Economies globally are struggling with high debt, high unemployment and low growth. This affects your investment returns.
A few seeds make many…
In a simplistic way, investing can be likened to farming. Seeds are planted and watered over time to eventually produce a crop which produces many more seeds than were originally planted. When a crop is harvested and the seeds replanted the potential of the next crop yields that much more. A crop struck by drought will result in lower yields. South Africa and most economies around the globe are in a serious drought.
Investment yields come with costs
In the financial universe, we rely on returns (yield) from various investments (assets). The main areas (asset classes) produce these types of yields:
- Shares – dividends
- Property – rental income
- Bonds – interest
- Cash- interest
Before we reinvest these yields they are reduced by certain costs by as much as the following percentages:
- Fund manager Fees – 2%
- Administrator fees – 0,5%
- Advisor fees – 1%
- Taxes – 45%
These costs result in a reduction in yield. So your returns could be reduced by as much as 50% by the time the taxes and fees are applied.
Tax can be avoided
The main culprit is tax, so yield can be improved significantly if you are savvy with certain structures that are exempt from tax.
- Tax-free savings accounts
- Retirement annuities
- Preservation funds
- Pension funds
- Provident funds
Understanding these structures is important for your financial plan as they have different features and benefits. One thing for sure is your growth on your investment will vastly improve not having any tax applied to your yield.
This a useful strategy in tough times which, in my opinion, are here to stay for a long while as economies try to work their way through the consequences of all the interventions of central banks in the attempt to get out of the damage of the 2008 financial crisis. Another blog for another time…….