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The Seasons of Wealth – Winter

in Asset classes, Behavioural finance, Investment Leave a comment
Winter
A wintery economy brings chores and opportunities

We are surrounded by cycles, some fast, others so slow we never see a change in our lifetime, but they are there. Climate change, for example, has been happening for millenia – it is nothing new (pollution is though of course). Somehow, every time winter comes round, especially a nasty cold front, we are caught unawares – gas bottles empty, no beanies and only salad in the fridge. The markets also go through cycles, while less predictable in timing than the four seasons, they keep on happening. Right now, for us in the Emerging markets, the winds are decidedly cool and the returns flattening, soon to turn negative for the year-on-year if it keeps up this pace.

Just like the winter season, we can pretend it isn’t happening, climb under the duvet and wait for the thaw, or we can take advantage of the opportunities it will bring.

Review your investment garden for better times in the future
When your garden is looking bleak and all the leaves are gone, it is often a good time to check that your garden plan is on track. Are all your risks covered, are your investments aligned with their objectives and your long-term plan? Many of the shares in our market have been overpriced, and as the market cools you could just pick up some bargains that have the potential to give you really good returns going forward. If you buy equities at the top of the market, it is like buying a ‘ready to eat’ avo, it can turn to expensive brown compost in the wink of an eye.

Keep your perennials alive
Some investments have a short-term objective – emergency fund or a deposit, but most of them are intended to be perennial, be there for many years. Gone are the days of ‘buy and hold’ – even the most robust of perennials have to be kept an eye on – once it is fully mature it is often too late to try and shape it. While your house is considered a ‘lifestyle asset’ and rarely liberates much equity in downsizing – it does do a number of positive things – it pegs your ‘rent’ (no 10% escalation clause – just interest rate changes, up and down) and it replaces paying rent post-retirement, so in effect it is part of your ‘pension’. Let’s put it this way, if you were to retire tomorrow you would need about R5m to generate rent of R20k pm, increasing at inflation for 20 years. Times are tough – but pay the bond first. (Please check that all bond correspondence is going to the right address and not the address on the bond – if you signed the bond before you moved into the house correspondence might be going to the old address – all legal in terms of the small print. Don’t assume because your bank details and statements are going to the right address that this ‘Domicilium citandi et executandi’. If you want to preserve the wealth in your property, buy once and once only. Every time you move you write off hundreds of thousands of Rand of that value.

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Caught in the middle

in Behavioural finance, Financial Advisory, Financial Coach Leave a comment
inthe middle
Surviving financially in the sandwich generation

Change is inevitable, but not always pleasant. Pre-retirees are finding that they are not only supporting adult children (sometimes even grandchildren) but their parents as well, neither of which was planned for. There are some fundamental changes to the norms and values in society that are causing these changes. Youngsters are waiting longer to marry, but cannot necessarily afford to move into their own home – or would rather live ‘rent-free’ and spend their money elsewhere. Marriages are failing at an unprecedented rate, and these split families can often not go it alone on one income. The incidence of ‘single parents’ is at the highest level ever. There is also the demographic issue that retirees are living longer, often much longer than they ever have and their retirement funds often run out, so they have to fall back on their children for support.

Whatever the reasons, at a time those would-be empty nesters should be ‘accumulating’ retirement funds, and have the mortgage bond paid off, they are having to incur expenses both to look after children and parents, both of which can have a devastating effect on their own pensions. There is no doubt that this trend will continue, and as longevity really kicks in, could get even worse.

This pressure of being financially sandwiched between children and parents needs to be planned for – both financially and emotionally. There are also some ‘soft skill’ changes that you can start implementing that don’t usually fall under the ambit of financial advice, but quite frankly they should.
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The Curse of Longevity

in Asset classes, Financial Advisory, Retirement funding Leave a comment
longevity
What if your money disappears before you do?

It is wonderful that modern medicine not only saves many young lives that even 50 years ago would have been lost, but it is extending our life expectancy out into the nineties. Many of us can expect to see not our grandchildren grow, but our great-grandchildren too (unless the continued postponement of birth into the late thirties continues of course). For years financial planners assumed that most people would only live twenty years past retirement at age 65, but that is no longer true, and this assumption is now out by a good ten, if not 15 or 20 years (for people who are currently in their forties). This radical change in our reality needs a complete rethink when it comes to investing for retirement and how we plan for an income in retirement.

Let’s look at some of the implications of living longer:

  • Governments and companies are already pushing out the pensionable age to take the burden off the State. If you’ve been winding down in anticipation of retirement, suddenly having to push that out another couple of years is not fun.
  • The income purchasing power for your retirement funds has to be maintained through the whole of life after retirement. This isn’t a simple matter of keeping up with inflation, because some key expenses that are vital as you get older, like health care, have been increasing faster than inflation for the last two decades, so it is reasonable to assume it will continue to do so. The cost of energy is also increasing above inflation.
  • Past age 80, one often needs additional care and that can double the monthly income requirement. There is more than one way to plan for this but it is going to expensive and needs to be considered.
  • The older you get, the greater the chance that you will get a severe illness that will require expenses over and above medical aid, who lamentably decrease in benefits every year. This requires additional capital/income or payments toward a risk premium to cover those expenses, and the foresight to get into those products while we are still healthy.
  • Your capital in your retirement fund may have to last double the time that was assumed when you started your planning, and if you’re closing into retirement accumulating more may just not be possible. If you work for a company that has a pensionable age, you could be forced out whether you like it or not. Starting a new career as a ‘pensioner’ is difficult.
  • If you get close to retirement and it becomes clear that your pension pot is just not big enough you have a few options:- You can keep on working longer, put away more of your current income, take less at retirement and use smart asset allocation to ensure your capital is going to yield an income for the whole of your life.

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Hedging your Investments

in Asset classes, Investment Leave a comment
hedge
Taking some hedging tips from nature

Volatility has returned to markets, globally, with whipsaw movements that would make even the most seasoned investor queasy. Unless you’re a hardened gambler, you probably don’t enjoy this much, and if you look for advice and reassurance out there you’re going to get wildly contradictory opinions. Is it possible to take advantage of the pockets of investment opportunity, preserve your capital and keep sane?

We plant hedges around our property to protect our privacy and assets, sometimes encroaching on our light and annoying your neighbours – and therein lies one of the secrets of hedging your wealth portfolio. You can overdo it. If you plant a 12-foot macrocarpa hedge, you’re going to crowd out all the light, destroy your flower beds and be the neighbourhood pariah. A dainty fuschia or abelia hedge, however, can be enough for your privacy, pretty to look at and enhance your asset. So, how do you work out the ‘goldilocks’ level of hedging you need in your investments? When you’ve determined that, you can look at choosing the asset classes (or plant species) to use.
In investment terms, hedging is used to flatten out or stop volatility. You can do this in a single asset class like stocks by having ‘stop-loss’ levels where a stock is sold when it hits a predetermined level, either to cash-out your gains or prevent further losses. For the average investor though who don’t have the skills or inclination to play with stocks, the same hedging can come from a balance of asset classes, including currency hedging with an offshore component (or offshore heavy local stocks).
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Getting the most out of Investments

in Asset classes, Financial Plan, Investment Leave a comment
squeeze
Squeeze them until the pips squeak

In uncertain times it is a natural reaction to make sure your investments are working as hard as you are – so how do you go about that?

  • Get yourself organized. Get up-to-date statements on all your investments, summarise them on one sheet, and find out how they have performed since inception. This might sound like common sense, but if your life gets busy you may just give the annual statement a glance, even file it, but when did you last give them a good look?
  • Find out the fees you’re paying on your investments. On savings (money market) that is fairly straightforward, but in Unit Trusts etc it is a little more complicated. Get your financial planner to help (if you have one). If you have an investment on an insurance platform, it might be difficult to tease out the fees but one way to do it is to get the fund fact sheets and performance of the underlying unit trusts (or use a resource like sharenet.co.za) and plot these against your statements. The difference is the fees you can’t find. While you’re at it, if you have insurance platform investments, find out if you’ve still got ‘early termination fees’. These are the remnants of the commission the broker was paid (up front for the full term of the policy) when you took out the policy. There are platform /admin fees, asset manager fees and advisor fees. What range of fees are reasonable? (LISP) Platform/Admin fees should run less than 0.5%. Brokers are permitted to charge up to 3.5% as an upfront fee, and 1.5% as an ongoing fee. The ‘new norm’ is zero upfront fee and 1% ongoing annual fee (decreasing as the sum gets over R5m). The asset manager fee is where you have wriggle room. For similar performing funds the asset manager fees can range from 0.5% to 2.5% (and performance fees tacked on that too). Be careful if you have ‘fund of funds (FOF)’ in your portfolio, these are unit trusts made up of other unit trusts and so have costs on costs and might be difficult to determine exactly what you’re paying. Even an unnecessary 1% on a R1m investment amounts to R10,000 a year, R100,000 over ten (without considering any growth on that investment).
  • Temper both your greed and fear. We all know the sinking feeling when an investment we didn’t buy soars and makes their investors a pile of cash (Bitcoin?). The worst thing that you can do is give in to your greed and join the stampede, the chances are you’ll get in near the top and watch paralyzed and mortified as it sinks, probably getting out when you’ve lost a chunk of your original investment. If you enjoy the rush of speculating, make sure it’s excess funds that you won’t miss if it all disappears. If you have a solid plan, then don’t give in to your fear either. If you switch in and out of different investments every time there is a little wobble, you’ll end up putting a hole in your investment.
  • Your investment cannot work miracles, are your expectations realistic? The law of abundance is all well and good, but you have to get off your derriere and actually take action and make the income to add to your wealth in order for it to grow meaningfully.
  • Put a plan in place and stick to it, reviewing it at least annually. Your Financial Planner can give you the structure, you have to provide the discipline. If you’re battling to focus on a plan, try a financial bullet journal. Make the progress toward your goals visual and tactile. Each bucket of investment should have a clear objective, time-line and asset allocation. It is obviously easier to get your financial planner to help you do this – but with research and if you have a passion for investment, it is possible to do this yourself. Getting rid of broker/advisor planner fees are low hanging fruit when you’re cutting costs – do they add value to your wealth? Some research done in the States indicate that have a financial advisor planner can make a 3.5% annual difference to your wealth portfolio, increasing the longer they are involved. I am a planner so of course I’d say that but you can read about it HERE: and follow the links to the original research. Read more

10 Ways to Beat the Budget

in Economy, Income, Investment, Tax Leave a comment
[/frame}budget 2018
The 2018 Budget will impact your disposable income – what can you do?

The Budget 2018 might have looked tame on the surface– a one percentage point increase in VAT, wealth tax for the fat cats, no increase in personal tax and a bit of a fuel levy increase. This is an illusion, the people most affected by this budget are the ordinary middle class – the working class. There are about 1,9m taxpayers who earn more than R350k pa, contributing 80% of the tax. (https://africacheck.org/reports/1-7-million-people-pay-80-sas-income-tax/). If we’re lucky this will just be temporary, and when the economy picks up (and the stolen funds are recouped) the VAT increase will come down again and the real tax rates decreased – but we all know that never happens, so what can you do to survive – or even thrive?

  1. Take a bit of time to understand your tax, and what allowances and deductions you can be taking advantage of to get a rebate or bring down your average tax rate. You can email me for the 2018 SARS tax booklet (also available on their website) and look at retirement investment allowances, interest and CGT allowances, car allowance, medical aid tax credits. It’s one thing to get help to file your taxes, it is quite another to abdicate the responsibility to someone else. I encourage everyone to at least try and do their own eFiling.
  2. You cannot build wealth if you consume everything that you produce (and then borrow to consume even more). This gives you two options, produce more income, or consume less – you choose. Cutting back on expenditure will have an immediate positive effect, increasing your income is not so quick or easy – but still possible.
  3. Investments and savings without defined objectives are almost meaningless. These objectives will dictate timelines and the asset allocation that should be used. Wealth is built slowly over decades, and if you don’t have a strategy from the start then that is time you’re never going to get back. Having an advisor to help is the best option, but if you’re just starting out you may not be able to get a qualified advisor to help you (because you just can’t remunerate them for their time, whether directly by paying for a plan, or indirectly via fees or commissions). Regulations in the financial advisory profession are becoming increasingly onerous, so this is going to become more of a problem, not less. The internet has made it much easier to upskill yourself (following my blogs for instance).
  4. Because the tax brackets have not increased in line with inflation, if you get a salary increase you are going to lose more to tax, and your take-home pay will be less in real terms. (real is the actual increase minus inflation). If you’re offered an increase or promotion with an increase, use the tax tables and your payslip to do the math. Perhaps you could negotiate more leave instead (there are 260 working days in the year, about 10 of which are public holidays, perhaps another 15 are annual leave.) This is a real problem on income above R555,601pa (R46,300 a month – guess what – if you’re in this tax bracket you’re considered a wealthy by SARS.) This tax bracket increased a whopping 1%, so any salary increase above this is going to be taxed at 39%. Even if you’re in the R423k range (R35k pm) the shift was only 3%. Inflation is currently at 4.5% – roughly equivalent to one day’s extra leave. These are the current tax brackets:brackets Read more
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