What could a South African do with R500 000 in a money market account (I know – get it out ASAP)? I have a small amount invested in Easy Equities (local), I have a tax-free savings account (used annual limit), no retirement annuity (RA), and an Easy Equities USD account. It’s not a great time to buy equities (locally or USD), or is it? Shall I put a lump sum in an Easy Equities RA? I need some money available for my daughter’s studies.
Thank you for your question. Firstly, regarding the money market comment, yes, I agree with you. Cash is currently yielding around 4%, and with current inflation at 5.2%, you are losing money in real terms. Until the interest rate situation changes in South Africa, I would strongly reconsider any cash exposure.
I am happy to hear you have a tax-free investment structure, as this is an excellent vehicle for any portfolio.
I would advise considering including a retirement annuity in your portfolio as this vehicle does offer excellent annual tax benefits, and can also provide a focused strategy for your personal retirement goals. You are allowed to deduct from your income for tax purposes up to 27.5% of the greater of your taxable income or remuneration, limited to R350 000 per year. This is a huge tax benefit if optimised annually.
Should you however require access to these funds as mentioned for your daughter’s studies, a retirement annuity is not the right vehicle as the funds will firstly not be accessible until age 55, and then only one third can be taken as a lump sum, while the remaining two thirds must be utilised to purchase a compulsory annuity that will provide you with a monthly annuity.
Specifically focusing on the funds for your daughter, I would advise considering a voluntary investment (this vehicle is accessible) and you can also add additional funds at any point in time. Here I would advise following a diversified approach, definitely including equity exposure both locally and offshore, but also diversifying slightly with cash and bonds.
I am not sure what your timeline is until your daughter starts studying – but the cash and bond components can provide immediate cash for the first withdrawals when they are required.
Diversifying sufficiently across asset classes also provides more consistent returns over the longer term, as you are protecting yourself against some market fluctuations you will experience with equity exposure.
We can’t time the market, although the ideal would always be to buy low and sell high. However, waiting for the right time could also mean missing many good days in the market. I would advise following a well-diversified approach.
More of the funds could potentially be kept in the cash and bond exposure (here I would advise also making use of multi-asset income funds, which invest in a combination of equity, bond, money market, property or derivative instruments with the primary objective of maximising income; the current yields are closer to 7% to 8%, significantly more than cash at this time) with the intention of moving more into equities in future, should that align with your investment timelines and goals.