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By Ruan Breed*
It’s tradition at this time of the year to give investors a glimpse into what they can expect in the coming year. These predictions typically focus on the opportunities that you should be looking to cash in on, but I’ll be breaking with this tradition by offering insights into investments to avoid in 2022.
1. Investments with high upfront commissions
One way to squander your returns is to invest with an advisor or large insurance outfit focused more on their financial benefit than your well-being.
All too often, their retirement products are structured around their needs such as earning upfront commissions and fees. Also, you must ask whether an insurer’s attention is sufficiently focused on managing your portfolio vs their primary business of short-term and life insurance.
The biggest danger is that you are sold a product or investment that is not managed appropriately, which could mean you will miss your retirement goals.
My advice: rather steer clear of brokers and insurers who have a greater interest in earning commissions and fees than looking after your investment portfolio.
2. Avoid investments you do not understand
This sounds like common sense to me, but the explosion of cryptocurrencies and meme stocks seems to have clouded many investors’ minds.
The problem with many of these fads is that they are not legitimate investments. Look at our home-grown Bitcoin Ponzi scheme Mirror Trading International that duped some 260,000 investors out of 23,000 Bitcoin.
The promise of great riches from schemes that sound too good to be true almost always are.
My advice: always be clear about what the underlying asset is that you are investing in. A legitimate financial advisor should be able to do so easily by showing you the funds and that assets that they hold.
3. Cash & money market investments
Interest rates are simply too low at the moment to justify holding significant amounts of capital in cash or money market instruments for the long term.
It makes sense to have short-term capital in these safer assets if you are saving for a short-term goal or have an investment horizon of less than 18 months.
But, unless you are holding this money in reserve as dry powder to take advantage of investment opportunities, you are doing more damage than good to your portfolio.
My advice: If you have a long-term view, and your goal is capital growth, then you will need to strongly consider higher risk investments.
4. Tax-Free Savings Accounts at commercial banks
I’m of the opinion that the naming of Tax-Free Savings Accounts (TFSA) does no justice to this product that should rather be labelled as a Tax-Free Investment Account.
That is to say if you do not take up accounts offered at the main street banks because their annual returns of around 5%-7% simply do not offer any meaningful value after costs and inflation.
The aim of TFSA’s is to encourage South Africans to save by offering a vehicle that can deliver long-term capital growth without sacrificing any gains to SARS. The secret to using this vehicle is the ability to leave the money untouched for as long as possible – more than 15 years will be ideal.
My advice: Rather invest in a tax-free investment account available on dedicated investment platforms like Momentum Wealth, Sygnia or Ninety One. These funds have shown much higher returns in the region of 10% and more.
5. Retirement annuities for young individuals
A retirement annuity (RA) is the go-to solution proposed by many advisors, usually those associated with the large insurers.
One of the big selling points is that they offer ‘tax-efficient investing’ because of the monthly rebate, but they also come with limitations that you need to be aware of. And because of these limitations, I believe that younger investors should avoid these investment options for the time being.
Here is my reasoning:
RA’s need to comply with Regulation 28 of the Pension Funds Act that limits how much offshore exposure is allowed in the fund. This has led Reg. 28 funds to drastically underperform over the past decade.
One other drawback is the possibility of changes in legislation (as is already on the cards) that could further limit your choices.
The reason I suggest that young investors avoid RAs as a retirement planning option is because the tax advantages are insignificant when you are earning an entry-level salary.
And then, your capital is tied up in the RA until you are 55, and when you retire you have no choice but to move at least two-thirds of your capital into a living annuity. Thanks to recent legislation, you will not be able to get any of your capital in an RA for three years after you emigrate from South Africa.
So, there are many more factors to consider than simply a tax deduction.
My advice: Young working adults would be better of putting your money into a TFSA where you can get 100% offshore exposure with much healthier tax advantages in future.