Investors sometimes fall into the trap of focusing on individual aspects of investing without taking the full picture into account. They may focus on saving tax above everything else, or taking advantage of higher interest rates.

Marius Fenwick of Mazars Moores Rowland Financial Services says in the current environment many investors are clamouring to switch out of the stock market and into preference shares which offer a tax saving while simultaneously taking advantage of higher interest rates.

What about inflation?

"But what about inflation?" he asks. Preference shares are currently providing a dividend of nine to 12 percent (many of the preference shares' returns are linked to the prime rate and fluctuate accordingly) whereas the declared inflation rate as measured by CPIX have averaged far above 10 percent over the past year.

"Remember that CPIX excludes mortgage bonds and other financing costs and as from this year the weighting of the transport and food components will be reduced in the measuring basket which means that real inflation may be higher for many individuals."

To make matters worse Fenwick says some investors want preference shares with a capital guarantee which typically reduces their dividend to levels well below inflation.

Fenwick says unless you've already created your nest egg, and living on a comfortable pension; the aim of investing is growth in order to outstrip inflation. "If you aren't achieving real growth you might as well spend your money now because it will be worth much less in years to come," he says.

Preference shares are typically issued by financial institutions and pay a dividend which, instead of being linked to the company's profits, is linked to interest rates. Because they pay a dividend, not interest, your earnings are tax-free.

Short term savings vehicle

Fenwick says they are ideal for retirees who want to supplement their pension income, or as a short term savings vehicle. "When people retire we'll put some of their free reserves into preference shares, but not their pension fund money." It makes sense to invest all your taxable type of investments (like money market funds) in your pension linked products seeing that pension funds (including retirement annuities) do not pay tax.

Because of their tax-free status preference shares are a better place for short-term savings than money market funds which pay out interest which is taxable. However, the minimum investment of many preference share schemes can be beyond the reach of many investors. The fact that the prime purpose of investing in preference shares is to derive a tax-efficient income, a fairly large amount needs to be invested to derive a decent regular income. Generally the minimum investment starts around R50 000 and monthly contributions of R2000.

Some investors are put off by the fact that the value of the capital they invested in preference shares fluctuates. If interest rates go up the value of your capital typically goes down and vice versa. The reasons for this are complicated, but Fenwick says there's no reason to stress about the capital value if your objective is to create income seeing that income will always pay out based on the original amount you invested. "But if your objective is real growth you shouldn't be in preference shares in the first place."

In conclusion Fenwick says it's vital to look at your investment portfolio holistically and not simply chase opportunities that might appear to provide short-term gains while proving detrimental to your overall position in the long term.