“Death waits for no man, if he does he usually doesn’t wait for very long” – Markus Zuzak (Author of The Book Thief).

Due to medical and technological advancement and, possibly, healthier lifestyles, many have been able to thwart death for a little longer nowadays than in the past. While many people live longer, they do not necessarily retire later. This has forced us to think differently about investing as a retiree. Admittedly a very morbid subject matter, it is crucial to consider your life expectancy, likely higher than planned medical expenses, inflation and how this is accounted for in your investment strategy.

Taxes and interest rates, nearly as morbid and equally important, also need to be considered in your decision making process.

The prevailing interest rate becomes a very important matter in an environment where uncertainty reigns. Mostly because many individuals will choose a certain rate of growth over an increasingly uncertain, but possibly higher, rate of growth. With the local JSE producing lacklustre returns over the past 3 years, the attention paid to fixed interest rates has spiked markedly. Understandably, it creates unease to see the market go sideways while your cash deposits just steadily tick up.

A complicating factor to add to the above is the effect of taxes. A cash deposit earning a rate of return of 7.5% will be taxable at your marginal rate. Thus, if your marginal tax rate is merely 25%, your net return will be 5.63% after tax. This is roughly in line with long term inflation, which means that you are breaking even. The value of the deposit is growing at the exact same rate that the purchasing power is decreasing.

You can infer that the higher your tax rate, the more inefficient it is to hold cash. Any rate of tax that is higher than (about) 25% will result in a substantial loss. Differently put, you are choosing a certain, but small, loss over the uncertainty of a potentially higher growth rate, which may fluctuate significantly over time.

Although we generally have positive real interest rates in South Africa, it is not always a simple and straightforward decision to allocate to cash. The personal circumstances of investors today are different to those of a decade or two ago. One needs to be incredibly careful of drawing on capital, as this approach will in all likelihood prove unsustainable.

There are, however, some counters to the above. For instance, capital growth is not untaxed. The difference is that interest is taxed each year, while CGT (Capital Gains Tax) is only paid when a gain is realized. By delaying the tax on capital growth, you are effectively earning growth on a higher asset base as it needn’t be depleted by tax expenses each tax year. The tax on capital gains are also capped at 18%, while interest can be taxed by up to 45%. From a tax point of view, interest leaves an investor at slightly more of a disadvantage than capital growth does.

Another counter is that because of the high uncertainty in the future growth prospects of the local stock market, investors are allocating to cash. The purchase price of a share is important. In South Africa the valuation levels definitely are not cheap, so while it may not be the best time to buy SA shares, it should be noted that there are still a few noteworthy opportunities to consider. Globally, valuations are more reasonable, and offer a much wider opportunity set.

It is advisable to think about it this way: most companies exist to make a profit. As a shareholder, you will share in these profits that need to be higher than a cash deposit rate. Simple. There will be years when things do not go as well as they should, and there are companies that you need to stay very far away from. However, profitable companies will always be around, and, barring a complete reset of the global economy, you will be better off invested in shares in the long term than cash in the bank. As an investor, one should have a much longer thinking horizon than simply looking at year on year performance.

It is by no means a binary decision. You should invest into a diversified spread of assets. Do not over allocate to cash, for the reasons mentioned above. However, do not invest only in shares either, as it remains a risky asset class. It is about finding the correct balance. In times when the local stock market’s prospects are dim, it pays to investigate options such as high yield income strategies, structured notes & increasing your global allocation. If the attractiveness of one growth strategy (SA Equity) is low then look for alternative growth strategies, such as the above, and ensure that assets earmarked for capital growth remain invested in growth strategies. Draw up your investment plan and stick to it – deviation is the best way to underperform in the long term.

Kind regards,
Stefan Keeve










All illustrations, forecasts, information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We endeavor to provide accurate and timely information but we make no representation or warranty, expressed or implied, with respect to the correctness, accuracy or completeness of the illustrations, forecasts, information or opinions. No party should act upon such information or opinion without obtaining the appropriate professional and specialised financial, legal and tax advice based upon a thorough examination of a particular situation. Investors should at all times remain aware of the risks involved in the buying or selling of any financial product, and hereby acknowledges the inherent risk associated with the selected investments and that there are no guarantees (Paragraph 6(2)(f) of BN92).
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DEFINITIONS (where applicable)
Annualised Return:       Annualised return shows longer term performance rescaled to a 1 year period. Annualised return is the average return per year over the period. Actual annual figures are available to the investor on request.
Highest and Lowest:     The highest and lowest returns, since launch, for any rolling 1 year period have been shown.
Annual Return



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