Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

What you proposing is quite a radical move and should not be taken lightly. There are a couple of factors that you consider:

Timeframe

What is the time frame of your investment? Is it for the long term, medium term for short term? 

If you are investing for the long or medium term, you should not be concerning yourself too much about short term movements in the market .  We will always have these but over a couple of years the impact will dissipate then you won’t even notice them.

Remember, markets are volatile over the short term but stable over the long term.

If you are investing for the short term, then you should not be having too much exposure to equities in any case.  These investments should be in cautious instruments like bank deposits, money market and bonds.

Recency bias

Recent events tend to colour our judgement. We expect the future to be very much like the present while ignoring the longer term trends that are happening.

If you are a long term investor, one of the questions you would need to look at would be whether the fundamentals of the market have changed over the past two weeks. 

A month ago, the analysts were flagging that the American market looks as though it is overvalued, and the South African market looks as though it is undervalued.  Now when you take away all the noise of the Trump’s tariffs wars and the South African budget, has there been any new evidence coming to the fore that would change those evaluations of the market?

If those evaluations still hold then you should just ride out the current volatility.  If you do see a difference, then you should act.

Timing the market

If you take your money out of the market, at what stage would you go back into the market?  Trying to time the market is incredibly difficult. 

When the markets fell during COVID, a number of people withdrew their funds put the view to putting it back when things stabilized.  What happened was the market bounced back very quickly and they ended up locking in the initial losses.

To give you an indication of the implications of not being in the market on the best days, Look at the example below: 

We invest R1 million invested on 1 January 2014  and withdraw it on 31 December 2024 – a period of 4017 days.  We invested in a fund that tracked the JSE all share index.

If you took your money out of the investment  for the best 5 days over that period, your returns would have been R305 000 less

If you missed the best 30 days it would have been almost R1m less as can be seen on the table below:

Not just to give some perspective, I repeated the exercise above but looked at being out of the market on the worst performing days

As you can see, being out of the market on the worst days can add substantially to your investment.

The challenge is being able to identify the best and the worst days before they happen.  If you cannot do that, then you should rather remain invested.  There’s a lot of wisdom in the phrase time in the market better than trying to time the market.

It is important that you have an investment strategy in place that can handle the many political and economic challenges that you will encounter over both the short and long term.  A disciplined, long term approach to your investments can certainly help you make wise decisions over the shorter term.