The best investments for 2016 and beyond
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Nonhlahla Kunene | 13 July 2016
Intellidex’s tax-free survey shows that of the 262,493 tax-free savings accounts (TFSAs) opened in their first year of operation, 59% are bank cash deposits; a somewhat concerning trend when considering cash investments are failing to beat inflation.
The survey shows that TFSAs are gaining market traction and National Treasury’s aim to encourage a greater savings culture is on track. Furthermore, about 21% of the new TFSAs were opened by first-time savers, an indication that TFSAs are succeeding to an extent in attracting low-income earners.
However, it seems consumers may be lacking some basic investment knowhow, and more information is needed on the broad investment options available through TFSAs to meet different investment needs.
This is particularly evident when considering that stockbrokers and collective investment schemes took the smallest share, each with 13% of the pie. This may be due to what Donald Rogan of Nedbank Private Wealth feels is a general perception that investing in equities is still expensive.
Sygnia portfolio manager John Anderson says bank account deposits would not be appropriate for medium- to long-term investment objectives. However, some form of money market investment would be suitable for very short-term savings objectives, such as saving for a wedding.
Nerina Visser, ETFSA strategist and advisor, believes banks are comfortable with the current situation and have no real incentive in educating consumers on the different investment options available to them. Another problem, she says, is with some larger financial institutions who are unlikely to encourage people to invest in TFSAs as they gain very little from these investments by way of fee income.
When it comes to information, for the message to be more effective, Visser believes it should fall on institutions such as the JSE, which she says is already doing a lot to create awareness. Visser feels information from such institutions, together with government itself, would be more effective than advertisements from private companies, which may be viewed as merely pushing company products.
Candice Paine – an independent consultant to Satrix which offers various ETF products that are available in TFSAs – feels the crux of the problem is not so much due to a lack of knowledge. She says it has more to do with the low savings rate in SA and the general lack of attention which many people give to their investments or financial future.
“Information is available, financial advisors are available and there is a host of information on the internet, financial forums, radio etc. It behoves people to do a little bit of reading and ask questions, attend seminars and educate themselves as having a sound financial situation leads to financial freedom,” she says.
In Anderson’s view the industry should be:
- Educating individuals on the benefits of tax-free savings, emphasising that although they can be used for short-term savings, the benefits are better over the long term.
- Educating individuals on different savings objectives and the kinds of investment strategies to match the objectives.
- Providing advice and products, and an appropriate investment strategy, that match the individual’s goals.
A great example of the above, says Anderson, is the introduction of robo-advisors into the South African market. “These platforms take individuals through simplified questionnaires to recommend, among other things, an appropriate TFSA investment strategy taking into account the individual’s goals, timeframe and risk tolerance. They would typically also make use of cost-efficient vehicles.”
Although take-up has been positive, there clearly is still room for further consumer education on tax-free savings. So where does this leave the novice investor, looking to kick start a winning investment portfolio, with no idea where to begin? What are the best funds to be invested in right now to take them through 2016 and beyond?
For Paine there are no “best” funds for now, and investors should rather look at funds which are low cost and broadly diversified. The fund choice, she says, depends on duration of the investment and the amount of risk the investor is prepared take on.
“A TFSA, if used correctly, is for the long term, 16.8 years to be exact.” Paine suggests this means all investors can and should take on risk (ie, invest in the stock exchange) with their TFSAs. “There are three taxes you are saving: tax on interest income, capital gains tax and dividend withholding tax. If you invest only in a low-risk money market account, you are forgoing all the savings you can achieve.”
Given the current market volatility, however, Rogan suggests that for new investors, near-cash would still be the safest bet until they’ve gathered enough knowledge to get up to speed with how investments work. “The first thing would be to open a TFSA, deposit money and when the time is right invest in equities, although I wouldn’t suggest that first-time investors try to time the market, but rather make use of a qualified adviser.”
Visser says many people tend to make decisions based on past performance and because of this have been investing in offshore funds because of the weakening rand. “But this would mean that you expect the rand to continue to weaken.”
For those wanting to focus on investments with the best tax benefits, Visser suggests a diversified portfolio such as ETFSA’s balanced portfolio which invests in both high dividend and capital gain instruments. “If I had to choose just one now, however, looking at the Brexit impact of financial shares, I would choose the Satrix FINI ETF, given how hard financial shares have been hit by the fallout. Although Brexit may have hit our financial shares hard, I do believe they much more resilient than we give them credit for.”
For first-time investors, Anderson suggests searching for companies providing low-cost equity portfolios. “If this is the first time you are investing, it is important to enter using a simple portfolio.”
This, Anderson says, is typically provided by index tracking providers – where the returns track a specified equity benchmark, such as the top 40 stocks on the JSE.
“I would also suggest you look at the robo-advisors in operation and go through their questionnaires to educate yourself on different goals and what they would typically recommend.”
Anderson does, however, stress the importance of checking the terms and conditions and whether the robo-advisor providers are willing to stand behind the advice they are providing.
“These robo-advisors would typically suggest an appropriate asset allocation taking into account your objectives, time frame and risk tolerance. Do not make decisions based on short-term volatility. Instead, stick to long-term principles – such as those typically used in quality robo-advisor algorithms.”
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