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Don't make these three fatal mistakes with a Tax-Free Savings Account

by , 11 July 2016
Don't make these three fatal mistakes with a Tax-Free Savings Account
Just imagine the shock I got when I read that, “59% of TFSAs have been opened at banks, and the majority of investments are in cash.”

Really? Cash investments? That really worries me.

Think about this…

Investing in a tax-free deposit account from the major South African banks will give a return between 6%-8%. But consider that inflation is sitting at 6.1% and not going to stop there, you're basically receiving no returns. Even worse, sometimes losing money.

That's why today, I'm going to share three fatal mistakes South Africans are making when investing in TFSAs.
 
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 I managed to outperform the JSE All-Share and every fund manager by more than double over the past six years.
 
And I can proudly say that, without a shadow of a doubt, the Room 305 strategy has been the biggest influence on my career – and still is to this day.
 
 
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Mistake #1: Not protecting your investments against inflation 

 
As I mentioned earlier, inflation is sitting at 6.1%, but I want to expand on why I think inflation won’t decrease even further.
 
Firstly, in November 2015, South Africa was hit with one of the worst droughts in 30 years affecting farms across the country. And it’s affecting the country today.
 
Inflation hit a high of 7% in February and consequently food prices have soared and interest rates rose.  In fact the South African Reserve Bank expects inflation to ONLY come down within its 3%-6% range in 2017.
 
So it’s vital you protect yourself against inflation and one way you can do that is investing tax-free inflation-linked bonds.
 

Mistake #2: Fearing the stock market

 
According to South African research house, Intellidex, out of the total assets held in TFSAs – R2.57 billion, R1.3 billion is invested in cash (tax-free deposit accounts) through banks.
 
The reason?
 
Firstly, South Africans fear the volatile stock market. But remember, with all investing comes risk. You have to risk a little to make a little.
 
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One of my subscribers actually sent in an email to me at The Winning Streak saying:
 
“This is not for the faint hearted, but if you want to make fast money, doing very little ‘work’, there simply is no better way than The Winning Streak.”
And I couldn’t agree more.
 
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Also remember, there are over 400 shares on the JSE, so you have plenty of options to identify the companies that can thrive in volatile markets.
 
But if investing in single companies is too risky for you, then carry on reading and I’ll share an easier less-risky way to invest in the stock market.
 

Mistake #3: Ignoring the capital growth and income aspect of ETFs

 
The great thing about TFSAs is you can invest in a range of exchange-traded funds (ETFs).  
ETFS provide you with an easy and cost effective way to gain access to a selection of shares or assets on the stock market.
 
ETFs track an index, so you gain instant exposure to the companies making up the index. This gives you instant diversification, which lowers your risk and can improve performance.
 
Investing in tax-free ETFs has become so much easier with EasyEquities platform. You see, when you open a normal brokerage account with EasyEquities, they automatically open a tax-free savings account for you – you don’t have to do any work. Plus the brokerage fees are minimal so you don’t have to worry about fees eating up your returns.
  
  
All you need to do is pick the ETFs you want to invest in. For example:
  • You can track South Africa’s 40 biggest companies by investing in the RMB Top40 or Satrix Top40
  • You can invest in gold without owning the physical metal using NewGold ETF
  • You can access the JSE top dividend-payers investing in the DivTrax
So instead of investing in cash investments that will generate meagre returns and will be impacted by rising inflation, there are many equity ETFs that provide capital growth and income, which are more likely to boost your overall returns.
 
Until next time,
 

Always remember, knowledge brings you wealth
Joshua Benton, Editor, Real Wealth


Don't make these three fatal mistakes with a Tax-Free Savings Account
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