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  • A taxpayer can make an investment in a Section 12J company and this investment is 100% tax deductible if held for a period of 5 years or longer.
  • If the taxpayer is an individual with a marginal tax rate of 45% or a trust, the taxpayer can invest R1 million and will effectively be paying R550 000 (R1 million – R450 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the taxpayer has taxable income of R450 000 or more).
  • A company (excluding a Small Business Corporation which will be taxed at different rates) can invest R1 million and effectively be paying R720 000 (R1 million – R280 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the company has taxable income of R280 000 or more).
  • When the section 12J investment is realised in the future, the base for the capital gain will be 0 due to the initial benefit of 100% tax deductibility.
  • There is no annual limit, but investors should not invest more than their taxable income.

“Price is What you Pay. Value is What you get.” – Warren Buffett
Just the thought of risk can give investors sleepless nights. However, through careful planning for your financial future, we can assist in managing your risk.

You Can’t Have One Without The Other

Risk

Just the thought of it can give investors sleepless nights. However, through careful planning for your financial future, you can help manage the risk. Risk is something you encounter on a daily basis. Even crossing a busy street involves some risk. With investments, balancing risk and return can be a tricky operation. All investors want to maximize their return, while minimizing risk. Let’s face it; putting your hard earned money on the line can be very frightening. Some investments are certainly more “risky” than others, but no investment is risk free. Trying to avoid risk by not investing at all can be the riskiest move of all. That would be like standing at the curb, never setting foot into the street. You’ll never be able to get to your destination if you don’t accept some risk. In investing, just like crossing that street, you carefully consider the situation, accept a comfortable level of risk, and proceed to where you’re going. Risk can never be eliminated, but it can be managed. Let’s take a look at the different types of risk, how different asset categories perform, and the ways and means to help manage risk.

Types of Risk

When most people think of “risk” they translate it as loss of principal. However, there are many kinds of risk. Let’s take a look at some of them:

Capital Risk: Losing your invested monies.

Inflationary Risk: Investment’s rate of return doesn’t keep pace with the inflation rate.

Interest Rate Risk: A drop in an investment’s interest rate.

Market Risk: Selling an investment at an unfavourable price.

Liquidity Risk: Limitations on the availability of funds for a specific period of time.

Legislative Risk: Changes in tax laws may make certain investments less advantageous.

Default Risk: The failure of the institution where an investment is made.

How Do Different Assets Perform?

It may seem that there are countless types of investment products to choose from but, basically, there are three types of core investments: cash (or cash equivalents), bonds, and stocks.

Cash

Investments such as bank savings and checking accounts, Certificates of Deposit (CDs), and Treasury Bills. The prices generally don’t fluctuate very much. To investors concerned with loss of capital risk, cash would appear to be the most secure choice, as principal is guaranteed and/or insured. Savings and checking accounts are highly liquid, as they can be readily converted into cash. With CDs, you may face liquidity risk, as they must be held for a predetermined period of time or may be subject to penalties for premature withdrawal. Although risk to principal may be minimal, loss of purchasing power, or inflationary risk, must be taken into consideration. When inflation and taxation are taken into account, returns can be considerably lower. Hypothetically, let’s say in 1981 you earned 14% in an investment. It sounds astronomical; however, the inflation rate at one point that year soared to 15%. That’s a net loss of value of at least 1% — and that’s before taxes take another bite.

Bonds

Commonly called “fixed-income investments,” they are basically loans or “IOUs.” Interest is earned on the money you lend. The prices of bonds do move up and down, but normally not as much as stocks. Many people think of bonds as conservative investments, but the returns can have a high degree of volatility. The fluctuation of interest rates is called interest rate risk, and a downturn in the bond prices could significantly decrease the overall return of any particular bond.

Stocks

Represent equity in, or partial ownership of, a company. An easy way to remember the difference between stocks and bonds is: “With stocks, you own. With bonds, you loan.” The price of a stock or share can move up or down, sometimes a lot. The returns of stocks from year to year can be quite volatile, but, the returns from stocks have significantly outpaced inflation, and topped the returns from cash and bonds as well, over a twenty-year period.

Finding Your Comfort Zone

It’s possible to achieve higher returns through stocks rather than bonds, and through bonds rather than through cash, but you can’t expect to get higher returns without taking on some degree of unpredictability. If you seek higher returns, you have to be willing to live with higher risk. “How much risk is right for me?” The answer will affect your investment decisions. Although past performance is not a guarantee of what will happen in the future, historical results over a long period of time can help you make your investment decisions.

The Ways to Manage Risk

There are a number of strategies that can help limit risk while offering the potential of higher returns. 

  • Diversification

Investing in a variety of investments, or simply following the old adage “Don’t put all your eggs in one basket.” With a portfolio spread among several different investments, you benefit when each type is doing well, and also limit exposure when one or more investment is performing poorly.

  • Asset Allocation

Building upon the diversification concept, with asset allocation you create a customized portfolio consisting of several asset categories (cash, stocks, bonds) rather than individual shares. Changing economic conditions affect various types of assets differently; consequently, each asset category’s return may partially offset the others’.

  • Rand Cost Averaging

Systematically investing a fixed dollar amount at regular time intervals. When this disciplined program is adhered to and market fluctuations are ignored, it attempts to “smooth out” the ups and downs of the market over the long haul. Dollar cost averaging, however, cannot guarantee a positive return in a declining market and you must consider your ability to continue investing on a regular basis under all market conditions.

The Means to Manage Risk

Most investors find it difficult to diversify effectively across the full spectrum of cash and individual stocks and bonds. That is why so many investors have chosen variable products to apply the strategies previously mentioned.

Plant Your Tree Today

An old proverb states, “The best time to plant a tree was yesterday. The second best time to plant a tree is today.” This “power of time” concept applies to personal finance as well. The sooner you implement your investment plan, the greater the wealth you can potentially accumulate. In addition, the longer your time horizon, the easier it is to ride out the ups and downs of your investments. The length of time investors hold onto their portfolios is one of the crucial factors determining the likelihood of obtaining a positive return. Financial history indicates that investors are amply rewarded in the long-term for assuming risk. Regrettably there’s no magic potion for eliminating risk. But by carefully creating a long-term, diversified investment program you can help manage risk.

Adapted from the New York Life original document

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Disclaimer: The material contained in this document is provided for general information purposes only. While every care and effort has been taken to ensure the accuracy of the information provided, Helfin Financial Services Group makes no representation and gives no warranty, whether express or implied, relating to the correctness of the information in this document. Helfin Financial Services Group accepts no responsibility for, and the user indemnifies Helfin Financial Services Group harmless from any loss, liability, damage or expense of whatsoever nature (including but not limited to direct, indirect and consequential loss), arising from reliance on information contained in these pages, or otherwise connected with the information in these pages [whether arising from breach of contract (fundamental or otherwise), delict, negligence, gross negligence or otherwise]. Except where otherwise stated, the copyright of all this document contents is owned by Helfin Financial Services Group. No part of this documents’ contents may be reproduced or transmitted or reused or be made available in any manner or any media, unless prior written consent has been obtained from Helfin Financial Services Group. In the event of any dispute of whatever nature arising as a result of the use of the information in this document, the user (including users resident outside the Republic of South Africa) accepts that the law of the Republic of South Africa shall apply. 

Past performance is not necessarily a guide to the future and investors may not get back the full amount invested. Asset class information is as at the stated date. However asset allocations could change considerably over time subject to mandate parameters.