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New Normal

in Behavioural finance, Investment 1 Comment

What if low returns are the new normal? Survival and growth strategies for your investments.

The performance of the Johannesburg stock exchange over the last 5 years has got every investor and Financial Advisor/Planner concerned. Many of us remember the times in the not to distance past where the JSE was giving us returns in high teens or twenties – no more.

When you’re putting a financial plan together, with or without some help, making assumptions are unavoidable. We Planners, have to make assumptions for the future on inflation, returns, tax, regulations, fees etc and our clients have to make assumptions like how much money they will need at retirement, if they will still have any debt or liabilities and at what age they are going to retire.
We also have to make assumptions on the returns that can be expected from each of the major asset classes (Equity, property, Cash and Bonds). Those assumptions for the medium and long term have worked for decades, but perhaps the model is broken – even if it is just broken for RSA Inc and not globally.
We usually measure the performance of an investment as CPI (Inflation) plus a certain percentage. This measure works well because the absolute minimum we should expect from an investment is that it keeps up with the “purchasing power” of the sum invested. When inflation is zero (as it has been in various parts of the West in the last decade) any return we get is a ‘reward’ for lending that money to someone else to use, in the case where there is inflation, the ‘reward’ is what we get over and above inflation. The RSA inflation rate in March 2019 was 4.4% (this is quite low by historical RSA standards and within the SARB target of 2-6%).

In the past we’ve always assumed that Cash will return about CPI or CPI minus 1%. In money market accounts (cash) you can expect anything between 5% and 7.4% and has been for years, in other words as high as CPI plus 3%. This is almost unprecedented. Bonds, both government and Corporate have been doing even better than this, and while we may equate it as being ‘like cash’ it actually is more of reflection of the amount of risk investors see in the country/company. These bonds have propped up many investments in the last couple of years (there has to be some upside to being considered a ‘high risk’ country to invest in, right?) Equity is usually assumed to return CPI plus 5% or more. In the last five years the JSE has returned 19.5% in total over the five years, or less than 4% per annum. THAT is what has everyone worried.

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in Asset classes, Behavioural finance, Investment 1 Comment

Thriving not just surviving a slower economy

We’d all love the good times to last forever, or at least a good few years. The reality in good old SA Inc is that in the last decade we haven’t seen much of the good times, they were hijacked by the nimble-fingered Houdini artists, some still proudly walking the halls of the Union buildings. The last five years have been tough on our investments, salary increases and nerves. While we can look at the glass as half empty – in that it is going to take a while for things to come right – there is plenty that you can do in the quiet times to set yourself up for the better times, even if the better times come in fits and starts and little pockets of light.

Wealth is a result of thousands of small decisions over decades – unless you win the lottery or get a huge inheritance. Accumulating wealth isn’t complicated, it is what is left over after you have consumed your income. Investing that wealth properly is hugely important, of course. You need to make sure it is in the right assets and portfolio, that it is tax efficient, that it will achieve your long term objectives, that the costs don’t erode what gains you do get and so on. That is my ‘day job’ as an advisor, but that is only because the other two, more important, aspects of accumulating wealth are up to you. If you consume more than you earn, with the best will in the world the best investment advisor out there can’t do anything with nothing, or less than nothing. That doesn’t mean that an advisor can’t give you some good pointers on how to make sure you produce enough for him or her to help you invest properly at some time in the near future.

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Short-Termism is a Wealth Killer

in Behavioural finance, Investment Leave a comment

In a world of short-termism, be a contrarian.

It’s not your imagination, the world is getting faster. Lifecycles of technology are ever shorter, and one cannot help but think that ‘built-in obsolescence’ has become the norm in hardware and appliances – forcing you to buy-up or replace every 2 to 3 years. Apps now have a shelf-life of months. Gone are the days when your trusty Nokia could be dropped from a second-floor building, run over by a car and still work. Nowadays they break if your cat sneezes on them. If you manage not to break the phone then the battery seems to die rapidly after the second birthday. Day-traders in currency and stock markets are now so prevalent they have the power to bounce currencies all over the place – and unfortunately, our currency is one of their favourites.
Long-term is now seen as five years, not ten or fifteen. Investors are addicted to the day to day movements in stocks looking for reasons why, when there is often none. Occasionally there is a dramatic move in a stock in the double-digit percentage range, usually for a specific reason, those we need to know about. Steinhoff, Sasol and African Bank come to mind.

Every day, irrespective of which radio station tune into, you get the exchange rates and gold price. In a vacuum they are meaningless (you probably don’t even hear them anymore unless they come with some perspective), trends are important, but that means looking beyond today and putting those meaningless numbers into some sort of order, and seeing if there is, in fact, a trend. Only gold bugs care about the gold price anymore, it is just a nice comfortable reminder of the good old days when we were king of gold. Not even 5 years ago, a well-respected investment advisor told me he would never employ anyone who didn’t know that day’s gold price – in my opinion, the price of bread or milk is way more important.

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Who needs a Financial Advisor anyway?

in Asset classes, Behavioural finance, Financial Advisory Leave a comment
Paying for ongoing Investment advice – is it worth it?

Fees have become front and centre of investment advice – specifically asset management fees and financial advisory fees. The major reason for this is the relatively low growth environment we’ve seen all over the world in the last decade. Those heady days of 30% plus annual returns are a dim memory, but look at it this way… If your portfolio had made 30%, losing 1% to a financial advisor – even if they do almost nothing for that remuneration – is a pittance. When returns are 7% or even less, it’s a whole different perspective.

Investors globally have been bringing down the cost of investing in a number of ways:

1. ETFs
2. Robo-advisors
3. Once-off Fee-for-plan

ETFs or Electronically Treaded Funds bring the cost of the investment down by merely using an algorithm (computer) to track an index, say the All Share Index. Simple ETFs in the US have certainly become extremely inexpensive, here in RSA? Not so much – you can get excellent active funds for the same price if you know where to look (and you have the ‘critical mass’ (enough invested)). ETFs have also evolved, and many of the new ones (offshore) are really not ‘passive’ at all – just active funds riding on the ETF bandwagon, at active investing fees. The 10-year offshore bull market has propped up this Passive investment vehicle and when it inevitably sinks, those millions of relatively inexperienced investors are going to see chunks of their capital go down the tubes. There is definitely a time and place for ETFs – if you’re decades off your retirement and these are excess funds (your retirement funding is sorted), and you can get the ETF at very low cost (.1 to .3 % or less) then go for it. There are however very low cost and well performing balanced (diversified asset classes) funds that can be had at almost the same price or cheaper than ETFs.

Robo-advisors are programs or algorithms which, after asking you a few questions, will come up with an ‘ideal’ portfolio made up of investments (usually Unit Trusts (called Mutual funds overseas)) on the platform that sponsors or has developed the Robo-Advisor. In other words, the advice is not independent, and you’re paying the fees elsewhere. Many of these Unit Trusts are largely passive (in other words they are mostly managed as, or like, an ETF by a computer/algo).

“Fee for Plan” was considered by many advisors as the pinnacle of the profession – if you were qualified enough and good enough at what you did, then someone was prepared to pay good money up front for this plan – saving you the ongoing annual fees. I hate to break it to you but this is an illusion. If you’ve been around a while then you ‘paid’ for this plan anyway (often spewed out from a program), especially if you have an insurance company investment (and this is still happening). In terms of the regulations, an advisor can charge up to 3.5% of the investment as an upfront fee, but few professional planners actually do so, but rather offset the upfront costs against annual ‘asset under management fees’ (levied monthly on the investment at 1/12 of the annual amount). With insurance companies, the fees charged have been historically opaque and only now starting to come to light with the requirement that they disclose “EAC” the Effective Annual Cost (and those EAC reports I have drawn have costs as high as 5.7% per annum).

This isn’t going to win me any favours with my fellow “Fee-only” advisors but I think that “Plan for Fee” is a complete waste of time for clients, and will always damage the advisor’s reputation because unless the advice is continually monitored and tweaked for changes to their personal circumstances, economic, political, taxation and regulatory environments, it will ultimately fail, and the advisor will be blamed. In other words, a plan is dynamic, each plan is merely a snapshot in time and correct for that moment in time – but nothing stays still. The plan does not need to be out by much to go wrong over time.

Say a plan is one percent off, and not corrected, that error will compound over time and after a decade it will be very noticeable and that is time you’re never going to get back. For those of you that play golf, it is like hitting a ball down the fairway – If you are 10 degrees off, but only hit it 100m, you’ll probably still be on the fairway. If you give it a good smack sending it 250m off 10 degrees from centre, you’ll probably be in the rough, and it may cost you a shot or two to come right.

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Asset Prescription Hell

in Asset classes, Retirement funding Leave a comment
The ANC’s been dumpster diving in Apartheid ideas

The bad news just doesn’t stop. Just when Ramaphosa is walking back the implications of AWC (Acquisition (of property) Without Compensation) the ANC manifesto published in Durban a couple of weeks ago is now resurrecting an Apartheid-era favourite – Prescribed assets. This forces retirement funds to invest a certain percentage in choice government assets. This is taking a leaf out of the Apartheid era playbook – In 1977 this “prescribed asset ratio” reached a peak of 77.5% (and was still over 50% in 1989)! The net result was a dramatic drop in savings – something this country can ill afford – to say nothing of the damage to the pension portfolios.

To quote the manifesto…

“Mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities”.

What on earth are we paying taxes for? There is little doubt that the Zupta years of wholesale klepocracy resulted in a lost decade for SA Inc, and the 5 years of flat equity returns are symptomatic of that. There are currently 17 million people in RSA receiving state grants, up 350% since 2001, now over R150Bn a year.

Unfortunately for those taxpayers who work for either the govt or private enterprise where pension contributions are compulsory, there is nothing that you will be able to do (unless you resign or change jobs). Personal retirement savings can be stopped (if you’ve been smart enough to not have an ‘early termination product with an insurance company), and if you’re over 55 you can ‘retire from’ it.

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Life Insurance- Red Flags

in Life cover Leave a comment
The Reality behind the headlines

The recent controversy over Momentum’s repudiation (decline) of a violent death claim on a life policy because of an unrelated, undisclosed medical precondition has kicked a hornet’s nest of opinions, so I thought it was a good idea to expose some of the potential pitfalls in life cover and investment that you may not be aware of and could lead to claim repudiation or investment loss.

The term non-disclosure applies right across the board, from medical aids and gap-cover, short-term insurance and life cover. If you have been to the doctor for anything – even if the medical professional considers it nothing, disclose it or it will come back to bite you.

Medical aids very few options to exclude ‘risk’ from their membership – all they can do is a 3 month waiting period and a 12-month condition specific exclusion – and they enforce that rigorously. I have come across cases of hospitalisation for bronchitis excluded because a cold was not disclosed in a child. In the small print of your application you will have given them the right to investigate your medical history so put in every medical practitioner’s visit, no matter how minor. Any claim made in the first 3 years of a life cover is almost always investigated, thereafter it is only usually if they have their suspicions. Gap covers are governed by different regulations but the same 2 exclusions/waiting periods apply. Just a word of warning, think very carefully before changing gap covers because you might just restart the 12-month exclusion clock. You are under no obligation to disclose whether or not you have a gap cover to a medical practitioner – and there have been instances of practitioners increasing prices to match the gap cover.

When you are taking out short-term (car house etc) you are always asked about your claim history and whether or not you have had any accidents (unsaid – whether you claimed for it or not). Just because you didn’t claim, doesn’t mean you aren’t supposed to disclose. You are also asked if any claim has been refused/repudiated. Don’t fudge this either, even if you’re disputing this or taking it to the ombud.
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