Investing is a deliberate approach to making the most of your money over a specific period of time.
Your investments should be balanced against your lifestyle needs – both present and future.

For example, if you have a life-changing event in the short term such as retirement then you should be investing far less aggressively than someone who is 35 and has just paid off all his debts and wants to save for the next 20 years.

Speculation is betting on returns. Particularly in a short space of time.

Here are three things to avoid which will keep you on a path of investing rather than one of speculation.

Using past performance to predict future returns

The big mistake is to take the historic returns of a fund over time and draw a straight line into the future. Returns are affected by many variables and
no one can predict these. If one could just imagine how easy it would be to make a lot of money. Economies and markets follow cycles and assets are affected by these swings over time.

Timing the market

Investing is all about compounding the returns achieved over time. Speculation is about trying to time the top and the bottom of the cycles of various markets. There is a lot of evidence using historic data that clearly shows that if you try and time the market you will get it wrong more times than right. Investors understand how markets move over the long term maintaining the course through the ups and downs and benefiting from the compounding along the way.

Borrowing to invest

Investors will be aware of their exposure to debt as the cost of borrowing neutralises the returns they get from investments. If you have a credit card debt of 20% and get a return from your unit trust of 15% then effectively you are negative 5%. Investors will deliberate over short, medium and long-term objectives ensuring their exposure to debt reduces sooner than later. Speculators will ignore debt believing that they can outperform the cost of borrowing over any time horizon.

Investors realise that it is all about time in the market. Speculators will bet that they can achieve high rates of return without losing capital – especially in the short term.

Reason 1 – Tax effective for high taxpayers
Following last week’s topic on why you should not have an endowment, it stands to reason that you will benefit from investing in an endowment if your tax rate is higher than 30%. The latest budget proposals have raised the top marginal tax rate to 41% which presents a benefit for taxpayers in this bracket benefiting even more when compared to a unit trust investment. What needs to be considered are the exemptions on the interest (R23 800) and capital gains tax (R30 000). If these will be taken up by other discretionary investments over the period of the endowment then the combined investment will be more tax effective.

Reason 2 – Offshore Investments
The taxation applied to offshore investments is tricky and complicated. By wrapping your investment in an endowment policy you avoid the headache as the administrators are obliged to pay the applicable taxes to SARS on your behalf.

Reason 3 – Payable outside the estate.
An endowment is a policy contract which allows for a nominated beneficiary. This enables the investment to be paid outside the estate in the event of the death of the owner. This is pretty useful in terms of providing much-needed access to funds whilst the estate is being wound up. Furthermore, additional owners can be added to an endowment allowing the survivors to continue with it for as long as they wish instead of having to cash it in in the event of death.

It horses for courses when choosing an endowment. The main advantage is the tax benefits which tend to benefit the higher taxpayers.