Cash Club: Investment FAQs

In Cash Club, Latestby Njabulo Nsibande

The Cash Club Blog is just over a year old, and the response has been amazing. I’ve even made new friends in the process! Over the past year, a lot of people asked me money-related questions, which often have been answered on The Fat Wallet Show by Kristia and Simon. However, after a friend enquired about the same things, I figured a lot of people who are starting out in the world of saving and investing have very similar questions.

So here they are:

Q: Why would one change from individual shares to ETFs, because shares have a greater potential for returns?

A:  In investing, diversification is the most important rule followed by time. Data has shown that only 15% of active fund managers (single stock pickers) actually beat the market/index and that 15% is not the same funds every year. This means it’s very hard to beat the market/index by picking stocks. So for better returns over a long period, you would be better off buying the index (and better off than 85% of the active funds). Another point to consider is the risks associated with single stocks. What are the odds that you won’t pick a Steinhoff, EOH, Aspen, MTN  or African Bank? When Steinhoff happened, the impact was less significant on the top 40 index. More on ETFs here.

Q: When should you buy an ETF? Won’t you always be exposed to the risk of minimal returns due to the fact that the performance of companies may fluctuate?

A: Equity ETFs have great returns over the long-term. They carry the same running stocks as their constituents.

Q: If I declare my returns as income this year, will SARS always see this account as a trading account or is it a per tax event occurrence?

A: If you invest your ETFs in a tax-free account, SARS is moot. If the security (share/ETF) is bought and sold within three years using a normal account, it will be deemed as income unless you can prove to SARS that you intended to invest and not trade the asset (i.e. hold for longer than three years). So your profit will be added to your income and taxed at your marginal rate.

Here’s an example: Let’s say you buy 10 shares at R500: 500 x 10 = R5,000.

The share grows and is now R1,000 per share. Now your holding is worth R10,000. You earned R5,000 profit on the trade and you entered and exited within less than three years.

Now let’s say you earn R200,000 per annum. According to SARS, you earned R205,000 (your income + share profit) and will be taxed on this amount.

If it’s beyond three years, you would be liable for capital gains tax (CGT) and, at most, it will be 18% of the profit.

However, your first R40,000 in profit is exempt from tax. So if you held on for more than three years and your profit is R60,000, you will be liable for CGT on R20,000 and not R60,000. More on CGT here.

Q: What is the best bond ETF (to reduce risk) to buy in a TFIA which will give the best return?

A: I think the Govi ETF which holds government bonds, but I stand to be corrected. If you’re young, I would suggest to go full equity and not near cash ETFs, because you have time on your side. Equity ETFs are the best in a TFIA – especially if you have time.

If there’s one episode of the Fat Wallet Show I strongly recommend, it’s Five concepts that will make you rich. I think these concepts are fundamentally the most important in building wealth.

Njabulo Kelvin NsibandeNjabulo Nsibande is a Just One Lap user-turned-contributor. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.

Njabulo is a founding member of an investment club. In this blog he shares his experiences trying to work out the intricacies of collective investment in the true sense of the word.

Follow Njabulo’s journey here every month.

Find him on Twitter: @njab_soul.

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