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I have R500k in the bank. What should I invest in?

Various available investment options will outperform cash over time.

I liquidated my equity portfolio and now have R500 000 sitting in a bank account that should earn 7% per annum. This is 20% of my total investment (including my pension) currently. I have an Allan Gray Equity Fund, a pension with Alexander Forbes, Satrix 40, Sygnia World, BEE shares, a few shares and a mortgage. I’m looking for an alternative investment as I’m not comfortable having R500 000 in cash sitting in a bank account.

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Cash in a bank account

I assume the money in the bank is at least invested in a money market account to earn higher interest than that earned on a cheque account. I concur that the reader should not be comfortable with the funds lying in the bank, as the after-tax interest could well be below the rate of inflation, resulting in a negative real return.

Liquidating the equity portfolio

Unfortunately, the investor does not mention the timeframe as to when the equity portfolio was liquidated or what the underlying shares were that were included in the equity portfolio. For the 2019 calendar year equities outperformed cash, although this trend was different for the 2018 calendar year. In retrospect, it may have been an incorrect decision to liquidate the equity portfolio. There’s no point in crying over spilt milk. Over the long-term (ten years) equities outperform cash consistently, albeit with more volatility. It is this volatility that many investors struggle to deal with – this has a lot to do with investors monitoring their investment balances every month.

Offshore exposure

Based on the limited information available it does appear that the investments portfolio does not have enough offshore exposure. Offshore exposure provides one of the bigger investment benefits of diversification. In addition to the access to different industry sectors, offshore exposure also provides the upside of growth through the depreciating rand.

Settling your bond (mortgage)

Settling your bond may have benefits that need to be considered. By settling your mortgage, you are guaranteed the saving of the interest on the bond – this could be 9% to 11%, depending on the interest rate on your bond. Keep in mind this saving is tax-free and certain. Looking back to 2015, there have been a few years where the growth on the local equity market has not exceeded 9% to 11%. From a cashflow point of view, one needs to apply discipline and utilise the bond payment that you no longer need to pay monthly to replace the funds used to settle the bond. This approach would probably be more appropriate for conservative investors, as well as investors who want more certainty.

Emergency fund

Before deciding on how or where to invest the cash available, you must have a readily-accessible emergency fund, such as a money market account. The size of the emergency fund will depend on the nature of your employment. For example, if you are a salaried employee the emergency fund should cover about three months’ budgeted expenses, and if you’re self-employed this emergency fund could be increased to six months’ budgeted expenses.

Timeframe of investment

The timeframe over which you want to invest is very important. This factor influences how aggressive you can afford to invest. Short-term (one to three years) – conservative (low risk with little equity exposure), medium-term (three to five years) – moderate (medium risk with between 40% to 60% equity exposure), and long-term (five years +) – balanced or aggressive (high risk with 75% to 100% equity exposure).

Structured products

In your question, you mention ‘alternative investment’. A structured product is an investment that is structured to provide a capital guarantee linked to upside exposure. Typically, such a product would have the following characteristics:

  • Time frame – usually five years.
  • Type of product – endowment (interest is taxed at a rate of 30% and 12% for capital gains tax purposes). If your current tax rate is below 30% then this product may not be appropriate.
  • Capital guaranteed – the guarantee is provided by investing a portion of the capital in a bond that over the five years gives back the capital amount invested.
  • Underlying index – the balance of the capital is invested in underlying derivatives linked to a world index. If this index yields any growth for the five years, a fixed return is guaranteed (as disclosed in the information brochure of the product). Some products are designed with an unlimited upside, meaning that if the index grows by more than the pre-determined guaranteed return, the actual growth is paid out on the investment.
  • Fees – the advisor fees are usually built into the product and do not reduce the capital guarantee.

Conclusion

There are various investment options available that will outperform cash over time. Which option is optimal, will be determined by your risk appetite, investment time horizon and how the investment complements the rest of your investment portfolio.

  

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