Dear reader,

Thanks for the question.

Let me start by saying that it’s always a good idea to diversify your portfolio. The inclusion of various currencies and asset classes helps protect your entire portfolio and gives you various opportunities for growth.

When the question of cryptography arises, I always try to be as diplomatic as possible. I’ve seen investors make huge amounts of money and I’ve seen investors lose just as much. I don’t believe crypto has any underlying asset value and is largely driven by hype, but saying this I believe the technology behind crypto will shape the future and change the how transactions are conducted and ownership of assets traded.

Let’s start with some basic questions about money in the bank. How long do you have until you retire? Do you want access to the funds or do you agree that the funds are illiquid until retirement? What is your marginal tax rate? What is your appetite for risk and your ability to take risks?

First, let’s look at the period of the investment.

I’ll show you different funds, their volatility, and their performance over time to illustrate the effect time has on each one.

Choosing the right fund is essential, as you risk leaving money on the table by choosing the wrong funds.

If you need the capital within one to three years, you probably don’t want to take unnecessary risks. You would probably need to invest in a combination of fixed income funds and money market funds. These funds are suitable for investors who are looking for a smart alternative to cash or bank deposits over periods of 12 to 36 months and are looking to provide stability of capital and aim to achieve a higher return than a traditional money market or equity fund. pure income.

If you need access to capital within four to seven years, you will typically look to a balanced fund that mixes different asset classes (money market, fixed income, real estate and equities). These funds are suitable for investors who are looking to build capital over the long term, who need a portfolio with moderate capital growth and who are looking to preserve the purchasing power of their capital over the long term, but who are not not prepared to accept the short-term turbulence of the stock market.

If you have a minimum period of seven years, you should consider investing in local and international equity funds. An equity fund invests largely in the stocks of various companies to generate returns. Investments in equity funds are associated with higher risk compared to the funds mentioned above. These funds aim to generate long-term capital growth and real returns (returns minus inflation). These funds are volatile and it will be fluctuations in the value of your investment. You must have a long term view when investing in these funds and you must be able to withstand short term pains. Again, these funds are not aimed at capital protection, but at long-term growth.

Below are some examples of money market funds and fixed income funds that would typically be used for short-term goals.

You will see that both funds generated stable returns from January 1, 2019 to June 15, 2022. If you are an investor who needed stability of capital and stable growth, you were in exactly the right funds to achieve these goals. The average fixed income fund has provided 7.33% over the past three years, compared to money market funds which have provided 5.04% over the same period.

Fixed income and money market returns – three years

Below are some examples of local balanced funds that would typically be used for medium to long term goals.

Performance of balanced funds – five years

You will find that these funds are more volatile than fixed income and money market funds. These funds introduce greater exposure to equities and real estate, which creates these movements. The sector average for balanced funds over the past five years is 6.62%. Most of these funds have struggled over the past five years and struggled to provide investors with real returns, but the situation is improving over 10 years, as shown below. It just illustrates that funds with riskier assets need time to generate real returns.

Performance of the balanced fund – 10 years

Below are some examples of local and international equity funds that would typically be used for long-term goals.

You will find that these funds are more volatile than fixed income, money market and balanced funds. These funds introduce almost complete exposure to equities and real estate, which creates even more volatility. The industry average for local equity funds (red chart) over the past five years is 7.33%, while offshore equity funds (black chart) have managed to deliver 10.35%. As above, most of these funds have struggled over the past five years and struggled to provide investors with real returns, but the illustration below shows that these funds need time to provide investors with real returns and reward them for the risk they have taken. Saying that, you had to be patient and invest during periods when the fund had downward movements.

Performance of offshore and local equities – 10 years

Money market and balanced vs local and offshore equities – 10 years

The illustration above shows that international equities (black) and local equities (red) outperform the equilibrium (purple) and money market (grey) by some margin. If you took a long-term view of your capital and invested in a money market fund, you would have been rewarded with 86% over the period, while the balanced fund provided 148%, local stocks 276% and international equities 347%.

Taxes

Let’s take a look at the different taxes to be paid on investments.

There are many taxes that investors will have to pay when they earn money on their mutual funds, the most notable of which is a tax on income (whether interest income, dividends or listed assets) and capital gains tax (CGT). The impact of these taxes will vary depending on each investor’s circumstances and the underlying assets in which they invest.

The actual tax you pay depends on a combination of factors, the two main ones being: your own marginal income tax rate; and the type and amount of income and capital gains you earn in your selected unit trust funds. The higher your marginal tax rate, the more tax you will pay.

interest income

If you own bonds or cash in your mutual fund, you will have to pay taxes on the interest income they pay out. This interest income is subject to income tax and is taxed at your marginal tax rate. Individual taxpayers enjoy an annual exemption on all South African interest income they earn, set by Sars each year. Interest from South African sources, earned by any individual under the age of 65, up to R23,800 per annum, and persons aged 65 and over, up to R34,500 per annum, is exempt from income tax.

Dividend income

For equities (excluding listed real estate), you will be liable for dividend withholding tax (DWT) on the dividend income they pay. The 20% DWT is withheld from your dividends before they are paid or reinvested. Note that DWT is only payable on dividends paid by corporations and is payable after the corporation has already paid 28% corporation tax on its net profits.

CGT is another tax associated with investing in mutual funds. A capital gain event is only triggered when you decide to sell (some or all) of your investments. If the price of shares has increased since you invested, this increase in value is called a capital gain. Currently, only 40% of this capital gain (not the total gain) is included in your annual income; this brings the maximum rate of CGT for individuals paying the maximum marginal tax rate from 45% to 18%. An annual exclusion of R40,000 capital gain or loss is granted to individuals and special trusts.

Investment vehicles and taxation

Now that we know our investment period and the funds we are going to use, we need to choose the right investment vehicle. These vehicles have different rules attached to them and understanding these rules is important in choosing the appropriate vehicle.

Retirement pension:

Tax on interest: No

Dividend tax: No

Capital gains tax: No

Tax deduction for contributions paid: Yes, up to 27.5% of the greater of remuneration or taxable income, subject to an annual cap of R350,000. Contributions over R350,000 will be carried over to the next tax year.

Investment period: Until the age of 55 or more of the investor.

Withdrawals: Capital will only be available upon retirement. One third can be withdrawn as capital and the other two thirds must be invested in a life annuity.

Offshore Limits: Yes. Maximum offshore exposure of 30%, with an additional 10% for Africa.

Flexible investment:

Interest tax: Yes

Dividend tax: Yes

Capital Gains Tax: Yes (Maximum of 18%)

Tax deduction for contributions paid: No

Investment period: Indefinite.

Withdrawals: Money is freely accessible at any time. You can make lump-sum withdrawals or investments at any time.

Offshore Limits: None.

Donation:

The tax rate on endowment income is set at 30%, which means that if your tax rate is higher than 30%, your returns will be taxed at a lower rate.

Interest tax: Yes

Dividend tax: Yes

Capital Gains Tax: Yes (Maximum of 12%)

Tax deduction for contributions paid: No

Investment period: Five years

Withdrawals: Restricted. You can only withdraw money once during a restricted period, but you may be subject to penalties.

Offshore Limits: None.

In conclusion …

Knowing the duration of your investment and choosing the right investment vehicle for your needs must be adapted. All of these factors influence the type of funds you will need and the investment vehicle you should use to ensure you are taxed effectively.

When you invest for the long term, you need to have time on your side and you need to be prepared for tough market conditions.

Please feel free to contact me or speak to a reputable financial advisor.

Good luck and good investment.