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Emotionless investment

in Asset classes, Behavioural finance Leave a comment
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Letting cool heads prevail with your investment decisions

Humans are complicated, when you add money into the mix you can throw everything you thought you know about most humans out of the window. We have all watched how families are torn apart by inheritances, marriages fall apart when they hit tough financial times – hell people even murder over money. One of the most fascinating aspects of my job is trying to navigate the tightrope between helping my clients look after and grow their money – and coping with unhealthy or unrealistic expectations around their wealth. I don’t always win!

Emotions around money are often deep-seated, and come from childhood, and are very difficult to change, at best they can be acknowledged and managed. Sometimes a person brought up in austerity will be very careful with their money, other times it will be the complete opposite and they become a spendthrift. Whatever has caused your emotional relationship with money, it isn’t helpful to continue to blame your childhood, just find tools to make sure you don’t sabotage your financial freedom or find someone to partner with. Creditors are not going to care what brought you to bankruptcy, they just want their money.

Financial behaviour is one of the biggest causes of marriage and relationship breakdown, and with 50% of marriages failing, you need to put measures in place to protect yourself. An antenuptial contract is absolutely essential, and perhaps you should also consider ‘without accrual’ (or at very least make sure your pension is kept out of the joint assets.) Big assets bought together should be jointly owned, and if both partners agree on a sty-at-home spouse, they need to be compensated with at least retirement fund contributions.

The Spendthrift personality (where money burns a hole in their pocket) are often described as ‘generous’ or ‘kind’ and as such, is a way of buying self-esteem and status. It’s the ‘Keeping up with the Joneses’ syndrome. Obviously highly toxic to your wealth in the long term, but perhaps fun while you’re doing it. The opposite personalities are Scrooges or Misers. Obviously not a label that many of us aspire to especially if it is accompanied by an adjective like a ‘mooch’ (taking from others with no intention of reciprocity, always wanting something for nothing). A healthy financial personality obviously lies somewhere between these two extremes, but are you rational enough to know what your unhealthy financial habits are? Just when I think that I have seen the full range of financial emotions, I am surprised by a new one. I have come across people who…

  • Won’t sell a vrot share because they inherited it from a much-loved relative.
  • Would rather take advice from an (unqualified) friend or relative than a professional because it boosts the friend’s ego.
  • Think that they make a ‘profit’ every time they sell a house without taking the costs or inflation into consideration.
  • Won’t sell a poorly performing unit trust because it is only a ‘paper loss’ and needs to behave itself to come back to par first.
  • Are adamant they are not going to live past a certain age, so it doesn’t matter if they use all their capital from then to now. (I guess this is the perfect financial plan where the last of your wealth is used to bury you, and then turn the rest into ‘Smutties’ (copper coins that used to have the head of Jan Smuts) and chuck them in your grave so you don’t crawl out).
  • Would rather ‘fire the messenger’ when given bad news by a professional ( your retirement funds are only going to last 10 years so start sucking up to the kids) than actually make the changes needed to sustain their wealth.
  • Will endlessly waste the time of professionals with second, third or more options for free, never make a decision and expect the same with implementation and management (Scrooge meets Mooch).
  • Will let one poor experience affect their financial relationships forever. Trust is a very fragile thing and is at the core of all healthy financial relationships. (Learn from the experience and move on as you do with all relationships.)
  • Are easily conned with empty promises of above-average or guaranteed returns – being so focused in on the prize without investigating the wrapping. Greed is a very human emotion, conmen rely on that.

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Preparing for the NHI

in Medical Aid Leave a comment
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What can be done about future medical costs?

The government appears to be hell-bent on implementing the NHI, despite the complete failure of all the pilot projects and no detailed or realistic budget on how this is going to be funded. Yes… no budget! Minister Mkhize has given a laughable thumb-suck of an additional cost of R30Bn (over and above the R222Bn at present,) most other estimates (of which there is a number) are north of an additional R300Bn. R20Bn of that R30Bn of which will come from the soon-to-be cancelled medical tax credit, and all that will do is bring the current, world-class private medical service down to the level of what the government currently provides. The NHI was first touted in 2003, and with a number of failed projects under their belt, most of us were hoping that someone in the ruling party would see sense and understand that we cannot afford a first-world healthcare system funded by a very small taxpayer base when we don’t even have anything like a first-world education system. How on earth can Ramaphosa launch yet another State Owned Enterprise with other critical SOEs like Eskom, in complete disarray and no resolution in sight? The shortfall is going to come from tax of course, but most taxpayers are not going to be able to afford yet more tax and their medical aid. It looks like medical aids are going to be allowed to offer ‘top-up’ services only for conditions not offered by the NHS. Who knows what that means.

What can you do to mitigate the effects (and you’ll need to do most of these well in advance of the proposed changes)

  • Take out good dread disease cover (from a life company). Not all cover is equal, and when it comes to ‘dread disease’ there is actually the greatest disparity across the various providers, and their benefits change all the time. This will give you a decent lump sum so that you can get private (or even international) treatment. If the NHI comes into effect, you’re not going to be able to choose your surgeon or hospital. Here are some tips:
    • Use an Independent Financial Advisor so you can get a range of quotes from different providers. Be specific as to your requirements and be aware some brokers may try and sell you an inferior product (because they don’t know better or because they can make the premium look cheaper with some fancy footwork). Rather take out less cover with a premium product than more cover for basic cover.

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Can Investment be Simple?

in Asset classes, Financial Plan, Investment Comments are off
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How can investments be simplified so everyone understands?

One of the reasons collective investments, ETFs and insurance company investments are so popular is that they make things simple for you – but is that really in your best interests? Sure, it means less work for everyone and the investment can be explained in a simple, sentence or two:-

  • “Put your investment’s here, they just copy the market and your fees are tiny”, (ETFs, not so tiny in RSA Inc, but anyway).
  • “Put your RA here and you’ll get a tax break and money when you retire” (Insurers, “but don’t think about stopping your contributions or ending it early or we’re going to smack you with a penalty that could cost your investment thousands”).

“Put your money in these Unit Trusts and we will pick the shares etc for you”, (Unit Trusts, “Of course the fees are high, how do you expect us to pay for our high rise offices in Sandton, we have to live (the high life) too!)

All of these are completely legitimate and legal, and the sins of the brokers (if any) are of omission and not commission. It is what they don’t tell you rather than what they do that is the problem – but do you have the time and energy to listen to hours of analysis and choices? You’ll find the disclaimers in the small print somewhere but that isn’t going to help years down the line when your expectations haven’t been met. To be fair, financial advisory is an increasingly difficult profession to break into and make financially viable, which is why the average age of advisors is over 55. If I was just out of school or varsity, I doubt I would be attracted to it when I could walk into a salaried job immediately that would take me a decade to get to in Advisory, without the real prospect of massive upside potential. The regulations that have been put in place to protect you, the client, also mean that an advisor earns less, and has to spend many more hours doing paperwork than ever before. The ideal solution for you is going to take time to evolve – and you’re going to have to do more of the legwork without getting locked into something you can’t get out of quickly and easily, (and without losing a bunch of money in fees or penalties in the process.)

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Diversify

in Asset classes, Investment Comments are off
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How, Where, What and Why?

With so much market uncertainty locally and abroad most of the Asset Managers and Financial Planners are advising their clients to diversify, diversify, diversify. That’s all very well, but when you look at the hundreds of possible scenarios – what exactly do you do?

Unit Trusts (UT)/Collective investments and ETFs. This is a popular way to diversify especially if you don’t have the ‘critical mass’ (enough money – say R3.5m or more) to have an appropriately designed and diversified bespoke portfolio. Be careful of unintended concentration in one or more shares. In other words, if you are buying into the top 20/40 shares in an index – locally or offshore – you could be buying a disproportionately large chunk of a ‘large-cap’ shares (Very big companies in the stock exchange like Naspers (locally) or any of the FANGS (Facebook, Amazon etc) offshore). When choosing a Unit Trust, don’t just look at performance or popularity, check the fees and the concentration of shares. We’re in a low growth environment, high-fee investments have eroded that growth even more (and performance fees exacerbate that even more). Try and keep the cost of the fund below 1%. Rather than pay an upfront fee to your advisor as a percentage of the Assets, rather pay for a ‘fee for plan’ which ranges in the R15k-R30k. Unless you know how asset allocation works and when to change it, don’t try and balance your own unit Trusts, rather use an investment that has been balanced for you. The JSE already has extensive exposure to offshore via Naspers, Billiton, Anglo, BAT, Richemond etc, but a pure offshore UT is also a good idea (more about this later).

Offshore/Onshore: This is probably the hottest topic at the moment because it is a good way to hedge the depreciating Rand. The Rand is one of the most volatile currencies in the world, and as such is much loved by ‘day traders’. The value of the Rand is the accumulation of thousands of opinions on the state of our nation and where it is going. That is very touchy-feely, I know, but when you see how it can move violently in response to political nonsense, you can understand why it is very difficult to predict the direction. Until our inflation rate (around 4.5-5%) approaches the inflation rate in the West (below 2%) we will continue to see Rand depreciation over time (that’s a result of simple purchasing parity). How much you take offshore depends on your objective for that investment. At the moment you can take R10m a year (subject to SARS clearance). If your objective is because you intend to emigrate at some time in the future, the advice will be different from someone who just wants some diversification or a nest-egg in case everything goes pear-shaped Zimbabwe-style. The age of the person, or more accurately, how far away they are from retirement or emigration will also change the advice. Your financial planner should be able to guide you in that decision.

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Cheat sheet… to sniff out cheats

in Uncategorized Comments are off
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If it sounds too good to be true…

One of the reasons I write these blogs is to rip the veneer and mystique off the financial services industry so that everyone out there can become better informed, especially when it comes to the crucial decisions that need to be made with investments. Way too often an episode like the ‘Stringfellow’ affair will shock an already reluctant investor into absolute paralysis. Procrastination can be just as deadly, so I try and point a spotlight on the crucial questions you need to be asking your broker/advisor/planner/asset manager. In a climate where the returns from investments have been lackluster, it is understandable that higher than average returns can be attractive – but this latest little lark has shown us that you can offer returns that appear just above the market and still get ripped off. The major disappointment for me is that a Trusted Advisor (and Trust is absolutely key in this profession) with hundreds of millions in Assets Under Management and an award-winning Unit Trust has single-handily undone years of work done by hundreds of investment professionals to clean up the industry.

Here are some of the questions you need to ask your advisor/planner/broker:

Is the person/company an FSP (Financial Services Provider) you can check this on the FSCA (Financial Services Conduct Authority, previously the FSB). This is no guarantee that you’re not going to get ripped off mind you but is a start. The FSCA number should be on all correspondence.

Is the person is a registered representative or key person of such Financial Services Provider This should be in their ‘letter of disclosure’ along with the products they are accredited to provide advice on. Again, no guarantee that you’re not going to be ripped off.

Are the investments ‘regulated’? This means that the investment is regulated by either the FSCA, Life office of SA or CISCA, and that will be in the paperwork you sign (application form or mandate). If you’re not sure, ask (you’ve got the acronyms now). Unit Trusts are regulated by CISCA, Bespoke Investments (investments run by Asset Managers that mimic Unit Trusts) are JSE regulated under the FSCA. Pension investments are regulated by the Pensions Fund Act and the Life Offices’ of SA. (Are you still awake? Yup, boring stuff). This should be made clear in the paperwork (now that you know what you’re looking for), but it may be in the small print. Ask your advisor to show you where it states who the regulator is in the paperwork. Don’t be shocked if they haven’t a clue – this is a complicated industry and those kinds of specifics often go right over the advisor’s head because it is complicated and boring and with so much else that has to be absorbed, this might have been glossed over – but recent events have highlighted just how important it is.

Do you know the ‘normal’ rates of return and associated risks? Comparing apples with apples when it comes to investment returns is important. The compounded interest on money market for money on call (immediate availability) is, 5 – 7% pa is average (you can get a bit more from the ‘good’ part of a certain bank that has seen a miraculous resurrection of late), up to 9.5%pa for a fixed 5 year term (mid July 2019). High-quality Bonds can range from 8% to 10% (more than 12 % you need to question the quality). JSE stock market has been pathetic for 5 years now, with the odd pocket of opportunity now and then. Historically the JSE has given some of the best returns of any stock market in the world, and might return to glory one day. Abnormally high returns should be a red flag, keep the ‘greedy’ devil on your shoulder under control.

Do you know what ‘normal’ fees are? In this new-normal of low growth, high fees can erode your investment dramatically. Your proposal should clearly spell out fees and make it easy for you to determine the ‘effective annual cost’ (EAC). Some brokers (usually if they are used to working on an insurance platform) still take ‘upfront fees’ and a maximum of 3.5% is allowed. If you follow my blogs you’ll know that I abore insurance-based investments because of early termination penalties caused by upfront commission. ‘Ongoing’ fees range up to 1.5%, and are usually charged on a sliding scale. 1% is average for investments under R5m, but should drop sharply thereafter, with 0.5% usually being the bottom of the range.

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New Normal

in Behavioural finance, Investment Comments are off
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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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