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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
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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