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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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Is your investment ‘broken’?

in Asset classes, Behavioural finance, Financial Plan, Investment Leave a comment
How to fix it

If you’re a keen gardener and a bush or tree you have planted isn’t thriving despite your careful consideration to the conditions it likes you don’t just yank it out and stick it somewhere else in the hope it will bounce back. There are things you do first: You examine it, you research it, you treat it and as a last resort you move it… INVESTMENTS ARE JUST THE SAME.

Examine it, Analyse it. In order to examine anything, a diseased plant or a rogue investment, you have to know the basics of what you’re doing or get the advice from a horticulturist or investment specialist. Every investment you have, from savings pocket to retirement savings, must have an objective. What do you want the money for, and when do you want to use it? This simple input will dictate what platform to use, the asset allocation (the blend of cash, bonds, stocks and property), type of investment, whether it should be ‘wrapped’ in a life license, the tax implications and more besides. What are your expectations and are they realistic? Plants can’t be put anywhere – if they need full sun, they will not thrive in the shade. Equity investments need time to ride out economic cycles to really perform – you can’t day trade with them and expect the same results.
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Recentism Investment Bias

in Behavioural finance Leave a comment
Understand your behaviour – Grow your wealth

Recency/Recentism – is one of the Behavioural biases (a Cognitive bias) that can wreck your wealth, and is especially relevant in these volatile, ‘late-cycle’ times.

Trying to understand a person’s behaviour is hard enough, as soon as you add money into the equation it becomes infinitely more difficult. This is the first in a series of blogs and articles trying to demystify financial behaviour and put some clear action steps in place to make sure they don’t sabotage your wealth. (At the end of the series I will be putting them all together in an eBook). When you look at the long list of biases (like HERE), many of which you’ll probably recognise in the behaviour of those around you (and you – if you’re honest). Marketers and salespeople make good use of these biases to influence (aka manipulate) your buying behaviour. If you want to inoculate yourself against slick salespeople and irritating family arguments, a better understanding of these biases can help. These biases influence our investment behaviour too, and that can have a devastating effect in the long term. We’ve all heard the phrase “it is not that you’re a bad person, it is the behaviour that is making you look bad” – this is certainly true of financial behaviour.

Financial behaviour extends to every aspect of the ‘wealth equation’ (income minus consumption equals wealth – you can read more HERE if you missed that blog). We let our fears and prejudices stop us earning more income, we feed our ego which impacts our consumption, and we allow biases to influence how, when and where we invest our wealth.

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Financial Freedom

in Asset classes, Financial Advisory Leave a comment
The Facts and the myths

The latest advertising buzzword and tag line you’re hearing from large FSPs is ‘Financial Freedom’ – in their case it usually means either taking out loads of credit so you can ‘live your dream’ aka living beyond your means, or investing with them on their mediocre high-fee platforms. What is true financial freedom?

No more debt: If you have debt your assets are under threat from the vagaries of the economy, your job and rising interest rates. Some debt, of course, is almost unavoidable, Mortgage bonds for example. This is also the ‘cheapest’ debt, unless of course car sales are down and inventories building, in which case those manufacturers will often lure you in with ultra-low interest rates – on new cars only of course (which devalue 25% the second you drive them off the forecourt). If you default on your mortgage you’re going to be royally scr*wed by the bank, whose only interest is getting back the value of their loan. Before you take out a loan, think through a couple of ‘what ifs’; What if interest rates go up 25%; What if one of us can’t work?; What if I/my spouse loses their job?; What if my business fails? A house is not an ‘investment’ in the traditional sense – it does two things – caps the ‘rent’ you pay which will rise and fall at the interest rate level not at 10% per annum. Secondly it ‘replaces’ the need to pay rent in your retirement years. In effect, it is part of your retirement plan. If you really want this ‘investment’ to work, buy once and live in it forever. If you absolutely must, move, sell the house yourself, it really is not rocket science and you’ll save tens, if not hundreds of thousands. Your investment is still going to be nastily eroded by transfer duty though so do the math before you move just because you’re bored or trying to make a ‘good impression’. If you look like you might get underwater on your bond, get ahead of the curve and sell before the bank gets hold of it.

Nest egg: One of the best ways to be financially free is to insulate yourself from the ups and downs of the economy and life by having ‘liquidity’. An emergency fund of at least 3 months family expenses is just the bare minimum. Until your retirement pot is full, you may need to take out some life/disability cover to create liquidity for your family in case you die or are disabled prematurely. Don’t go overboard on the ‘Life insurance’ to leave a legacy for your kids, that premium would be far better spent in investment, and leave them a legacy from investments, not life insurance. Don’t mix investment an life insurance (your premiums back if you don’t claim nonsense). If you’re married, make sure that both spouses have liquidity available, this also makes sense from a tax perspective.

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Wealth equation – illustrated

in Income Leave a comment
Wealth equation – mini-blog

For most of us, the accumulation of wealth – to at least retire in some sort of comfort – is a life-long mission. Unless you’re lucky enough to inherit loads of money, or win a lotto, for most us the accumulation of wealth happens slowly, it is the end result of days, months and years of financial discipline. At the most basic level wealth is what is left over after you have consumed your income – the wealth equation. If you consume what you earn you do not accumulate wealth, and of course, if you consume more than you earn, you end up in debt. As a financial advisor, most of my effort has been spent in helping my clients look after their wealth and to use market forces to help them grow it. I also get involved on the ‘consumption’ side to help clients get a hold of their spending, but I rarely have got involved in the ‘Income’ side of the equation. No more. This series of miniblogs are going to specifically address how to increase your income, by identifying and taking advantage of new trends emerging globally. As nice as it sounds, if you blindly ‘follow your passion’ when it comes to earning an income, it rarely pans out. The phrase ‘poor artist’ did not come out of nowhere. If you want to be smart about earning more money, you need to find just the right product or service for you – with the greatest chance of success. This new miniblog series intends to do that. You can read full-blown blogs on the wealth equation HERE.

wealth equation infographic

The Seasons of Wealth – Winter

in Asset classes, Behavioural finance, Investment Leave a comment
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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