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So you want to be an entrepreneur?

in Behavioural finance, Business Assurance, Financial Advisory, Financial Plan Leave a comment

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Hidden traps waiting for unsuspecting entrepreneurs

Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or an MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence that will guarantee your success, but “jump and build your wings on the way down” sometimes ends in a bloody mess at the bottom. A bit of homework on wing design and jumping with the right tools would have prevented that – and the same goes for that entrepreneurial venture you dream about.

Test your idea: Unless you’re buying a franchise, a new venture usually starts with an idea, and with a product (which could be a service of course). It is important to iron out at least some of the bugs before you sink too much money into the venture. Who is your target market? What are their expectations? How much are they prepared to pay for the product? What after sales service do they expect? How often will they buy your product? How can you retain their loyalty? Don’t let a poor product sink your venture before it even starts.

Everyone needs to ‘maak’ a plan: Seat of the pants ventures or bootstrapping your way through the early years probably works a charm in your early twenties when you don’t have obligations, not so much later on. One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your “break-even” is for example – and when you might achieve that dream – then it can become a nightmare. The good news is that all this information is freely available on the net, in books and online courses. Do all that homework and put your plan together before you leave your day job. If you’re ‘between jobs’ then use the time to do this homework, but keep looking for a job, even if it as a temp, Uber driver or from your rented room while you rent out your house. Money to launch your venture is hard enough to come by without spending it doing the homework and learning basic business skills.

Who are your clients going to be and how are you going to get them? This is key to any venture’s success. If you’re starting a business very similar to your ‘day job’ tread carefully, if you cannibalise their clients or copy their products, you might spend a chunk of your change in court. Brushing up on social media marketing and building your potential network takes time and trail and error as you find out what works and what doesn’t. You can also use social media to test your product or use free tools like Survey Monkey

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Investing Offshore – First Ask Why

in Asset classes, Investment Leave a comment

offshore

Offshore Investing – First ask why -(then where and how).

Whenever SA Inc has a wobble, South Africans worry that we are going the same way as our neighbours to the north and look to moving some of their nest egg offshore (or moving themselves out altogether). It’s all very well to dismiss this as a kneejerk reaction, but those fears and doubts are very real and personal, so let’s take a look at the pros, cons and possible pitfalls.

Whenever you make a new investment, and an offshore investment is no exception, it is very important to determine the end-use objective of the investment – that will be the primary determinant of how it should be invested. To put it very simply, the objective will determine the timeframe and the need to protect or grow capital – and the asset classes that should be used to achieve this. Short-term investments usually need to be liquid and preserve capital, so cash and bonds are used. Long term investments, on the other hand, can have less liquidity, and ride out the cycles in the stock market to optimise the growth of that capital over a decade or more.

Before we look at the different investment objectives, let’s look at some of the realities of offshore investing. In all investing (local or offshore) there are 4 basic asset classes: Cash, Bonds, Property and Equity. Currency mixes everything up! Basically, it acts as a ’multiplier’. Think of it like this:

  • Rand depreciates and your offshore investment grows at about the same rate – effectively (in Rand terms) your investment has ‘doubled’.
  • Rand depreciates but your investment shrinks – these counteract each other and your growth is flat.
  • Rand appreciates and your investment shrinks – you will get a double downward whammy.

 

Another factor that will impact your offshore investment is inflation. In the West, inflation is so low that disinflation is a very real threat. Interest rates are used to keep inflation under control (the ‘monetary policy’ of central/reserve banks), and these have been in the low single digits for over a decade (and in some instances have actually gone negative). The UK has seen a ‘welcome’ bump up in their inflation, but that is thanks to GBP depreciation as a result of Brexit. Cash and Bond returns of your offshore investments will probably be minuscule, and after bank or investment fees could well be negative. This puts you in a quandary if you want to preserve your capital and get it to grow even at just inflation without risk.  Although the Western stock exchanges have been doing quite well (especially in the last 6 months) the days of double-digit stock growth are rare post-2008.

Currency values do not move rationally, they are the playground for day traders, and the Rand volatility makes our currency one of the favourites for these gamblers. Having said that, the gradual depreciation of the Rand over decades is largely due to the large inflation disparity between us and the West. Even at our 6% inflation, we are consistently 4% above developed nations, so it is can be expected that we will continue to depreciate by this difference over the long term.

Let’s look at the different ‘objectives’, and how to structure your investment accordingly:

Emigrating: If you have made this decision, then partner with someone who knows the Reserve Bank regulations so you can start moving your money out – the sooner you start it the better. If you formally emigrate (as opposed to leave and live or work outside the country for a while) then this is considered a Capital Gains Tax event on all your assets, even if you leave them here. This tax will be due on investments, and property (especially property that is not your primary residence). If you are not formally emigrating but want to top up your retirement bucket by working in a tax-free/friendly country, beware of the changes in regulations that are on the cards which will bring you back into the SA tax regime and will be a game changer.

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The absolute basics of managing your wealth

in Asset classes, Financial Coaching, Financial Plan Leave a comment
10 points

Never abdicate your responsibility

Personal finance can be overwhelming and complex, but if you want to partner with an advisor to help you protect and grow your wealth there is a bare minimum you need to know so you can assess whether your wealth is invested properly and you have the factors you can control on your radar. There is nothing more dangerous than being ‘unconsciously incompetent’ – not knowing what you don’t know.

Here are the handful of numbers you must know (in order of priority):

  • The “repo” (repurchase) rate (currently 7%), prime interest rate (usually 3.5% above repo rate, now at 10.5%) and the interest rates of all the loans, mortgages (usually close to prime), credit cards ( as high as 18-24% at the moment), car loans etc. that you have. Why? This will illustrate which debt must be paid off first. Read HERE for more on ‘Smart debt’. This will also give you a benchmark that you can rate your investments against.
  • The inflation rate (currently 6.3%, the top end of the target range is 6%.) If you know this number then you can do a simple calculation on how well your investments are doing. If your investments don’t keep up with inflation then the ‘purchasing power’ of your investment erodes. The actual rate of return, minus inflation, gives you the ‘real’ rate of return which is what you should focus on, not the bottom line.
  • The difference between “Interest” (money market), “Yield” (bonds but taxed as interest), “Dividends” (from shares) and “Capital growth” (shares and property). These all grow your wealth but are very different, have different risks and are taxed differently.
  • The very basics of your annual budget. Your net income, fixed expenses, investments, variable expenses (groceries, entertainment, clothes, fuel, cell phones etc) and ‘disposable income’ (what is left over.) If you ever apply for a loan or mortgage you’re going to need these numbers anyway. Disposable income should never be zero. If money burns a hole in your pocket, put it out of the way on payday, say into a call account. Living within your means and continually saving is the key to long-term wealth.
  • The age at which you (realistically) want to retire. This is the line in the sand where you essentially stop investing and start drawing down on your income.
  • What your annual budget will look like at retirement. Once you have your present day budget, this is easy. You take out things you won’t be doing at retirement – mortgages, school fees, debt and add back things you will – travelling more perhaps. You or your advisor will now be able to project how much you will need in investments to retire and live on your income until at least 95 or 100 years old.
  • The monthly contributions you need to go into your investments to retire on your due date, at your desired income. Knowing the actual capital amount you need (above) is useful 10 years out from retirement, longer than that it is pretty meaningless, focus on eating the elephant one month at a time.

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Financial Worry

in Asset classes, Behavioural finance, Investment Leave a comment
<worry
Worry – paying for an outcome now that may never happen.

In uncertain times, like now, it is very natural to worry about the future, specifically to worry about your future financial security. Worrying is highly stressful and pretty useless, but one of the best ways to counter it is through action and knowledge.

One of the most useful things you can do is to understand what you can control and what you can’t. You can’t control the economy, interest rates, exchange rates and political climate. Sure, you can chafe against it, write letters, sign petitions or protest, but the bulk of your energy should be focussed toward things you can do to protect your wealth and your lifestyle.

Knowledge is power, I am not saying you need to know everything, but there is a certain amount of knowledge you need have so that you aren’t ‘unconsciously incompetent’ – when you don’t know what you don’t know. That is the most dangerous place to be. We all know that being unaware of a law is not going to save you when you get to court, and when it comes to wealth it is just as important. You don’t want to get 5 years out from retirement and realise that you’re going to have to keep on working into your 70s and 80s. Never abdicate the full responsibility for your wealth to anyone – not a spouse, financial institution, broker or advisor.

Always invest in yourself, not just by saving and investing what you earn, but in your knowledge and skills too. To have longevity in the economy, whether you work for yourself or someone else, you need to build the brand “You”. Don’t be sucked into by superficial things though – expensive clothes, cars and houses only impress the shallow and wanna-bes – and why do you care what they think?

Know your limitations. Even if you’re a knowledge accumulating machine, there is going to come a time where you are going to need help – or go the whole hog and become that professional. There is always going to be a medical condition that needs a specialist, a legal situation that needs a lawyer or a sabotaging behaviour that needs a coach/shrink. Sure, knowing the basics is a huge help and can save you a lot of money, but it is not a weakness to seek help, it is just smart. When it comes to managing your wealth, the days of ‘free’ advice from your broker is dying fast. Just like you can get accounting help that varies from a bookkeeper to a CA, the same applies to the management of your wealth, the Chartered Accountant equivalent in Financial Advisory being a ‘CFP®” (Certified Financial Planner)- a professional, internationally recognised designation.

While we cannot control the economy or politics, we can control most of our personal wealth and earnings potential – even in the most trying times. Being a Chicken Little (“Oh! Oh! The sky is falling on my head, I must go and see the King”) is negative, destructive and unhelpful. It might make you feel better to pull others into your perception of drama, but there are more useful ways to divert that energy. Quite frankly, if you have a Chicken Little contaminating your inner circle, sideline them, especially at times like these where there is so much uncertainty. Now is not the time to make knee-jerk decisions like selling all your investments or emigrating. You need to ‘keep your head when those about you are losing theirs,’ (with apologies to Rudyard Kipling).

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Those Little Luxuries are not your Wealth Killers

in Behavioural finance Leave a comment
lattefactor

Little luxuries are not your big wealth killers

A few years back the ‘Latte factor ®’ by David Bach was seen as the panacea to all personal financial woes. The idea was that if you forwent all those little luxuries (like your daily cup of Java) then you’d accumulate thousands and all your financial woes would be over. Frankly? Bunkum! It is the major decisions that will have the biggest impact on your wealth.

The biggest of these decisions is a house, specifically moving, even if you swap ‘like for like’. That one act is going to put a huge hole in your wealth, and one you may never recover from. On a R4.5m house for example, the costs are around R375,000. At R30 a latte, that is R12,500 lattes, or 2 lattes a day for 110 years – for just one move. Those costs are lost and gone forever and have not added a single cent to the value of your property. If you get itchy feet, before you go looking at show-houses and rope your spouse in on this wave of euphoria ( aka retail therapy on steroids), ask yourself why you are wanting to move house – and be honest (with yourself if not with anyone else). Keep those BS excuses of ‘better schools’, ‘safer area’, ‘more/less room’ for your friends. Don’t fool yourself with the ‘profit’ you’re going to make on the sale – where are all those other costs going to come from? That profit is a myth, most of it is just inflation. A couple of tips: Don’t fuel that want by ‘just looking’ at houses. Don’t rope in a partner who will encourage you. Think about some renovations. If you absolutely have to move, pick something you’re going to be happy with for a good 25 years if not the rest of your life. Holiday homes are a complete waste of your wealth, they are not just a dead asset but they cost you money every month. Sell it and invest in a couple of rental properties close to home.

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A jobless world?

in Asset classes Leave a comment
< jobless world
New normal?

We’re all brought up to believe that you cannot have your cake and eat it. You can’t have both loads of family time and a stellar career; you can’t be wealthy unless you work for yourself; both parents have to work – or their children won’t be given the best education. In the past, this has often been true, but just maybe things are changing.

Change happens around us all the time, most of the time we hardly notice it, and only when we compare life to ten years ago to today do we actually realise just how radical that change has been. There are times though that change happens uncomfortably fast, and we try with all our might to stop it, usually only postponing the inevitable. This rapid change too will pass, and our lives go back to a new normal, in the interim though it may leave mayhem in its tracks.

The Credit Crisis precipitated a new normal in economic cycles, and now ten years down the line (it started in the second half of 2007) very few people have changed their expectations and adjusting to this new normal of low growth, low-interest rates and very low inflation. As a financial advisor, one of my biggest challenges is managing those expectations, especially if asset allocation and the fund mix has to be changed to protect a long-term investment.

The rise of populism in politics around the world is an idea that has been dying to break through for a long time now. Ironically it has been nurtured by the low growth era in the last decade, and the growing disparity between the ‘one percent’ and the ‘others’. The ‘others’ are sick to death of politicians pandering to that one percent, or even worse, using politics to leapfrog into that one percent. Unfortunately for those wanting the ‘good’ change in politics and politicians, they have had to hold their noses and accept the ‘bad’. To get that political change you may have to swallow nasties like right-wing fascism, rampant and confiscatory socialism, racism and xenophobia. It makes my hair curl even to write that sentence. The Americans held their noses on some (most?) of the above to get the populism Trump promised (whether or not he will deliver remains to be seen). The Dutch, however, came out in droves to make sure the right wing did not prevail. There was a substantial element of xenophobia in Brexit and very little change in the bureaucracy. The EFF is another ‘hold your nose’ populist (and make no mistake, the ANC will try and woo them back into their ranks.) The low economic growth is feeding into this desire for change.

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