Savings Plan Through ETFs

Since you have found your way to the Finance Gym, I assume you do possess a basic interest in financial matters. Hence, you have probably heard of the term “ETFs”, or Exchange Traded Funds before. If not, not a problem! Having an interest in financial matters doesn’t necessarily go hand in hand with knowing how to manage money effectively. Many people want to start buying shares or ETFs, they just don’t know where to start, and some don’t even know what is an ETF.

To briefly sum it up, an ETF is pretty much a bundle of shares of different companies, often from different industries. Within the scope of this blog, we want to focus our attention on the practice of ETFs more than the theory.

Today, I will try to give you guys a hands-on approach on how to decide in which ETFs to invest as part of a longer-term savings plan. Let’s start, shall we?

Quick question: In which of the following ETFs would you personally rather invest in?

ETF (A): Established in 2019 with an annual performance (or growth) of 50 per cent

ETF (B): Established in 2010, with an annual performance of 5 per cent

To tell you right away. There is no “correct” answer here. If you opted for ETF (A), you are prepared to take a higher risk for a higher reward. This is a pillar of finance by the way -> High risk, high reward and vice versa. If you opted for ETF (B), you are rather risk-averse. You could also opt for both ETFs and spread the risk. But why is ETF (A) more risky? Simply because you have less information/data about it – It was established in 2019 so you only have 1 year of data, which is not very reliable in the financial world. The more data you have, the more reliable is your prediction.

Ask yourself, if an ETF performed with 5 per cent for 10 years straight, how would it perform in the 11th and the 12th year? Probably with 5 per cent again. Emphasis on “probably” because certainty doesn’t exist in the world of finance. And if an ETF's performed 50 per cent in one year, how would it perform in the 2nd year? Potentially with 50 per cent again, but are you willing to bet money on the fact that it will? You will hesitate because you have less data to draw your conclusions from.

One of the tricks to make a sound and reasonable decision (which is essentially what I want to assist you with) is to look for ETFs, which display a decent performance over the course of as many years as possible. If I would have to answer the question above, it would be a no-brainer to opt for ETF (B), as I prefer, albeit slower, steady and safer growth (and a less stressed mind, because hey, stress is killing us and I don’t want to count my gains in the casket lol!) In my judgement, this is also the most beginner-friendly way to do it.

Is buying ETFs a trick? No, because this isn’t really a secret to people from financial management spheres. This is what they do and have been doing for decades.

If you are a rookie to financial management, however, you are probably asking yourself “why do we not know about this?”. Well, now you’re all caught up. You might also think “Yes, this is a trick" because of a few aspects you might miss when starting your investment journey. Some of the aspects one has to be aware of before heading straight onto the first best trading platform or to a bank consultant include:


You are not guaranteed a positive performance. If the companies, which comprise the ETF perform well, the ETF performs well, and your money grows. If another pandemic hits us and the world goes into lockdown again – best believe your ETF will underperform and you might (temporarily) lose money.

  • Fees and/or transaction costs:

There are fees and costs everywhere. Before you hop onto any online platform, make yourself comfortable with their fee structure. On some platforms you pay a small amount per transaction. On other platforms, you have recurring monthly/annual costs, which is a percentage of your total investment. Hence, the more you put in, the more the provider earns. This is how they make their money, in case you are wondering.

  • Taxes:

Be aware that the revenue you gain from your investment is a gross amount. Allowable deductions may differ from country to country, so check what the allowable deduction is in your country when trading international stock. Everything that goes beyond that amount is required to be taxed. (Be mindful here: The REVENUE is taxed and NOT the amount you put in, as the amount you put in has already been taxed when you earned it). So, before bragging that your ETF performs with 10 per cent, mind that the net amount is actually smaller (by a few per cent). If you take it a step further, you could deduct annual inflation from it as well and figure out that the net amount you receive might actually be only half as much as you’ve expected. Just saying this to keep you grounded and humble… and to avoid unjust anticipations.

ETFs are really no rocket science and you can start at any time. You could just put a certain once-off amount into an ETF and observe its performance, or you can instruct your bank to send recurring monthly payments (for example, 5 to 10 per cent of your salary) into your ETF deposit (with whichever provider you chose to use) and use it as a mid-to long term savings plan. This decision is eventually up to you.

So, are ETFs good or bad tools to use as a savings plan? Simple answer, if they perform well, they are, if not, they’re not. This is the simple reality. The trick is to invest in the ones that are projected to grow the most and what helps to make this decision, is experience. But we all got to start somewhere. Engage with us on our socials, have you picked your first ETFs? Keep checking our blog for new weekly content

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Author: Sthandiwe Msomi

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