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Getting the most out of Investments

in Asset classes, Financial Plan, Investment Leave a comment
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 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. ( 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

Retirement Annuities – the demon revisited

in Retirement funding Leave a comment
Monet's garden, Giverney

Monet’s garden, Giverney

Should you top up your RA before the tax season ends?

It is ‘retirement annuity (RA) season’, any contributions you can get into your RA before the end of the month can count toward your tax deduction for this financial year. If you have been ignoring all that advice, advertising and appeals from your broker like the plague, I don’t blame you. I have been around long enough to be tainted by some of the appalling business practices around insurance company RAs (and company pensions) myself, some of which still hang around today. With all the investment options available now, is there a place for retirement annuities today?

With the exception of a tax-free savings account which is capped at R33,000 pa, there are very few tax-efficient investment vehicles out there. Endowments are not ‘tax-free’, they are taxed within the fund at 30%, so unless your average tax rate is well above this, and you have maxed out on your annual interest and CGT allowances, they aren’t going to give you much real tax relief (except of course being out of sight so out of mind). They do however work really well for investments in a Trust.

Before looking at how tax effective an RA can be, let me just put some caveats in place: In my opinion, never use an insurance platform, nor add to an existing RA you already have on an insurance platform (beyond that which you are contracted to do so). Why? There are still nasty things called ‘early termination penalties’ that they can impose on your investment when life happens and you dare to want to reduce or stop the contribution. These penalties are levied because insurance companies pay brokers all the commission on the policies, for years into the future, at the start of the policy. Use a LISP platform.

The government have started to limit the amount of contributions you can deduct off tax – now at 27.5% of your taxable income or R350k pa, whichever is the lower. Taxable income can include interest on investments, rental income or income from other sources like commission (but allowable expenses related to these, like home-office or rental expenses, must be deducted first). At least these days all retirement savings – pension, provident fund and RAs are all lumped together for this allowance – in the past, if you had a company pension, irrespective of how much or little it was, you could only claim a minuscule additional portion of your RA.
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Passive investment – time for accountability?

in Asset classes, Investment, Passive investing, Passive Investing Leave a comment
Look Ma! No hands!

Passive investment has gained enormous popularity in the last few years, with over 50% of new investment flows in the US going to ETFs. Until now this has worked very well for investors, they have benefited from the third longest Bull Run in US history at very little cost. As you probably know, an ETF is ‘proudly average’ and follows an index or basket of assets, usually buying and selling the underlying asset in the fund at the end of the day without fear or favour. They don’t ask questions, they just buy what the market did on the day. ‘They’ in this case is usually a computer algorithm or program. This is how the costs are brought down from the pre-2007 norm of 1-2.5% asset manager fees to less than 0.5%, in the case of the US, way below 0.5%. Millions of investors have taken the hands off the wheel of their investors and ridden the bull-run up. The proof in the pudding is how those investors are going to react when the bull run does what they always do eventually – correct themselves. It just isn’t human nature to allow anything to run at great speed down, and if they do they could land in an ugly mess at the bottom of the hill. The computer algos will just adjust to the drop in stocks, and if the drop is in specific stocks or sectors, this dumping could well exacerbate the downswing purely because of the sheer volume of money in ETFs in the West. Much of the upside US bull market has come from the FANGs – Facebook/ Amazon-Alphabet-Apple/Google/Netflix – if they take a hammering then those tech stocks held by ETFs so that they can mimic the index have to be dumped – you can see how the tail now wags the dog.

There is definitely a role for ETFs, and for the average Jo they are a good way to get diversified exposure to the Stockmarket at a very low cost – but stocks are only one asset class. In South Africa (where ETFs are not as low cost as overseas) the stock market is very tightly held in the top 20 stocks, Naspers specifically. In other words, it is not very well diversified because so much (80%) ‘market capitalisation’ is found in 40 of the about 400 shares. In fact, 166 companies make up almost 100% of the market capitalization, and this is what the JSE All-share index is based on.

Designing a wealth portfolio that is resilient to harsh market movement means getting exposure to all the asset classes (shares, property, cash, bonds and perhaps some commodities like gold) – so how do you do that? The first thing to do is to divide the portfolio, on paper, into the objectives – time frame and necessity to preserve capital. There should be an emergency fund (liquid, capital preserved and short-term) and retirement investment (not liquid, capital growth, long-term) but there could be a dozen of other objectives including a college fund, saving for a house deposit, legacy, future medical expenses, provision for parents etc. That’s the easy part. Next, those buckets of investments need to have an asset allocation that takes the objective and time-frame into consideration and adjusts according to the performance of the different asset classes as they change over time.

The really smart ‘active’ managers today are not just stock pickers – they may well, in fact, use the ETFs to form the core of the ‘equity’ portion of their client’s investments. The good active asset managers have a ‘flexible mandate’ and can buy and sell out of the different asset classes according to the underlying objective. What is a ‘flexible mandate’? When a unit trust (a mutual fund in the US) is conceived and registered, it has to lodge a mandate with the financial regulators. A fixed mandate might dictate that the fund has 95% in Property REITs for example – That means that irrespective of the potential for a meltdown in the market, the asset manager can only buy REITs, with a 5% wriggle room, usually held in cash or near-cash. ETFs are not much different – if they are mandated to track the top 40 stocks, in proportion to their market cap (for example), they can’t sell out – that becomes your job. This ‘asset allocation’ has become the secret sauce of asset managers – and requires way more skill than stock picking. ‘Balanced’ unit trusts do this adjustment of asset classes, with mixed effect. They develop their ‘house view’ and buy and sell accordingly.
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Savings and Social Media

in Behavioural finance, Debt, Investment Leave a comment
silent saving
Saving is silent, consumption is conspicuous

At the most basic level, the only way to grow wealth is to earn more than you spend and save the rest. If you can get that wealth equation to work for you, then you’re not going to have to worry about financial independence at any time in your life, but we all know that life happens, and more importantly – emotions happen. Humans are complicated, add money into the equation and it really becomes a mystery. Money has the power to completely change someone’s character, and let’s face it, it is even one of the major motivations for murder. We all have a ‘money mindset’, and often that is deeply entrenched in how we’ve been brought up, or the challenges we have had to face getting to this place. The past doesn’t always stay there, it lives in your mind and can influence everything you do, positively or negatively. That doesn’t mean to say that that mindset cannot be changed, the brain is a powerful thing, and more importantly it has plasticity, the ability to grow new connections all our life. We might have the most neurons we ever are going to have at birth, but considering we only ever use 5% of that brain, we have billions of ‘spare parts’, so we can make new pathways and those neurons can grow new connections all the time.

Building up a habit is the equivalent of walking a well-worn path in the brain, so deep it can become a rut. When we’re out and about doing our daily thing, we naturally walk down paths, they are easier and more comfortable – the same with our habits. We are often oblivious to our habits – how we dress, eat or talk. We all have money habits that we are probably just as unaware of, and most of those are wrapped up in emotion. Do you get a sinking feeling in your stomach at the beginning of the month when the cacophony of notification after notification signal the decimation of your bank account? There is a very good reason stores have payday specials – it isn’t that we are all looking for a great deal, we’re often looking to get a retail therapy high – because we deserve it.

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Prioritise without FOMO

in Asset classes, Behavioural finance Leave a comment
Eenie, meenie….

There is always something that is at a premium – it could be time, space or money – and it is all about making choices so that you can keep all the balls up in the air and your dreams on track. These variables can also be traded off against each other. If time is at a premium, you could pay someone to do that task for you, if you run out of space, you can buy more, if you run out of money, you can use some time or space to make more. It’s all about balance and choice – and because money always enters into the equation somewhere, your wealth is impacted, either by consuming more, or earning less.
Now that we’re coming into the silly season it’s a good time to start getting your priorities right for the year ahead. By all accounts, it could be a tough year, and there certainly is a lot of uncertainty in the economy and politics. Inflation is creeping up, mostly because of the weaker Rand. Treasury is all tapped out of tax-payers funds (we think, but they may not), so Eskom are more likely to be granted their 18% increase than getting a bail-out or told to be more efficient – so keep looking at going off-grid and saving both energy and water. The Medical Aid tax credit is more ‘low hanging fruit’ that could bite the dust on 1/3/2017. Reign in your Medical Aid spending by combining a lower plan with Gap cover and if you’re on a family plan with one person using the lions share of your plan, look at hiving them off into their own plan.

If your priority is to accumulate wealth, there is no magic trick – you have to consume less than you earn. That is it. You can prioritise earning more, or by spending less – and of course looking after that wealth properly.
One important aspect of getting your priorities straight, and having half a chance of making them succeed, is that you and your partner have to have to be aligned, especially when it comes to consumption. Money may not be the source of all evil, but it certainly is at the root of more than half of rocky marriages – with toxic in-laws coming a close second. You might get away with running a dictatorship in the garden or kitchen, but when it comes to retirement, if you are pulling your wealth in opposite directions, it is going to end in tears.

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