Personal Finance

A house is a home, not a way to fund a comfortable retirement

The best strategy for wealth accumulation is a diversified portfolio

Buying your own home is important. It provides a place to live and a form of security. But you cannot rely on appreciation in house prices to fund a comfortable retirement. Data on household wealth accumulation over the past eight years shows that the best strategy for growing wealth is to hold a diversified portfolio with a weighting towards financial assets like shares or bonds, rather than property.

Household wealth is influenced by three factors. The first, is that a surge in debt can quickly undermine the net worth of any household, especially if the debt is being used to fund consumer spending rather than buying an asset such as a vehicle or residential property.

The second component is growth in the value of financial assets such as unit trusts, direct holding of shares, pension funds, retirement annuities or a bank deposit. Their appreciation is largely determined by the level of interest rates or the performance of the stock market. Stock markets can be volatile over short periods, but they mostly perform exceptionally well over the longer term.

The final component is growth in non-financial assets. These include mainly residential properties, but also vehicles and other durable goods. Over time this category has been expanded to include a wider range of assets, such as art and other collectable items.

In 2017 SA’s householders were richer than ever before, with a net worth (after debt) of more than R10tn. That is partly because, after the financial crisis of 2008, household debt, particularly mortgages, rose slower than in the borrowing spree of 2005/06. Now it is quite manageable.

Household mortgage debt, measured in rands, increased by an annual average of only 3.7% over the past 10 years, which is well below the rate of housing inflation.

Apart from lower debt, South African householders also gained from the appreciation in their financial assets, which has far outstripped growth in physical assets. Over the past eight years growth in financial assets, including equities, money market and income funds, has averaged 9.7% a year. By comparison, physical property has appreciated by an average of 6.8% a year and inflation was 5.6%.

Source: Business Live

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