The power of smart decisions and compound interest

As South Africans indulged in Black Friday 2023, the highest single transaction on the day totalled a staggering R113,000 at a luxury jewellery boutique[1]. While diamonds are said to be a girl’s best friend, in this article we consider what could happen if that money was invested instead.

The example below illustrates the true cost of spending on big-ticket items on Black Friday.

If the consumer who spent R113 000 decided to rather invest his/her money into the Optimum BCI Equity Fund (delivering 19% growth), the investment could have grown to be worth R134,470.94 in just one year. That’s R21,470.94 in potential growth from simply letting the money work for you instead of spending it.

Exhibit 1 | Optimum BCI Equity Fund – growth of lump sum investment

Source: Factset. Data as at 30 September 2024. Past performance is not indicative of future performance. For illustrative purposes only and not indicative of any investment.

A small shift in mindset can have a big impact

Instant gratification can get the best of us and we often don’t think twice about treating ourselves when goods are on sale. The sad reality is that people rarely have the same instant enthusiasm when it comes to saving and investing. It’s easy to understand why – apart from the obvious market uncertainty and volatility – money in the bank doesn’t always feel as thrilling as a shiny new bracelet. However, the truth is that time in the market is one of the most powerful (and shiny) tools consumers have.

The challenge lies in deciding to invest. If you’re waiting for the perfect moment, remember that time in the market trumps timing the market. The cost of staying in cash, or even worse, not saving at all, can be detrimental to long-term wealth creation. When you invest early, you position yourself to benefit from the market’s natural upward trajectory.

Let’s consider the average Black Friday shopper’s basket value, which was R1,364 in 2023[1]. What if instead, you invested this amount monthly over 10 years instead of spending it?

In the example below, we illustrate the growth of R1,364 invested in the OIG High Equity Return Option for 10 years, with a 5% escalation in contributions annually. A small starting amount of R1,364 can turn into R365 561,17 through the power of compound interest and diligent saving. This demonstrates how even small investments can yield substantial returns over time.

Exhibit 2 | OIG High Equity Return Option – growth of monthly investment over 10 years

Source: Factset. Data as at 30 September 2024. Past performance is not indicative of future performance. For illustrative purposes only and not indicative of any investment.

In conclusion

When making a long-term investment, keep in mind that market timing is elusive, and patience is crucial. With the guidance of a financial advisor, determine your equity exposure based on your goals, investment time horizon, and risk tolerance, then invest as soon as you can.

As we approach this year’s Black Friday, consider the impact of your spending. What if your splurge became an investment instead? The sooner you start, the greater the potential for your wealth to grow.

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Sources:

[1] Source: TimesLive “Black Friday shoppers spent R4.5bn, with jeweller seeing largest single transaction”. Published 29 November 2023.

[1] Source: Moonstone “Black Friday: retailer payday or sales fizzle?”. Published 7 December 2023.