In these uncertain times, investors are faced with an important decision: whether to stay invested in the markets and bear the brunt of the tough economic climate or switch to cash?
1. Equities beat inflation over time. Cash diminishes an investor’s purchasing power once taxes and inflation are accounted for. After subtracting the inflation rate from what looks like an attractive interest rate offered on a cash account, the investor may be left with only a small return of 1 or 2 percent. Although returns on the JSE only just outpaced inflation over the past five years, when you look over a longer period, the returns are a lot higher. Equities have repeatedly outpaced cash over longer periods.
2. Equities provide long-term capital growth. From 2001 to 2018, South African cash outperformed South African equities and South African bonds only once over that period. During this period, South African equity outperformed South African cash and South African bonds on 11 occasions. Over the period, the average annualised return for South African equities was 15.73 percent, whereas the average annualised return for cash was 8.03 percent and 10.20 percent for bonds.
3.Dividends from equities provide an income source. A large portion of an investment’s growth during the capital build-up phase can come from re-investing the dividends paid. Dividends can also add to an investor’s income during retirement. In most cases, the dividend tax rate of 20 percent will be less than the investor’s marginal tax rate charged on interest.
4. Equity investors benefit from compound growth. In addition to benefiting from re-investing dividends, investors in equities benefit from compound growth. By starting early, investors will see growth compound over time.
5. Market volatility can work in equity investors’ favour. If investors have a long-term investment horizon, volatility can work in their favour. This is because they buy more units when prices fall - provided they stay invested and don’t panic and sell because markets have fallen. Investors also need to remember that markets fall slowly but tend to correct and rise quite quickly. Because of the rapid rise, investors who sell out of the markets and move into cash when markets are down realise their losses and will almost certainly miss out when markets rise again.
6. Investing in equities through a unit trust provides liquidity. Certain equity investments, such as collective investments (unit trusts) and shares, can be bought and sold easily. Although investors are encouraged to hold their investments for the long term, they do have the flexibility to sell if they need to.
7. Equities enable portfolio diversification. Equities provide diversification in a number of ways. By investing in a collective investment scheme, investors gain exposure to a number of shares and not only one company. Different unit trust funds can be included in a portfolio to provide exposure to different industry sectors, as well as offshore exposure. A large percentage of our stock exchange’s earnings are offshore, providing diversification even when investing in a local fund. Investors can invest with different fund managers, gaining exposure to different management styles.
8. Equities provide tax benefits. When investing in asset classes such as equities and property in a discretionary investment, investors have a capital gain exemption of R40 000 a year, which means they can realise a gain of up to R40 000 without any taxation.
9. Equities could also offer estate planning advantages. In addition to the tax benefits of investing up to 27.5 percent of the higher of their taxable income or remuneration in a retirement annuity (RA), pension and/or provident fund each year, this amount falls outside of an investor’s estate and therefore attracts no estate duty or executor’s fees. An RA is also protected from creditors in the event of an insolvency.
10. Benefit from qualified and experienced professionals. By investing in a collective investment scheme or a managed share portfolio, investors benefit from having their investment professionally managed by qualified and experienced professionals with proven track records.