Cash vs RAs vs ETFs comparison:

Where can I get great returns?

We need to compare apples and pears

As with my previous article, here are my parameters, biases and limits of my comparison:

• The initial investment will be R 50 000
• I will be looking at investing R 1 000 per month in all asset classes
• I will invest for 20 years.
• I will work on the best interest rate that I can find for that asset class.
• The aim would be to pick investments that we can measure for the last 20 years to avoid people complaining: “your investment time is too short!”
• I will include the tax payable after 20 years, as this is often left out.
• I will assume I am in the 36 % tax bracket.
• I will not reinvest the returns from tax returns as less than 46% of my followers do that – check out the poll here:

 

After you get your tax return and got money out from your retirement annuity, do you reinvest the money?

— frugal local (@FrugalLocal) August 25, 2019

Let’s get into this

Retirement annuities

I have chosen the CORONATION BALANCED PLUS FUND for my Ra – as their returns look amazing (link here to their website). They had annualised returns of 12.4 % and had enough information to compare the information thoroughly.  Note that you will need to pay tax when you take the money out of the retirement annuity.

I do know that legally you cannot withdraw the full amount, but for the purpose of comparison, I am calculating it as is below. 

BUT YOU NEED TO PAY TAX!

Tax implication:

Remember that you will need to pay tax when you withdraw your money. Assuming you are in the 36 % tax bracket, the following calculation will be true:   R 1 405 940.73‬ x 0.64 (deducting the tax payable) = R 899 802,07

Pre-tax Results

• You will have invested R 290 000
• You will have R 899 802.07 today
• Your profit would be R 609 802,06

Cash and Equivalents (TFSA)

Tax Free Savings Account in cash and equivalents

A special thank you to Save Tax-Free for information on this section. I have decided to work on a return of African Bank (or Investec) for their TFSA: 8.67 %. I know that the lifetime limit at the moment is  500 000, but knowing how the government works, I will be counting on inflation forcing the government to up the savings rate.  

Tax implication:

I know that many people don’t know what a TFSA is. In a nutshell, this is a TAX FREE savings account – you do not pay tax on any of the profit – none ever!

Results

• You will have invested R 290 000
• You will have R 914 637.60 today
• Your profit would be R 624 637.60

Non-TFSA (Where tax will be payable)

Non-TFSA For the non-tax-free savings account, I will use 60 months deposit account from African bank which gives great 60 month returns of 10.75%. I would need to pay tax on any proceeds bigger than R 23 800. This will be reached within 41 months. As you need to deduct the tax amount yearly, I have gone as far to do so monthly to simplify the equation. 

BUT YOU NEED TO PAY TAX!

Tax implication:

Remember that you will need to pay tax when you withdraw your money. Assuming you are in the 36 % tax bracket, the following calculation will be true:   R 1 405 940.73‬ x 0.64 (deducting the tax payable) = R 899 802,07

Final Results

• You will have invested R 290 000
• You will have R 707 601.70 today
• Your profit would be R 417 601.70

ETFs (Exchange-traded funds)

I am fully aware of the fact that ETFs are broad – there’s no easy way to measure all of them. I used the renown MSCI World Index as my benchmark. The issue is that the differences are so terrible between companies and it’s exceptionally difficult to get a true reflection about what is happening with the ETF. Here are some examples:

• The MSCI World index website (fact sheet here) gives some values, e.g. 2015 making a loss of 0.32 %, whereas the Sygnia fact sheet (found here) gives it as 31.3 %. This makes for great confusion.
• I will deduct the fees (TER and platform fees) but will accept that the dividends tax has already been deducted. I am doing this because I am not able to get more accurate data.

Other notes:

• You would be paying fees on your entire fund value. I have decided to work on the SYGNIA ITRIX MSCI WORLD INDEX ETF.
• All profits will be reinvested – because it’s cool
• The 10 year return year on year has been 8.6 %. If we go by the Wikipedia returns, the 20-year return average will be 6.775 %.
• I am using the Dollar returns, as the Rand returns seem to be almost non-existing for 20 years. 
• I am not deducting the dividends tax that is payable in South Africa, as I really am having difficulty finding the full dividend payout information
• I am also not including the ZAR / USD exchange rate, which I should. In the last 20 years, it’s gone from R 7 / $  1 to R 15 / $.

If we had only had this in ZAR at 1999 rates:

ZAR Results

• You will have invested R 290 000
• You will have R 517 044 today
• Your profit would be R 227 044

But we have a fluctuating ZAR/ USD:

Results

Tax implication:

Remember that you will need to pay tax when you withdraw your money. Please check the calculations here as they are intense! If we assume that the growth is not from dividends (which they probably are to a certain extent)

Assuming you are in the 36 % tax bracket, you will need to pay the R 220 766.40 in taxes:

• You will have invested R 290 000
• You will have R today R 903 240.39
• Your profit would be R 392 473.99

Conclusion

It’s not easy getting historical information, and thus almost impossible for us to conclude what the best investment could have been. If you want to check my calculations, please check the excel file here. Warning – these are shocking and challenging calculations.

We could guestimate that ETFs seem to be a good bet, whereas the TFSA option is amazing. 

If you don’t have to pay taxes or fees, your profit will increase substantially.

Make sure you speak to your Financial advisor about fees

Always remember that past performance does not indicate future performance.

Happy investing!