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.