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By Ruan breed *

It is traditional this time of year to give investors a glimpse of what to expect for the coming year. These predictions usually focus on the opportunities you should be looking to grab, but I’ll break that tradition by offering information on which investments to avoid in 2022.

1. Investments with high upfront commissions

Race Ruan

One way to waste your returns is to invest with an advisor or a large insurance group focused more on their financial benefit than your well-being.

Too often, their retirement products are structured around their needs such as paying commissions and upfront fees. Additionally, you need to consider whether an insurer’s attention is sufficiently focused on managing your portfolio compared to its core business of short-term and life insurance.

The biggest danger is that you will be sold a product or investment that is not managed properly, which could mean you will miss your retirement goals.

My advice: Instead, avoid brokers and insurers who have more interest in receiving commissions and fees than looking after your investment portfolio.

2. Avoid investments you don’t understand

It sounds like common sense to me, but the explosion in cryptocurrencies and even stocks seems to have clouded the minds of many investors.

The problem with many of these modes is that they are not legitimate investments. Look at our locally developed Bitcoin Ponzi scheme, Mirror Trading International, which fooled some 260,000 investors out of 23,000 Bitcoin.

The promise of great wealth from projects that sound too good to be true almost always is.

My advice: Always be clear about the underlying asset in which you are investing. A legitimate financial advisor should be able to do this easily by showing you the funds and assets they hold.

3. Cash and monetary investments

Interest rates are simply too low today to justify long-term holding of large amounts of capital in cash or money market instruments.

It makes sense to have short-term capital in these more secure assets if you’re saving for a short-term goal or have an investment horizon of less than 18 months.

But, unless you keep that money in reserve as a dry powder to take advantage of investment opportunities, you are doing your wallet more harm than good.

My advice: If you have a long-term view and your goal is capital growth, then you will need to seriously consider higher risk investments.

4. Tax-free savings accounts in commercial banks

I am of the opinion that the designation of a Tax Free Savings Account (TFSA) does not do justice to this product which should instead be labeled as a Tax Free Investment Account.

That is, if you don’t accept the accounts offered at the big banks because their annual returns of around 5% to 7% just don’t offer any significant value after costs and inflation.

The goal of TFSAs is to encourage South Africans to save by providing a vehicle that can generate long-term capital growth without sacrificing gains to SARS. The secret to using this vehicle is the ability to leave the money intact for as long as possible – more than 15 years will be ideal.

My advice: Instead, invest in a tax-free investment account available on dedicated investment platforms like Momentum Wealth, Sygnia or Ninety One. These funds posted much higher returns, in the order of 10% and more.

5. Retirement pensions for young people

The retirement annuity (RA) is the solution of choice offered by many advisers, generally those associated with large insurers.

One of the main selling points is that they offer a “tax-efficient investment” due to the monthly discount, but they also come with limitations that you should be aware of. And because of these limitations, I think young investors should avoid these investment options at this time.

Here is my reasoning:

RA must comply with regulation 28 of the Pension Fund Act which limits the amount of offshore exposure allowed in the fund. This led Reg. 28 funds have significantly underperformed over the past decade.

Another downside is the possibility of changes in legislation (as is already on the cards) which could further limit your choices.

The reason I suggest young investors to avoid RAs as a retirement planning option is because the tax benefits are insignificant when you earn an entry-level salary.

And then, your capital is locked in the RA until you are 55, and when you retire, you have no choice but to transfer at least two-thirds of your capital to a life annuity. Thanks to recent legislation, you will not be able to recover your capital in an RA for three years after you emigrate from South Africa.

Thus, there are many more factors to consider than just a tax deduction.

My advice: Young working adults had better put your money in a TFSA where you can get 100% foreign exposure with much healthier tax benefits down the road.

Learn more about investment planning.

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