Congratulations on winning the lottery! It’s fantastic that you’re seeking investment advice. Did you know that a significant percentage of lottery winners end up losing their fortune or going bankrupt? That’s why reaching out for guidance is such a smart move!

If you don’t plan on spending the money within the next 18 months, a fixed deposit might not be the best place for it. Currently, the return on cash is below inflation, which means that money in the bank is losing value over time. This is a widespread problem in South Africa, with around R1.6 trillion in cash and similar.

In the chart below, whenever the black line falls below the blue line, it means that the inflation rate is higher than the repo rate. (The repo rate is the rate at which the SA Reserve Bank lends money to commercial banks). Bank account interest rates are usually lower than the repo rate.

Stephen Chart

Considering your money is in a fixed deposit, you should be earning a higher return than what a daily call account offers. But does this contradict my previous points?

Currently, a three-month fixed deposit pays an interest rate of approximately 5.5% per annum, which is above the current inflation rate. However, taxes are an important consideration. Interest income, whether received or accrued, is taxable. So if you have an average tax rate of 20%, the net return on a 5.5% interest rate reduces to 4.4%, which is below inflation.

Now, let’s use a three-year fixed deposit as reference. Another factor to consider is the gap between inflation and the interest rate earned. Based on a fixed deposit rate of 5.5% and an inflation rate of 4.6% (according to the chart above), the difference between the two is 0.9% (ignoring taxes for this point). If the inflation rate remains constant and interest rates increase by more than 0.9% over the next three years, you might experience an opportunity cost by locking in your money. For instance, if interest rates increase by 1.5% in the next 12 months, the three-year fixed deposit rate could reach 7%, while you would still be locked into 5.5%. Considering the low gap between the inflation rate and the fixed deposit rate, along with predictions of interest rate increases, it’s crucial to carefully consider the concept of “opportunity costs.”

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Quoting from an article I received from Nedgroup Investments Cash Solutions on August 19: “The amended implied policy path of the SA Reserve Bank’s Quarterly Projection Model (QPM) now indicates a repo rate increase of 25 bps in 2021q4 (fourth quarter) and in each quarter of 2022. […] The risk is that should the fiscal outlook further deteriorate, and we have persistent currency weakness, the SA Reserve Bank may need to consider a more aggressive hiking pace.” If this prediction holds true, locking into a long rate that doesn’t provide sufficient cushioning could be disadvantageous.

Investments need to go beyond cash
So, where will you find the best long-term return? Cash is suitable for short-term needs like holidays, but investments need to go beyond cash to achieve better long-term returns.

The table below compares returns on different asset classes over four periods:

Period FTSE/JSE All Share Index BEASSA All Bond Index STeFI Call Deposit SA Inflation MSCI World NR USD
1 year 27.06% 13.92% 3.51% 4.87% 16.04%
3 years 9.67% 8.67% 5.30% 3.85% 18.79%
5 years 8.75% 8.87% 5.91% 4.24% 15.52%
10 years 11.60% 8.46% 5.68% 4.98% 20.05%

Source: Nedgroup Investments/Morningstar Direct Data as of July 31, measured in rands.

Don’t pay too much attention to the one-year returns. Firstly, the period is very short, and secondly, the numbers can be misleading due to the market lows during the pandemic. In other words, the returns appear much better than usual.

However, what the table does show are the excellent long-term returns achievable through investments beyond cash. Investing outside of cash does introduce more risk, especially volatility risk. But as your investment timeframe lengthens, the risk decreases.

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Now, let’s look at the benefits of earning a few extra percent per year:

Example 1
Invest R3 million for 10 years at the STeFI Call Deposit rate. The investment value after 10 years will be R5,212,539.

Example 2
Invest R3 million in the following portfolio, which resembles a balanced investment:

  • 40% FTSE/JSE All Share Index
  • 20% MSCI World NR USD
  • 30% BEASSA All Bond Index
  • 10% STeFI Call Deposit

The investment value after 10 years will be R9,111,640.

The difference in the 10-year values between the examples is staggering and demonstrates the benefits of taking appropriate risks. The amount of risk you can tolerate will depend on factors such as your age, asset base, future liquidity requirements, and personal attitude towards risk.

Since you haven’t provided any information about yourself, we can’t suggest specific products or funds like unit trusts, exchange-traded funds (ETFs), or shares that you might consider. However, due to the high rate of lottery winners losing their winnings, we strongly recommend seeking professional advice.

If possible, try not to let the lottery win lead to an increase in your lifestyle costs. Instead, let it provide you with comfort, knowing that you have a safety net and a boost to your retirement plan.

Good luck on your financial journey! Feel free to check out Simple Money Tips – Steps To Financial Freedom for more useful tips and information.