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Don’t you hate when you go to someone looking for a quick answer and all you get is – “Well it depends”

“It depends” comes with the territory in investment and financial planning unfortunately. Some clients like the fact that I have strong analytical skills and can consider investments under various scenarios, others just want the quick and easy ‘in-ten- words –or- less’ type answer.

My answers almost always fall into the category of “It depends”. My wife has adopted a firm zero-tolerance policy towards this type of answer but I would argue that it is often a necessary evil. When I answer a question with “it depends”, it is because I am trying to offer a more comprehensive answer or I am trying to better understand where the question is coming from.

I think a good way of illustrating why I adopt this approach is to consider a basic case study which covers the concept of REAL RETURNS in investment planning.

I think it is one of the most important concepts that an investor needs to grasp when considering long term investment options. Earning real returns is in fact the only way to create wealth. A real return on your investment is what you have left over, from the face value or’ nominal return’ that your investment delivers, after you have accounted for fees, taxation and inflation.

I would suggest that the nominal return is a PERCEPTION and the real return is the REALITY!

 Real Returns

Looking at a basic case study:


I invest R100 000 and earn a 15% nominal return. That means after year one, my perception would be that I have R115 000 sitting in my investment account or that I have made R15 000.


Suppose that I pay an advisor to help me manage my investments. We use an administration platform or two to access the investments she chooses. Those investments may involve buying funds which themselves carry a management fee. Altogether let us assume my fees amount to 1.60% of the portfolio value each year.

For simplicities sake I deduct the fee at the end of the year, so I would pay R115 000 x 1.60% = R1840 in fees, leaving me with a portfolio value of R 113 160.

Then SARS takes a look and notes that the entire return is in the form of income; that my marginal tax rate is 30% and that I have used up all my allowances for the year. 

The taxman wants his share, calculated as R13 160 x 30% = R3948, which leaves me with R109 212.

Oh well at least I have made R9212…That’s not too bad is it?

Well yes BUT “it depends” – If inflation is averaging 7% a year that means my rent that cost R100 000 last year now costs me R107 000. So you are really only better off by R2212. (R109212 – R7000 – R100 000 = R 2212). But if inflation is averaging 9% (incidentally this is more realistic) then I would be left with a not very impressive R212. (At least its positive though)

Nominal Returns

So next time you ask me if 15% is a good return on investment or not, I am afraid my answer will have to remain “It depends”.  It depends what fees you are paying; it depends what your marginal tax rate is; it depends how you have earned those returns (income or capital gains); it depends on the investment vehicle you are using and it depends on how much your cost of living is likely to be going up year after year.

Annoying isn’t it!

Tips to try and reduce the gap between reality and perception in your investment plan:

Maximise your nominal returns over the long term – Understand the implications of your asset allocation decisions and align this to meet your investment objectives and not your tolerance for risk. In other words, for a long term investment horizon you need to take enough risk to achieve your goals and earn real returns.

Minimise your fees – If you don’t need advice then don’t ask for it. If you do, then use someone who you trust, who seems to have your interest at heart and who charges a fair fee. Hint: White Investments offers an advisory service which attracts a once off upfront fee.  You can incorporate low cost passive funds into your portfolio strategy to reduce asset management fees. Different administrative platforms charge differently depending on the funds you choose – do some research on what suits your needs best.

Minimise the tax you pay on your investments – Invest don’t trade. Capital gains tax is likely to be a lot less than your marginal rate of tax which would apply to income returns (cash, bonds, property and equity trading activities). Utilise the tax free accounts which are coming into effect in South Africa in 2015. Save in retirement vehicles (Retirement Annuities, Pension Funds), where appropriate, as the returns are tax free and you get to deduct contributions within certain limits. Use your interest income allowances each year (Currently R23800 per individual under 65 and R34500 for those over 65 years of age).



If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at



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