Starting an investment journey can be challenging – with reasons ranging from procrastination to competing financial priorities. While it’s important to make sure you’re meeting your current financial needs, having an investment plan in place can help you avoid facing a financial battle when needing to cover future expenses.
A tax-free savings account (TFSA) offers a flexible, tax-efficient way to save for long-term future goals like paying for a child’s education, buying a car or supplementing retirement income. For as little as R500 a month you can start your money journey.1 What’s more, your nest egg will attract no SA tax. No income or capital gains tax is payable, which means more money is available to help your investment grow over time.
While a TFSA can be a powerful tool to build future wealth, it is only one component of a holistic financial plan. Sticking to a budget and setting up a separate emergency cash fund will help you stay invested in your TFSA. Investors typically only realise the tax benefits of a TFSA after 10 or more years, so it’s important to take a long-term view. But realising the true power of a TFSA requires more than staying the course with your investment.
TFSAs and “The Art of War”
In “The Art of War”, a military treatise dating back more than 2000 years, Sun Tzu emphasises the importance of knowing your enemy and knowing yourself. Tzu goes on to say: “The supreme art of war is to subdue your enemy without fighting.”
Having an investment plan in place may be half the battle won, but do you know who your enemy is?
Inflation is the silent enemy that erodes the value of money over time. Rising prices mean your money today won’t be able to buy the same goods and services in the future if you don’t grow it. To outsmart this stealthy invader, you need to ensure that funds you’re allocating towards your long-term needs retain their purchasing power.
Unfortunately, the fear of losing money means that some investors are reluctant to take on investment risk – even if they are putting away money for 10-15 years. Investing too conservatively in a long-term money pot, such as a TFSA investment, means you may lose the battle with the inflation monster as it devours the value of your nest egg. Investors need to guard against underestimating the risk of inflation. Here’s how inflation can destroy your financial future: Based on inflation of 7%, the value of your money will halve roughly every 10 years. The erosion will happen at a slower pace if inflation is lower; for example, CPI inflation of 6% will halve the value of your money approximately every 12 years. The devasting impact of inflation means that you need to ensure that your TFSA has enough fire power to ‘subdue’ the inflation enemy.
Choosing funds that will give you ‘bang for your buck’
You have many choices when selecting the underlying investment for your TFSA. These include fixed-term bank deposits, money market funds, income funds, equity funds and multi-asset funds. Being too conservative may end up being a risky investment strategy. A cash investment, which only pays you interest on your capital, tends to provide much lower returns over the long term and will not keep pace with inflation. To beat inflation over the long term, your investment needs to include growth assets such as a well-diversified portfolio of equities.
While financial markets can be volatile in the short term, investment risk tends to lessen over time, as illustrated in Figure 1. The chart shows that over a rolling 1-year period there is a high variability in return, with the maximum return an SA equity investor could have earned being 73% and the worst return -37.6%. However, over longer investment periods, the range of returns substantially narrows. For example, over rolling 10 years, the best return would have been 21.4% per annum, while the worst return would have been a positive 7.7% per annum.
Figure 1: Best, worst and average returns for the SA equity market over various periods
All Share Index (ALSI)
| Rolling returns (%) | 1 year | 3 years | 5 years | 7 years | 10 years |
|---|---|---|---|---|---|
| Maximum | 73.0 | 45.4 | 36.3 | 24.5 | 21.4 |
| Average | 15.8 | 14.9 | 13.4 | 12.9 | 13.3 |
| Minimum | -37.6 | -2.1 | -0.1 | 4.7 | 7.7 |
Past performance is not a reliable indicator of future results; losses may be made.
Source: Ninety One and Morningstar, as at 31.12.23. For illustrative purposes only.
So in the short term, investors face a lot of uncertainty as there is a wide range of potential investment outcomes. When you invest in equities, you need to stay the course over the long term. The longer an investor’s period of investment, the lower the potential volatility tends to be.
Growth funds proving their mettle since the inception of TFSAs in 2015
Figure 2 provides a compelling illustration of how funds that hold growth assets such as equities can help investors unlock the true power of a TFSA. Our example examines how various investments have fared since the introduction of TFSAs in 2015 (1 March 2015 to 30 November 2023). The chart shows the different investment outcomes for TFSAs using different underlying funds from Ninety One (Global Franchise Feeder, Equity, Opportunity and Diversified Income), as well as a cash fund – based on the ASISA average SA Money Market unit trust fund. Figure 1 also reveals how the different TFSAs have performed against inflation (CPI) over this period.
Figure 2: The fund you select for your TFSA can make all the difference over time
Past performance is not a reliable indicator of future results; losses may be made.
Source: Ninety One and Morningstar, as at 30.11.23. Performance figures are calculated NAV-NAV, net of fees, in ZAR. For illustrative purposes only. Fund values are shown in nominal terms for a TFSA started on 1 March 2015, with the maximum monthly contribution (equivalent to the annual maximum limit) for the different investment options. Please refer to the fund pages of Ninety One’s Global Franchise Feeder, Equity, Opportunity and Diversified Income funds for more information.
Here are some key takeaways:
Conclusion
The old adage “time in the market counts” remains relevant for long-term investors. During the 8-plus year investment period in our example, financial markets had to grapple with the devasting impact of the Covid pandemic, a host of local and global political issues, the economic impact of load-shedding and massive interest rate hikes locally and globally. Despite these tough market conditions, funds with equity exposure still proved their mettle. While markets are volatile, the risks lessen over time.
Unlocking the power of your TFSA means you need to remain invested for the long term. You also need to choose a fund that can grow your next egg so that you can preserve the purchasing power of your money into the future. A financial advisor can help you to select a fund based on your individual needs and circumstances.
Resist the temptation to use your TFSA as a piggy bank. Set up a separate emergency fund to cover unexpected financial shocks. Holding your TFSA for 10 years or more will also help you to reap the tax benefits. And finally, understand the TFSA rules and contribution limits to ensure your TFSA works for you.
1 Besides monthly contributions, you can make a lump sum investment, but remember, the current annual TFSA contribution limit is R36 000 and the lifetime limit is R500 000. Any amount you contribute in excess of these limits will be subject to 40% tax payable by you. Also see the article, Avoid these money moves with your TFSA.
2 The Ninety One Equity Fund is a local equity fund with some global equity exposure, and the Ninety One Opportunity Fund is a multi-asset fund
comprising a diversified mix of local and global assets such as equities, bonds and cash.
Tax-Free Savings
Maximise the long-term growth of your savings by benefiting from a Tax-Free Savings Account (TFSA).
