An introduction to investments in South Africa [video] - Rands and Sense by 10X
26 September 2024
In the era of state capture and its associated economic uncertainty, understanding the core choices facing South African investors has become more crucial than ever. As the financial landscape continues to evolve, investors need a clear understanding of fundamental investment principles, and the confidence to act on that understanding. Enter Rands and Sense by 10X, a video platform dedicated to giving South Africans the information they need to feel confident in making informed decisions about their financial futures. In our first episode, we discuss everything from market cycles to tax-free savings accounts and offshore investing, and a lot more besides. We've summarised the main talking points below as well.
- 00:00 Introduction
- 02:12 Election, the GNU and South Africa's investment outlook
- 06:45 Understanding market movements and volatility
- 07:57 How markets work in cycles
- 16:18 Cryptocurrency as a commodity
- 19:44 Property as an asset class
- 27:04 Investment timelines, and risk in asset allocation within investment portfolios
- 30:38 How not to run out of money during retirement
- 34:10 What to buy and when? Investing in different assets
- 41:22 Retirement investments, unit trusts and tax-free savings accounts
- 47:35 Fixed deposits
- 51:18 Offshore investing
- 53:11 Offshore investing in retirement
Market Rhythms: Understanding Economic Cycles
One of the fundamental concepts in investing is the cyclical nature of markets. Markets move in waves, reflecting the underlying business cycle. This cycle begins at a trough, moves through expansion as businesses invest and grow, reaches a peak where profits are highest, and then enters a decline or recession phase.
Overlaying this business cycle is investor sentiment, which can amplify market movements. During prosperous times, investors may become overly optimistic, driving valuations to unsustainable levels. Conversely, during downturns, pessimism can push prices below their intrinsic value. Understanding these cycles is crucial for investors to maintain perspective and make informed decisions.
The Art and Science of Asset Allocation
Diversification and proper asset allocation are important cornerstones of successful investing. A well-structured and (regularly reviewed) portfolio typically includes a mix of local and international equities, bonds, property, and cash. The exact split depends on an individual's life-stage: a combination of risk tolerance, investment goals and time horizon.
Growth assets like equities are favoured by investment managers for investors with long time horizons, because of their potential to consistently beat inflation over time. However, so-called 'defensive' assets like bonds and cash are equally important for stability and lowering the overall risk of the portfolio, especially as investors approach retirement. If you're unsure about the mix of assets in your investments, consider getting a free comparison report from 10X.
The Tax-Free Savings Account: A Hidden Gem
In South African, the Tax-Free Savings Account (TFSA) stands out as a unique and powerful investment vehicle. Introduced by the our National Treasury in 2015, TFSAs allow individuals to grow their wealth tax-free, with no tax on interest income, dividends, or capital gains. Which means you can benefit from the full might of compound interest.
These tax advantages are so significant, in fact, that you could be looking at 30% more wealth over 30-40 years compared to the usual taxable investments (unit trusts or property, for example). However, it's crucial to use TFSAs correctly - they're not a short-term savings pocket. They're best suited for long-term investments in growth assets, which can weather (and indeed, benefit from) the effects of market volatility over time.
The Property Conundrum: Home Ownership vs. Property Investment
The question of property ownership vs. property rental is ubiquitous when discussing personal finances. If you own property, your primary residence is best viewed as a lifestyle choice rather than a pure investment. The decision to buy (and what to buy) should be based on affordability and how that home will fit into your overall budget, rather than any speculative future gains.
For those considering property as an investment, it's essential to understand the hands-on nature of owning a property. Unlike more passive financial instruments, physical property requires active management, from maintenance to dealing with tenants and the municipality (and paying rates, taxes and insurance, obviously!). In short, physical properties require time and money simply to maintain them. People sometimes think rental properties are a guarantee of good income; but it's impossible to know the real costs of producing that income over time.
Offshore Investing: Balancing Opportunity and Risk
The primary reasons for considering offshore options include hedging against country-specific risks 9and Rand depreciation), portfolio diversification, access to industries not available locally (such as big tech and AI), and exposure to faster-growing markets.
But, offshore investments come with an additional layer of complexity due to currency fluctuations. If you have money offshore and it does well while the Rand does badly, there is a lot of potential upside. But that can work in reverse too - international markets take a dip while the Rand strengthens, and then you've been hit with a double whammy. For retirees, in particular, it's crucial to match assets to liabilities – for a Rand-based investor, our data shows that some offshore exposure is a good idea, but what that number is depends on your unique financial situation.
Did you know that with the 10X Living Annuity, you can invest up to 100% offshore?
Retirement Planning: The Golden Equation and the Value of Expertise
For those approaching retirement, understanding the "golden equation" is vital. This concept involves balancing drawdowns (income taken from investments), inflation, and fees on the one hand, against investment returns on the other. The goal is to make sure that the initial investment capital is never depleted.
This delicate balance underscores the importance of consulting a retirement expert, especially when navigating the complexities of products like living annuities. While DIY investing has its place, the stakes are often too high in retirement planning to go it alone. From understanding market cycles to optimising tax-advantaged accounts and planning for retirement, successful investing is as much an art as it is a science, and leveraging the vast experience of the 10X investment consulting team could mean far less stressful decision-making.
Did you know that a 1% savings in fees can mean up to 30% more money in retirement? Understand your costs by using our handy Effective Annual Cost calculator.
10X is here to empower you
As we navigate an uncertain economic landscape, one thing will never change: knowledge is power. By understanding the fundamental principles of investing and seeking expertise when needed, you can make the right decisions to achieve your financial goals and secure your financial future.
The often opaque world of investments, with its weird jargon (diverse asset classes, anyone?) and complex products, can seem overwhelming. But by staying informed, maintaining a long-term perspective, and making the right strategic decisions, you can navigate this landscape with confidence. Get in touch with 10X now to ensure you're on the right track.
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