, announcing that after months of speculation South Africa had finally been grey listed and warning of the dire implications of this action.

The lowdown

Grey listing is the public identification of a territory (in this case, South Africa) that has inadequacies in adhering to global standards related to Anti-Money Laundering and Countering the Financing of Terrorism. It means that South Africa now has to work to address these inadequacies by creating and implementing an action plan in order to avoid facing further consequences.

Who is in charge of global grey listing?

On an international level, grey listing is instituted and managed by the Financial Action Task Force (FATF). It sets international standards relating to the combating of money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction. South Africa is a member of FATF, along with 36 other jurisdictions, two regional bodies and 31 associate members.

In order to assess countries’ adherence to these internationally agreed standards, FATF carries out “mutual evaluations” or peer reviews. This evaluation is used to identify issues in a country’s meeting of the agreed standards, which the country in question then attends to in order to strengthen its financial system and combat money laundering etc.

If a country is found to have deficiencies in adhering to these standards it can be grey listed while it works to address them in order to be removed from the grey list. Countries that have been added and then “delisted” include Morocco, Pakistan and Ghana.

There are only three countries on FATF’s black list of countries deemed to be non-cooperative: North Korea, Iran and Myanmar.

What does it mean to be grey listed?

There are two main negative implications for any country that is grey listed.

The first is that the country suffers reputational damage, which carries macro-economic costs. In South Africa’s case, being added to the grey list does nothing to help the perception that South Africa is moving closer to becoming a “failed state”. This has implications for obtaining direct foreign investment. World bodies such as the IMF and the World Bank also do not look kindly on countries that have been placed on the grey list, while development finance institutions are likely to add a risk premium to their lending terms – thus increasing the cost of capital for the country. And as Webber Wenzel pointed out, grey listing could even affect South Africa reaching its ESG goals because of the increased cost of funding for the transition to a lower carbon economy.

The second is felt more practically. Trading with international partners becomes harder because financial institutions based outside a country’s borders, but involved in doing business with local companies, are likely require more onerous due diligence to be undertaken – which has implications for time and money. The global village depends on ease of capital flows, and if trading with international partners is made more difficult it can have a serious impact on the ease of doing business, and the cost of doing business for both companies and individuals.

South Africa’s case

For its 2021 mutual evaluation, South Africa did not fare well, with FATF determining that the country did not adequately meet many of its recommendations.

“South Africa needed to work on resolving 20 of the 40 FATF standards which requires a complete overhaul of legislation and processes. And as with any changes of legislation and processes, there are multiple steps that need to be followed. These steps are time exhaustive in nature and South Africa ultimately just did not have the sufficient time to make these necessary changes prior to the decision to grey list,” says DMA’s Cuan Sauter.

It was put under a one-year observation period in October 2021 to allow it to address the 67 Recommended Actions. South Africa made great strides in addressing these with the Recommended Actions being reduced to 8 strategic deficiencies. But despite this progress, FATF announced this February that South Africa would still be grey listed while it worked to address these.

What it means for you

As mentioned previously, one of the key effects of being grey listed is that it increases the due diligence requirements for international banks and other investors doing business with South Africa. The more onerous due diligence load increases costs.

It is probable that any individual or institution sending money offshore or receiving money from offshore will have to bear at least a portion of these increased costs. That makes it more expensive for South African investors to trade or to have bank or investment accounts offshore.

There is also likely to be a time cost, as there will be a greater requirement for investors to submit additional documentation and verification.

And besides the direct costs that the grey listing carries, the indirect costs can be even more damaging.

“The increased cost of doing business offshore would be considered the immediate consequence. However, the main consequence is the reputational damage and discouragement of foreign investment into South Africa which will ultimately ripple through the entire economy,” adds Sauter.

Silver linings

If you’re looking for a silver lining, the South African government was quick to find one. In a letter to the country after the announcement of the grey listing, President Cyril Ramaphosa stated that although the grey listing was “concerning” it was “less dire” that some suggest. He pointed to the fact that the country had been diligent in addressing the shortcomings identified by the FATF, and concluded that the grey listing gave the country an opportunity to tighten its financial controls and response to organised crime.

Other, more neutral commentators do agree that this could act as a wake-up call for the government, and result in improved regulations.

It is also unlikely that South Africa’s grey listing will result in the termination of existing relationships. Unlike a credit downgrade, which comes with specific actions required, institutions can individually decide how to respond to South Africa’s grey listing.

What a recession means in the stock

moneybetter — Mon, 05 Dec 2022 08:21:50 +0000

What a recession means in the stock

To understand what a recession means for the stock market, it helps to understand exactly what a recession is.

There are a number of definitions but put most simply, it’s when there is a significant slowdown in a country’s economic activity over a period of time. Generally if there is a decline in a country’s Gross Domestic Product (GDP) for two consecutive quarters (two three-month periods) then the economy would be seen as being in recession.

The threat of a global recession is looming large because of “once-in-a-generation” factors such as the effects of the Covid pandemic and the war in Ukraine, and this has an impact on stock markets and investors across the world.

Tough times for consumers

A recession has a variety of negative effects that can be felt across society: increased unemployment as companies retrench workers; people spend less money on goods and services; companies cut down production as consumers buy fewer products and services; and wage levels come under pressure.

For the consumer, the cost of living can increase as prices of items like petrol and groceries increase. This leads to a reduction in their spending on discretionary (non-essential) items. Job losses can further affect consumers’ income levels, while it can become even harder to find employment as companies look to reduce their wage bill and cut down on new hires.

Profits under pressure

None of this is good news for the listed companies that trade on the stock market, or for those who have shares in these companies. Although the stock market is made up of individual companies that fulfil a wide variety of services and produce a variety of products, to a large degree the success of these companies is influenced by the broader economy.

If the economy is thriving, then companies (and their share prices) will tend to benefit. That means happy days for shareholders. And of course the inverse applies. If the broader economy is under pressure, or in a recession, then this will generally have a negative effect on listed companies, and their share prices.

All in all, a recession can be a scary time for investors, with wild swings in share prices, downward pressure on investments, and a distinct lack of stability and predictability.

So where does that leave you, the investor?

Take a long-term view

When you start investing, one of the most important factors to take into account is your investment timeline – in other words, how long you want to keep your money invested for. This can differ depending on what your investment goal is. For example, if you’re in your 30s and you are saving for retirement, then you’ll be investing with a long-term horizon. If you’d like to cash in your investment for a house in the next two years, then that would be considered a short-term investment horizon.

During a recession, when investments have generally reduced in value, it helps if you have a longer-term horizon and don’t rush to access your investment if you don’t need to. All markets go through cycles, and eventually a recession will run its course. Cashing in investments during a recession, or “at the bottom”, can be avoided if you are able to sit tight and stick out the downturn. Yes, it’s hard not to panic when you see the share price plummet, but panic doesn’t make for good investment decisions.

As American investment guru Warren Buffet says, “It won’t be the economy that does in the investor over a five, 10 or 20 period – in my view, it will be the investors themselves … if you look at the record of the 20^th Century you’d say ‘How could anyone have missed in owing equities?’ and yet we had all kinds of people wiped out … if you had just owned stocks straight through, didn’t leverage them, you would have had perfectly decent returns.”

Diversify

Ensuring you have a diversified portfolio – one that is spread between the different asset classes such as stocks, property, bonds and cash – is one of the cornerstones of sensible investing. This is because it spreads your risk so that when one asset isn’t performing, you’ll be cushioned by the performance of your other assets. During a recession, when there is an increasing amount of volatility, diversification can help protect your investments.

Invest with caution

And yes, a recession can even offer some opportunities for investors because there are likely to be some “cheap” stock buys on offer.

“While a recession can be a difficult time for investors who are seeing declining values across their portfolios, it can also represent an opportune time to pick up value stocks whose price has been adversely affected by the wider sentiment. For investors, this can mean buying shares in a company that holds good fundamental value such as earnings, sales and cash flows at a cheaper price with a longer-term view of that company’s share price increasing in the future,” says DMA’s Christopher Clarke.

“A good example of a sector that tends to remain healthy in a recession are consumer staples such as basic goods that support everyday living. Think companies like Tiger Brands or Walmart where their main form of business is the manufacturing a distribution of necessities like food. Other classic examples of sectors that do well in recessions are companies in the health care, energy and IT fields.”

But because no one knows exactly how the stock market is going to perform, or when the bottom of the market has been reached, investing under these circumstances should only be done if you’ve ticked a few boxes.

Firstly, ensure that you have emergency savings in place that could get you through a few months. If you have extra cash left over after making this provision, then perhaps give the stock market a try.

Again, invest with a long-term mindset. During a recession volatility is the name of the game, so don’t be surprised if your stock picks don’t behave the way you’d like. If you’re not expecting immediate returns then you’re likely to be better off.

How to invest offshore (without sending money offshore)

moneybetter — Mon, 28 Nov 2022 13:58:26 +0000

How to invest offshore (without sending money offshore)

How to invest when the rand is getting weaker

South Africans have become used to the rand’s volatility, but the past few months have been a crazy, white-knuckle ride for even the most experienced investors.

The reasons for the currency’s weakness against the dollar are varied – rising global inflation and concerns about a global recession are just two of them. Both these factors mean that investors have been buying dollars, which are seen as a safe haven, and selling emerging market currencies like the rand. And when there’s a sell-off in the rand, the value of the currency drops.

“It is likely that the rand will always be more volatile than developed market economies due to various risks associated with emerging markets. However, volatility is not always constant and tends to change through time,” says DMA’s Charlotte Van Tiddens.

The bottom line is that these ‘macro-economic’ factors behind the rand’s weakness are beyond the control of individual investors. But knowing that there’s nothing to be done about a falling rand doesn’t really help when you see your hard-earned cash losing its value against a super-strong dollar, and your investments starting to shrink in global terms.

The secret to staying one step ahead and securing some financial peace of mind lies in understanding what strategies can protect your investments; and using this knowledge this to your advantage so that you know how to invest when the rand is getting weaker.

Winners and losers

A weaker rand is going to positively or negatively affect local companies, which in turn will affect their share prices – and your investments. If you’re the kind of investor who buys shares in individual companies, bearing this in mind and asking the question, ‘Who stands to gain when the rand is weak?’ can be helpful when deciding which shares you want to invest in.

For some businesses a weak rand is good news, particularly if they are exporters. That’s because they receive dollars for the products that they sell, and so when the dollar price is high, they’ll receive more money in rand terms. But there’s always a downside, right? A weaker rand is generally not good for companies that import products. Because they have to buy products in dollars, they’ll be spending more rands when the dollar goes up and the rand goes down. Prices of their products get hiked, and consumers end up buying less of them. Not good for the bottom line or the share price.

Research shows that when the rand is weaker, as it is now, companies that offer communication services and consumer staples tend to be better off. On the other hand, companies that focus on real estate or those that depend on consumer discretionary spending (in other words, spending on non-essential items) tend to be worse off.

Take it offshore

The other critical component for a South African investor is to ensure that a portion of your portfolio is invested offshore – or not in your country of residence. This is exactly for the reason that because offshore investments are not rand-denominated, they are protected against the currency’s devaluation.

There are an increasing number of ways for South African investors to get offshore exposure. You can literally move your money offshore by exchanging your rands for a foreign currency and in turn investing this foreign currency into offshore domiciled shares or funds. This can be very admin-intensive and involve factors like exchange controls or tax-clearance certificates etc.

A more straight-forward option can be to invest in local funds that provide offshore exposure. These would include unit trusts that have underlying investments in international companies, or locally listed feeder funds such as the array of ETFs that one can buy on the JSE that track an offshore basket or index. What’s great about these ETFs and feeder funds is that they don’t require large initial investment amounts, so even if you only have a small amount of money you can still have access to investment opportunities.

It can also be comforting to know that even if you’re investing in big South African companies rather than taking your money offshore, you’re often likely to be protected against a weak rand. Many South African listed companies are “rand-hedged”, or protected against the ups and downs of the local currency.

“These companies generate the bulk of their revenue in foreign currencies like the dollar. Their expenses are not incurred in rand either. When the rand weakens and loses value, all else equal, their rand profit increases. Examples of rand hedges include the tobacco and luxury goods sectors and include stocks like British American Tobacco and Richemont,” says Van Tiddens.

Other examples of rand-hedge stocks are Aspen, BHP Billiton and Glencore.

Make sure you mix it up

As always, that classic investing mantra “Diversify Diversify Diversify” applies, and even more so when you’re wanting to invest when the rand is weak.

There are so many moving parts to the investment landscape, and unless you are a full-time investing expert it can be extremely complex to keep a handle on all the factors affecting the value of your investments. Bearing that in mind, one of the most important ways to protect the overall value of your investments is to make sure that they are diversified – in other words, exposed to a variety of asset classes, such as cash, equities (shares) and property so that you don’t have all your eggs in one basket.

This helps to spread the risk, and means that when one asset class is under pressure or under-performing, the other assets are not affected.

Concentrated Equity fund

moneybetter — Fri, 18 Nov 2022 05:58:13 +0000

Concentrated Equity fund

The sun comes out

moneybetter — Thu, 17 Nov 2022 08:34:18 +0000

The sun comes out

First half of 2022 decoded

moneybetter — Sun, 30 Oct 2022 14:19:48 +0000

First half of 2022

Content hosted by iono.fm

6 Tips to Invest To Beat Inflation | Moneybetter

moneybetter — Sun, 30 Oct 2022 13:32:28 +0000

Investing to beat inflation, and It’s a must-do

“Running up a down escalator.” That’s what legendary investor, Warren Buffet, had to say about inflation.

And it’s true.

Growing your hard-earned money in a saving account is difficult enough. The interest rates are low. And when you factor in inflation, it’s almost impossible. Did you know that South African inflation sits at around 5.9%? That is right at the top of the South African Reserve Bank’s monetary policy target inflation range of between 3 and 6%.

That means having your money in some of the best paying easy-access accounts and even some fixed deposit savings accounts. You’re actually losing money in real terms.

The culprit? Inflation, where prices go up, and purchasing power goes down.

Investing to beat inflation is a must-do to make sure your nest egg grows faster than the soaring cost of living.

Let’s look at investing to beat inflation

Anyone can invest, even if you start with a few rands. Now, while it’s always best to get help from the experts, you don’t need a financial adviser. It’s a riskier approach, especially if you are a novice investor, so using the services of a financial advisor should be your first port of call.

On the other hand, you can use one of many online investment platforms. In this case, it’s probably best to choose a ready-made fund where you select your preferred level of risk. The platform then offers a selection of funds that suit your risk profile.

1. Diversify your investment.

On diversification, you should build a diverse portfolio, or ready-made diversified fund, with a mix of assets. These could include equities, property, bonds, and alternative investments such as gold, often seen as a safe haven that can maintain value in times of stock market turmoil. This means you won’t be overexposed to the ups and downs of assets, firms, or sectors.

2. Invest in gold.

Gold is the oldest hedge against inflation.

The shiny yellow metal has grown at an average annual gain of 9.48% over the 20 years between September 2001 and September 2021. Over the same period, inflation was much less, which means gold investors are sitting pretty with several percentage points above inflation.

3. Look for companies that can raise prices when inflation rises.

Find that business with a reputation for brilliance. Now compare it with one which has a reputation for bad economics. Which would you choose? Would you still choose the brilliant company if they put their prices up? Chances are, if you’re an intelligent investor, you will.

What this means to you and your battle against inflation is that you can invest in a business that can increase its prices without losing business. You have significant advantage during periods of high inflation because the company can now offset its increasing costs.

4. Invest in yourself.

One of the sure-fire ways of beating inflation? Invest in yourself and your own talent. This is one of the best ways to maintain your purchasing power over time and defeat inflation.

The best lawyer or accountant in town benefits from having paid for their education in “old rands” but can now offer their services in “current rands.” That means they’re ahead of the curve, at least in investing to beat inflation

5. Keep some cash savings

Now, while we haven’t been kind to allow your money to sit in a current or easy-to-access savings account, it’s vital to do so. On that subject, you should ideally have 12 months of average income as “cash in hand”. Yes, interest rates are low compared to inflation, but if you’re faced with an emergency, like losing your job, and don’t have cash, you’re in a dilemma.

This is because ALL your money is now invested in the stock market. What if it’s a downturn? You’ll have to sell, which means losing money, and inflation wins.

The solution: find the highest-paying savings account to protect your money against inflation as much as possible.

6. Limit your wants.

This is a no-brainer. Worried about inflation and your rand simply being unable to go the distance? Cut back on the needless things in life, the stuff that can make you drown in consumer debt: the designer trainers, that overly expensive watch. Now, look at your bank account? You still have as much money as you had, giving you a considerable defence against the vicissitudes of life.

To sum up, whilst we have included practical day-to-day tips (like limiting your wants), we have also made the financial case of investing to beat inflation.

And again, that’s a no-brainer. Investing in a diversified portfolio over a more extended period is almost always several points ahead of inflation, and that’s where you want to be.

Investment Principles To Think About | Moneybetter

moneybetter — Sun, 30 Oct 2022 11:33:50 +0000

Not so fast rand pessimists

It is January 1986. It is four months after PW Botha’s Rubicon speech and South Africa is under a State of Emergency. A South African investor decides to take cash out of the country. The investor transfers his rand-based deposits into a US dollar bank account.

Would this have proved to be a wise decision?

Isn’t it obvious? The exchange rate for $1 was R2 in 1986, yesterday it was around R15.50. A significant devaluation! Furthermore, there were several times during this period in which the rand experienced a blowout (a meaningful weakening over a short period of time). These periods include:

1998 – the Russian debt default
2001 – the 9/11 attacks
2008 – the great financial crisis (GFC)
2015 – Nenegate
2020 – the Covid crash

Investors might be surprised to learn that they would have been better off leaving their cash in rand rather than converting it to US dollars.

But how is this possible given what we highlighted above? The answer lies in the so-called “interest differential”, that is, the difference between the Rand interest rate and the US dollar interest rate.

South African interest rates were on balance significantly higher than US interest rates over this period. More accurately, the interest rate difference more than compensated investors for the currency depreciation. Too few of us factor in the much higher interest rates in South Africa, when considering whether to have cash deposits in rand or in hard currencies such as the US dollar.

However, it goes without saying that investors were not always better off leaving their cash in South Africa. For example, the rand was particularly strong during the commodity boom of the mid 2000’s and again after the GFC. Investors that took advantage of these periods of rand strength and converted rands into US dollars were handsomely rewarded.

Going forward, what are South African investors to do? Should they listen to the doomsday practitioners and rather have dollar exposure, or should they keep their rands?

At Corion, we believe that the answer to that question is not an exact science and applying the following sound investment principles is the appropriate starting point:

Ensure a diversified portfolio that is not overly exposed to a single risk factor.
Having a portfolio that is fully exposure to a single currency, even the mighty US dollar is not prudent.
Understand the volatility that offshore currency can have on your investments over the short term. If one cannot tolerate sharp fluctuations in the value of deposit- based investments due to the need for liability matching, it is arguably better to have a greater amount in the same currency as your liabilities.
History gives us guidance. Whenever the rand was extremely strong, investors were better of using the opportunity to take deposits offshore and to be exposed to rand depreciation rather than earning a higher interest rate. However, the timing of this is exceptionally difficult and as they say, it is only hindsight that is a perfect science.

*Article written by Simon Du Plooy – head of strategic investment thinking at Corion Capital (an Authorised Financial Services Provider). Corion is driven by a desire to simplify the world of investing and manage a broad range.

Would this have proved to be a wise decision?

1998 – the Russian debt default
2001 – the 9/11 attacks
2008 – the great financial crisis (GFC)
2015 – Nenegate
2020 – the Covid crash

Investors might be surprised to learn that they would have been better off leaving their cash in rand rather than converting it to US dollars.

Going forward, what are South African investors to do? Should they listen to the doomsday practitioners and rather have dollar exposure, or should they keep their rands?

At Corion, we believe that the answer to that question is not an exact science and applying the following sound investment principles is the appropriate starting point:

Ensure a diversified portfolio that is not overly exposed to a single risk factor.
Having a portfolio that is fully exposure to a single currency, even the mighty US dollar is not prudent.
Understand the volatility that offshore currency can have on your investments over the short term. If one cannot tolerate sharp fluctuations in the value of deposit- based investments due to the need for liability matching, it is arguably better to have a greater amount in the same currency as your liabilities.
History gives us guidance. Whenever the rand was extremely strong, investors were better of using the opportunity to take deposits offshore and to be exposed to rand depreciation rather than earning a higher interest rate. However, the timing of this is exceptionally difficult and as they say, it is only hindsight that is a perfect science.

Asking Yourself the Difference Between Investing & Trading? | Moneybetter

moneybetter — Sat, 29 Oct 2022 15:12:33 +0000

Investing vs trading. What’s the difference?

Profiting in the financial market. That’s the aim, whether you’re investing or trading. The two take different routes to arrive at this shared goal. In Investing vs Trading 101, investors seek solid returns over an extended period. So, they buy and hold. On the other hand, traders enter and exit positions over a shorter period, taking potentially higher and more frequent profits.

Let’s define the two in more detail.

Unless you’re a Wolf of Wall Street (or a Jackal on the JSC), and even then, the stock market is a complex place. So, you must understand the basics, let’s clear up any confusion.

1. What is investing?

Investing’s goal is to build wealth over an extended time by buying and holding a portfolio using financial vehicles like stocks, mutual funds, and bonds.

Investments are held for years, or even decades, and, ideally, enjoy growth, compound interest, dividends, and stock splits. As we all know, markets fluctuate, but investors will ride out the downtrends with the expectation that stock prices will rebound eventually. You can often increase your profits by compounding or reinvesting profits and dividends into additional shares or stocks.

A clever investor will do their homework before investing and look at a company’s fundamentals, like its previous financials and industry analysis, as well as a country’s macroeconomic situations.

2. What is trading?

Trading’s goal is to generate short-term returns that outperform buy-and-hold investing. This involves frequent transactions, aiming for buying-low and selling-high instruments like stocks, commodities, and currency pairs.

So, while buy-and-hold investors may be happy with 10% to 15% annual returns, traders might want a 10% return each month.

But, trading is dynamic and volatile. Its high-risk and high-reward nature is at the direct and short-term mercy of the market, so it can incur both hefty profits and losses.

A trader has different homework to do. They need to analyse a company’s performance based on the uptrends and downtrends in the market in a single day. They need to use this analysis to predict changes and trends in volume, price, and moving averages.

What’s the difference between the two?

The key differences between investing and trading are their approaches: appetite for risk and time involved. As we’ve said, investing is lower risk and rewards over a more extended period, and trading is higher risk and higher rewards over a short period. Depending on your profile, you can choose one, the other, or even a combination.

So who earns more profit, investors or traders? Both have the potential to earn profits, but traders frequently earn more profit than investors when they make the correct predictions and decisions, and the market performs accordingly.

Investing vs trading. Which one is right for you?

Your first step is to decide on your investment strategy and goals. Are you saving for retirement? Are you looking for returns today? You also have to establish your appetite for risk, as this is a key differentiator between investing and trading.

Whichever one you decide, let’s look at how to do each wisely.

The clever investor

The smart investor wants to build long-term wealth, and here are some pointers.

First off, define your investment goal and decide on a strategy. Are you investing for retirement or saving for your kid’s university tuition? And how much risk can you tolerate when it comes to strategy?
Be prepared for the long haul. Know that successful investing takes longer, so your money will be tied up, and you’ll have less disposable cash.
Have patience and discipline to stick through the market’s ups and downs.
Form a plan for buying, selling, and rebalancing your holdings. For example, some investors sell some holdings and buy others to rebalance their portfolio to existing original goals if market fluctuations have thrown it out of whack.
Think about choosing index funds which don’t try to beat the market but mirror its performance. An example of such a fund in South Africa is the FTSE/JSE Top 40 Index.

The clever trader

The astute trader will always minimise risk. Here’s how you can do it.

Go in with wide-open eyes. The stock market’s long-term average return is 10%, and many studies have shown that it’s difficult for even professional traders to beat the market.
Plan when you’ll buy and sell. So, sell if a stock rises or falls by a predetermined percentage.
Stick to that plan. Even the most experienced traders change their reasoning for holding stocks and shares, and that’s not always wise.
Work out how much money you can afford to lose, and don’t trade more than that.
Take tax liability into consideration. Tax rates differ between short- and long-term capital gains.

So before you choose to invest vs trade, sit down, and think carefully about your goals and appetite for risk. Your future self will thank you for it!

Invest For Monthly Income | Moneybetter

moneybetter — Sat, 29 Oct 2022 15:04:25 +0000

Investing for monthly income. Make your money work for you.

The wealthy think about money differently from the average Joe, and that’s because they don’t need to work for their money and make their money work for them. So, even while playing with their kids, teeing off, or hiking in Patagonia, they earn income without lifting a finger.

But let’s say you’re not super-wealthy and want monthly income for your retirement. What are the best ways to generate this passive income?

First, let’s take a glance at why investing for monthly income can be right for you.

You may want a constant stream of money flowing into your bank account for many reasons. Who wouldn’t? But here are a few of them.

An early retirement
A more comfortable retirement
Reduced dependence on your job
Increased financial freedom

Whatever your reason to earn passive income, and there are definitely more than the above, there are many ways to do so.

Buy-TO-let property

This is one of the most convenient ways to secure a monthly income.

You can choose a commercial property or residential property. The best investment here is in the former: a building offered as a workspace. They attract a higher rent than other real estate, so you’ll earn a higher regular income. Residential property is the next most profitable, as these are living spaces; let’s face it, everyone needs a place to live.

So how do you pay for it? A mortgage is the most obvious if you don’t have the cash upfront. You’ll need tenants to enjoy monthly income so you can pay the repayments. Be aware, though. You’ll have to foot this bill yourself if you don’t have tenants.

The long-term benefit here is that, after the mortgage term is over, you’ll enjoy a net positive monthly income in the form of rent your tenants will pay you.

Equity Real Estate Investment Trusts

Real Estate Investment Trusts, or REITs, are companies that invest in real estate for you, so all you need to do is invest in them. You can choose Equity REITs which rent out the property for income, or Mortgage REITs which sell mortgages and loans.

It’s cheaper than buying a property because you’re only buying a share of the property, not the whole thing. But it does guarantee you dividends, which are usually monthly payments.

Preferred stocks

A stock or share means part-ownership of a company. There are two types, common stock and preferred stock. Common stocks give you partial interest in the company. In contrast, preferred stocks give investors more consideration when dividends are given out. You want a preferred stock here as it guarantees you a higher income, usually paid monthly.

Living annuity

A living annuity provides you with income during retirement. With this, you decide how to structure your savings within a basket of investments. You also choose how much income to draw within the regulatory limits of 2.5 to 17.5% annually.

A living annuity is popular because it provides transparency, investment flexibility, and tax efficiency. When you pass, as we all do, the remainder of the capital is transferred to your loved ones without estate duty or executor’s fees.

Short Term Bonds

Bonds are also an excellent way to gain a monthly income. They are debt instruments that the government, an institution, or a company issues to raise funds or capital. Essentially, you are giving them a loan that they repay with interest.

The interest that bonds earn is paid before the debt is paid back. That is how you can make a monthly income. The principal amount is paid back at the end of the term (known as the maturity date). Be cautious, though. Bonds come with a risk of default, so they don’t guarantee you a monthly income; you may lose your investment entirely. This is more true when buying company bonds. Government bonds are generally far safer. But be sure to do your investment homework!

Long term bonds

Long-term bonds last between 12 and 30 years. Thus, they come with the advantage of a higher interest rate but the disadvantage of a higher risk of default. If you have a lump-sum amount and want regular income, these are options. You can also invest in local bonds like unit trusts or on the JSE.

In closing, don’t think that the list above is exhaustive. There are many ways of investing for monthly income. Fixed deposits, money market accounts, and high-interest savings accounts will generate passive income. But because they barely keep pace with inflation, if they do so, many investors wisely choose one of the higher interest investments we’ve discussed earlier.

So, congratulations! You now have a source of monthly passive income. You can join the wealthy on their hiking expeditions, have a more comfortable retirement, or rely less on your 9-5. And what’s wrong with that!