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How do I construct a portfolio to live off?

I’m 25 years old, have a long-term investment horizon, looking for adequate returns and gains on capital. I have the following investments...

Q: …

  • A R30 000 tax-free savings account
  • R40 000 in a 32-day fixed deposit 
  • A ten-year investment policy of R1 000 payments (nine years to go) 
  • Shares (Adcorp, Woolworths, Growthpoint, Steinhoff) with EasyEquities totalling R5 000
  • Share builder and share saver accounts totalling R6 000 with FNB 

1. How best should one establish a stable portfolio to the level where one can live off some of the returns? Do I assume a mixture of government bonds, ETFs and blue chips, bearing in mind relatively little capital? Could you nominate a few ideal small caps, considering my age?

2. I want to move my tax-free savings account (2017 YOA) into a tax-free investment account (2018), to include purely ETFs. Is this wise? What are the tax implications? 

3. I’m looking at share trading through technical analysis. I’m a novice, looking at getting serious knowledge. Where would the best and cheapest place for such a trading platform be? 

4. Assuming I had an additional R2 000 every month, how and what would be the best way of investing it? 

Laurie Wiid - NFB Private Wealth Management

A: May I begin by saying how encouraging it is to hear a young investor so excited about investing and learning more about investments. Clearly you have done some research and have started your investment portfolio with ‘self-help’ options. Some of the key components to every investment portfolio include:

  • Determining your investment goals
  • Understanding the investment risks associated with different investment instruments
  • Having realistic return expectations
  • Knowing the tax implications of your investments
  • Being aware of the various costs associated with the product
  • Reviewing and monitoring your investments regularly
  • Being patient during difficult investment cycles

To build a portfolio that can provide income takes time. As a young investor, your primary objective would be wealth creation and not to draw income in the near future. A well-balanced portfolio will diversify across asset classes, including local and foreign bonds, listed property and equities.

To provide the stability you are looking for it’s recommended to invest in large blue-chip companies, as opposed to the small- and mid-cap companies. Investing in multi-asset unit trusts would be the easiest way to build a diversified portfolio with relatively small monthly investments. Younger investors do have more risk tolerance and should look towards local and foreign equity unit trusts. Numerous top fund managers have out-performed the JSE All Share index and passive ETF products.

Investing in tax-free savings accounts (TFSAs) is certainly beneficial to all investors. However, there are a few matters to consider:

  • Does your investment portfolio generate interest income that exceeds the R23 800 interest exemption? At an interest rate of 7%, you can have capital of R340 000 invested and pay no income tax.
  • The first R40 000 of capital gain is excluded from any capital gains tax.
  • The current lifetime limit you may invest in TFSAs is R500 000. It would therefore take +/- 15 years investing the current annual limit of R33 000 to exceed the current lifetime limit.
  • Young investors need to be aware that, should they require these funds for the purchase of a property or a start-up business etc, once redeemed they may not replace these investments. If you are not sure about your short-term needs, rather keep the TFSA for future investments.
  • This investment is made with after-tax income and, as a salaried employee, you may benefit more from the tax deduction derived from investments made to a retirement fund or a retirement annuity.
  • Finally, TFSAs do not permit funds with performance fees, so you could be restricting your investment choice. Switching between funds and ETF options would depend on the TFSA you are invested in.

Numerous software programmes are available for investors to purchase to learn the art of share trading. This could be a very expensive learning exercise, as many of these products are leveraged and your loss could exceed your capital invested.

I strongly recommend that you continue your quest to research investments, but consult with a financial advisor and let the management of your money rest in the hands of an experienced stockbroker or fund manager. Once you have acquired more investment expertise then consider allocating yourself a portion of your portfolio for technical trading.

It would appear that you don’t have any retirement funding or property investments. All your investments are voluntary and made with after-tax income. Provided you are earning more than R7 300 per month taxable income, you can invest up to R2 000 per month into a unit trust-based retirement annuity. You can invest the lesser of 27.5% of taxable income and R350 000 pa into a retirement product and deduct the full amount from your taxable income.

The retirement annuity is exempt from income tax and capital gains tax and is protected from creditors. The earliest you can retire from this investment is age 55 – therefore a very good savings vehicle for long-term wealth creation.

The listed South African property market offers small investors access to quality local and foreign properties through listed property shares or property unit trust funds.

Do you have any questions you would like answered by registered financial planners?



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