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Focus on what doesn’t change

A few things to consider when you plan for 2024

By Deidré Valentine

23/12/2023

As we start a new year, one tends to reflect on everything that has happened throughout the previous year: what unfolded as planned and what surprises caught us off guard. When looking at the year ahead and attempting to plan for the future, we often ask, “What will happen to the economy?” or “What will the world look like in ten years?” However, making predictions is challenging.

In his latest book, Same as Ever, Morgan Housel shares a few short stories about things that never change in a world that is constantly evolving. He notes that Jeff Bezos, the founder of Amazon, once said that he is frequently asked what he thinks will change in the next ten years. Yet he is rarely asked what he thinks won’t change – a question that, according to him, is much more important.

By focusing too much on things that are beyond our control, trying to be clever, chasing the next big thing, and listening to others’ conversations, our attention is often diverted from the things we should actually be focusing on. Building knowledge about things that remain the same gives you the ability to think differently about risks, opportunities, and how to handle uncertainty about the future.

What remains the same?

Growth assets perform better over long periods than conservative assets

While investors often look at asset class returns in the short-term, they might think they would have had better returns from cash investments than from the stock market, pre-tax. However, it’s essential not to lose sight of the fact that over longer periods, such as the past 29 years, having exposure to growth assets like stocks and property would still be advantageous, averaging a 13% return per year. Conservative assets (cash and bonds), on the other hand, would have yielded only 9% to 10% per year on average.

Tax

If I were to make a prediction, it would be that the South African Revenue Service (SARS) is not going to make the taxpayer’s life easier anytime soon (or ever). The impact of taxes on investment portfolios is more significant than most people realise, and investors should always try to construct portfolios and utilise investment products in a way that minimises the impact of tax on investments.

An example is that income earned from compulsory investments (through living annuities) is subject to income tax (between 18% and 45%), whereas income from equity trust portfolios is more tax-friendly because the income is not taxed as income but only on the capital gains it generates.

Estate duty is also always a sensitive issue, and individuals with large estates can relinquish up to 25% of their estate values above R3.5 million to estate tax. Including investments that do not form part of your estate in your portfolio or using a trust can help minimise estate tax.

Market Cycles and Return to the Mean

We often hear in the media that investors should move all their assets abroad. This view is particularly driven by the fact that the South African stock market (FTSE/JSE All Share Index) has performed considerably worse than foreign markets (MSCI World Index of all countries) over the past ten years. However, what we fail to consider is that markets move in cycles. Asset classes cannot keep rising indefinitely without periods of decline. The chart of SA stocks vs. World stocks from 2013-2023 looks exactly the opposite over the previous ten years (SA stocks vs. World stocks from 2003-2013) and again the opposite in the preceding ten-year period.

It is, therefore, crucial to consider where assets are in their market cycles when making decisions about portfolio allocations. We have no idea what the stock market will do over the next year (or any year), but we can confidently say that people’s inclination towards greed and fear never changes. We also often know that investors’ behaviour indicates overconfidence and shortsightedness.

Time in the Market 

The eighth wonder of the world is the power of compound interest over time. People often postpone saving until it’s too late and then try to come up with “smart” strategies to quickly make a lot of money, which often fails. A good process with a well-diversified portfolio and enough time in the market will outlast “smart” strategies over 30 years and more.

In conclusion

Knowledge about things that will never change can be more valuable than a prediction of an unknown future. Life is about managing probabilities. No one can say with certainty what will happen in the future, but the best we can do now is to make informed decisions where the outcome can ultimately work in your favour.

Deidre Valentine is a certified financial planner and wealth manager at Woodland Wealth. Contact her at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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