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Financial Freedom

Posted on August 31, 2018 in Asset classes, Financial Advisory Leave a comment
freedom
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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The Seasons of Wealth – Winter

Posted on July 4, 2018 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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The Curse of Longevity

Posted on April 19, 2018 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

Posted on April 4, 2018 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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Getting the most out of Investments

Posted on March 13, 2018 in Asset classes, Financial Plan, Investment Leave a comment
squeeze
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 sharenet.co.za) 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

Passive investment – time for accountability?

Posted on February 7, 2018 in Asset classes, Investment, Passive investing, Passive Investing Leave a comment
[/frame}passive
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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