You’ve probably heard the term asset allocation (or diversification) before, right?
Most financial advisers will tell you it’s one of the most important decisions you’ll make when it comes to investing. That’s because how you spread your money across things like shares, property, bonds and cash plays a big role in how much risk you’re taking—and how much you might earn.
Everyone’s mix will look different – don’t compare yours to others.
Your unique mix will depend on things like:
- How much risk you’re comfortable with,
- How much risk you should be comfortable with, to achieve your goals, and
- How long you plan to leave the money invested.
This is what we call the risk vs return trade-off.
But here’s a question: Have you ever heard someone talk about “Asset Location”?
Probably not as often.
Asset location is all about where your money sits from a tax point of view. It’s a smart, long-term way to cut down the amount of tax you pay—so more of your money stays invested and growing. Win Win situation!
Once you’ve decided how to allocate your investments, thinking about where to keep them can be the next clever move.
Let’s break it down into three “buckets”:
Taxable Accounts
This would be your everyday investment account—like a discretionary share portfolio or a unit trust/ETF.
You might earn interest, dividends, or make a profit when you sell. These are all potentially taxable in your personal capacity. Depending on how much you earn and the type of income, you might pay income tax or capital gains tax. There are some exemptions allowed to individuals, which are not available to companies or trusts.
Tax-Deferred Accounts
In South Africa, this includes things like your retirement annuity (RA), pension or provident fund.
You don’t pay tax on the growth while your money’s invested. And in many cases, your contributions help reduce your taxable income. But when you retire and start drawing an income, that’s when tax kicks in—based on the normal income tax rates at the time. However, don’t let the potential tax deter you, there are many ways your Certified Financial Planner can reduce that to zero, all within the provisions of the Income Tax Act.
Tax-Free Accounts
These are your Tax-Free Savings Accounts (TFSAs).
You pay tax on your income as usual, but once your money is inside a TFSA, any interest, dividends, or growth you earn is completely tax-free—as long as you stay within the contribution limits set by SARS.
For me, these are amazing solutions when building retirement plans. Now you can earn an income in return as well as draw capital for those overseas holidays and other bucket items – completely tax free.
Why Does All This Matter
If all your investments are in just one of these buckets, you might not be making the most of your tax advantages.
Working with a Certified Financial Planner® can help you build a smart mix across all three. It’s not just about investing—it’s about investing in the right place to get the best long-term outcome.
Here’s the big takeaway:
You don’t want to end up with a tax problem later in life just because all your money sat in the wrong place.
Just a friendly reminder: investment strategies can’t guarantee a return or protect you from loss. It’s always a good idea to speak to a Certified Financial Planner® personalised advice.
