Anthony Toker - Anchor Capital
It is admirable that you want to buy your first car in cash.
A car, which falls in the category of a lifestyle asset, is not an investment. It is generally accepted that the value of a car depreciates significantly over time, with some estimating that after only two years a car is worth half of what you paid for it. So, by buying a car in cash you are already saving a considerable amount in interest charges.
However, besides the price of the car, it is also important for a future car buyer to factor in the cost of having comprehensive insurance on the vehicle when assessing the affordability of the car you are interested in.
Prior to making any investment decisions, we believe it is important for an investor to understand the type of return he/she can expect during the required investment period and to know how the money will be invested. We highlight that it is impossible to know from one year to the next which asset class will be the best performing. For example, last year local equities were one of the worst-performing asset classes, with a return of 2.63% for 2016. However, this year local equities are the best-performing asset class, with a return of over 12% year-to-date.
Any investor should therefore be aware that there are many different factors that can have an impact on market returns, including local and international interest rate movements, geopolitical events, currency swings, among others. All of these factors can result in short-term market volatility and capital fluctuations that can be difficult to go through at that time.
Nevertheless, investing in a good, balanced unit trust has historically delivered decent returns. A unit trust, which allows a group of investors to pool their cash and invest in various asset classes, is managed by a fund manager who invests in accordance with the regulations and mandates of the funds. Unit trusts are registered with the Financial Services Board (FSB), which affords investor protection.
A balanced unit trust fund invests in a mix of equities, bonds, commodities and cash and can have foreign exposure of up to a maximum of 25% of the value of the fund. There are hundreds of funds to choose from and we would suggest sitting with an experienced financial planner who can assist a potential investor with choosing those funds that have a good long-term track record and proven fund managers.
You mention a time horizon of three to five years for the monthly investment. If one looks at the returns of a quality balanced fund over the last five years, investors would have achieved returns of between 10% and 12% per annum, on average. However, the last three years have been a tough period in South Africa, with low annual growth and a stagnating economy, resulting in investors achieving returns of 6% to 8% per annum, on average.
If you contribute R4 000 per month with no annual escalation for three years and with an 8% return, it would result in a value of R162 500 at the end of the three-year period. At a 10% return it increases to R167 361 and at a 12% return to R172 317. However, all of these scenarios are still well below what you would need in order to buy the car in cash. With the current political and economic uncertainty in South Africa and the potential of further downgrades to our credit rating by Standard & Poor’s and Moody’s, it is also unlikely that we will get higher market returns over the next few years.
If we look at achieving your goal over a five-year period, by contributing R4 000 per month with no annual increase, an 8% return will result in a value of R293 656, while 10% growth gives you a value of R308 687 and at 12% yield you get R324 414. These are far better scenarios in terms of attaining your stated goal.
It is also important to consider the costs involved in your investment(s), which include the management, financial advisor and platform fees. We would therefore recommend a discussion with your financial advisor, who can assist you in keeping these costs as low as possible. In addition, bear in mind that the investment may incur some capital gains tax (CGT).
If you decide to invest for five years and you have a marginal tax rate greater than 30%, then it may well be suitable for you to invest in an endowment policy. This allows you to invest for a minimum of five years and, while access to the capital is limited, taxable growth is taxed at 30% and the capital is tax-free in your hands when you withdraw the proceeds of your investment.
To summarise, in our view three years is not sufficient time for you to save enough capital to buy your first car in cash. However, investing in a good balanced fund over a five-year period should result in you being able to do so.