Johanna writes:

My daughter is turning 21 and she has asked that instead of organising a party for her she would love to invest the money for herself. What is the best investment to consider as currently we have unit trusts and a share account with FNB. We are looking at investing at least R10 000 for her.

Maya replies:

How wonderful that your daughter understands the value of investing at such a young age! The power of compounding is in her favour given her young age and that money could double every seven years based on the average return of the stock market.

To put that in context by the age of 50 that R10 000 would be worth R360 000. Hopefully this is just the start and she will use this as a base to start investing and adding funds as she can.

The important question is what she wants to do with the money. If she is planning on saving for a gap year or a deposit on a home and expects to need the money within the next five years, then she would follow a more conservative approach of either investing in a money market fund, if she needs the money within the next two years, or by investing in a balanced fund with a lower exposure to the stock market for a period of up to five years.

If, however, this is for a longer-term investment the first thing to consider is a tax-free savings account (TFSA). She can invest up to R30 000 a year and her investment will not attract any tax, saving her a significant amount of money over time.

The second consideration is that given a longer time frame she can afford to invest in higher growth funds that have a high exposure to equities (shares). There are many unit trusts available as TFSAs or she can even invest via a stockbroker into the JSE Tax-Free Investment Account which effectively invests in exchange-traded funds.

She can either continue to add to this investment or she can start to learn about the markets and slowly start buying individual shares to build up a long-term portfolio. If she starts at such a young age, she could realistically reach a point where the dividends earned from the share portfolio are able to supplement her income by the time she reaches the age of 50. That is the power of starting early.