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Financial Worry

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<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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A jobless world?

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< 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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The Money-Go-Round

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tale

A tale of some money

Most of us don’t think twice about opening our wallet and handing over cash or plastic. Perhaps we think this is just a form of barter, you give me something and I will give you something back of equal value – and money is just one of those ‘things’ we can barter with. I suspect we think that all that money is backed by investments in the bank in one shape or form. Not so. In effect banks ‘create’ the money but it is ‘leveraged’ – in other words they don’t lend out R1 for every R1 they have in investment but much more than this. The degree to which they can leverage themselves (lend more than they hold) is controlled by their ‘capital requirements’ – an amount that has increased over recent years following the credit crisis fall-out. You’ve probably heard of QE or quantitative easing. This a monetary policy governments use when ‘normal’ monetary policy (interest rates) fail. Basically, with QE governments buy bonds from financial institutions to increase their liquidity in the hope they will lend out the money and get the ‘Money-Go-Round’ going again. In other words pushing it out of it’s inertia and give it some momentum so it can go around by itself. Unfortunately this has had limited success, mostly because the banks aren’t getting enough of a ‘margin’ (aka profit) because of historically low interest rates. Banks have also been inefficient and are now having to use technology to become more competitive – and have been haemorrhaging jobs as a result.
Let’s illustrate this “Money-Go-Round” with a short tale:
In a small dorp in Limpopo, a German tourist walks into the local B&B and puts R500 on the desk. “I want to look at your room upstairs and maybe I will stay here, Ja?”
“Sure,” answered the owner, Jacob, handing the tourist the key to the room.
The tourist heads upstairs and Jacob looks at the money on the desk. “What if he doesn’t stay?” he thought to himself – fleetingly – before picking up the money and heading to the liquor store next door and settling his long overdue account so his supply would start to flow again.
The Liquor store owner looked at Jacob and the money in surprise, but smiled his thanks and placed it in his pocket. Once Jacob was out of the door the liquor store owner walked across the street to pay the hairdresser’s account that his wife had clocked up on her last visit. She, in turn, closed up the shop, flicked the ‘back in 5’ sign and went to the petrol station and paid her account there.

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Wealth Lessons to be learned from the US elections.

in Asset classes, Behavioural finance, Economy, Financial Coach Leave a comment
confused

Expect the unexpected: The polls in the USA got it seriously wrong – why? It is only a sample of the population and people lie! Few (sane?) people will publicly admit to endorsing the racism, bigotry and misogyny espoused by Trump but when it comes to the secrecy of the ballot box, it became obvious that there were millions of closet Trump supporters. This has ushered in a whole new world of uncertainty, just like the Brexit vote did, and just like Nenegate did here. It has taken us nearly a year to recover from Nenegate, and the UK is still shuddering. When it comes to your wealth – protect your risks, diversify every aspect of your wealth.
Populism is here to stay. The protest vote against the status quo in government is turning the tide everywhere, including here. Brexit is a good example (trust the Americans to one-up the Brits! This result is Brexit to the power 10). This outcome is a result of emotion and not reason. “We, the people” are sick to death of lobbyists, special interest groups, bloated government payrolls, erosion of real purchasing power and having to reskill into new jobs. The only voice that growing ‘disaffected’ group has, is to vote for something different, however nauseating that might be. The major threats? If you work for, or supply to, government- diversify and seriously reduce your risk exposure. Opportunities – Small business, the Health industry, Service industries, On Demand, Customisation.
It’s not cool to be clueless: Hillary’s email fiasco hit her hard and should be one of the biggest lessons anyone, of any age, needs to learn. If you refuse to climb on the technology bandwagon, and keep up with it you’re going to get hurt. As a retiree your banking costs will climb, but more onerous than that – you will open yourself up to being conned and taken advantage of. In your working life you will not be able to be as productive as someone who embraces technology – forced early retirement is calling! Most of the growing jobs and professions require a good understanding of technology. This is even more true of ‘passive’ income opportunities. Keep your work and home social media presence separate.

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Investment Diversity

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aloe
Investment Diversity is as important as Biodiversity

 

One of the constant features of us complicated humans is the desire for diversity. We get bored quickly. We want new tastes, new experiences, new ‘stuff’. As soon as anything becomes repetitive we lose interest or get stressed. Repetitive jobs, reruns of old TV shows, repetitive ads, poor menu choice at your favourite restaurant. Fashion is a direct result of our need for variety. In nature this variety is called biodiversity.

Biodiversity is extremely important for the planet. It allows for flexibility when change happens to an environment. That change may kill one or two species, but something will always survive – even if it is just a cockroach or Trump. When it comes to our wealth, diversity is just as important. You cannot afford to put all your retirement eggs in one investment basket.
So let’s look at the various components of wealth and see where the diversity can come from:
There are 5 asset classes: Cash, Bonds, Equity, Property and Currency (not a classic asset class but a multiplier for offshore investments).

 
Cash is pretty self explanatory. It is ‘boring’ and gives you a below inflation rate of return. It’s importance to your wealth however cannot be underestimated. Cash-flow is king, not just for businesses but for individuals too. If you have cash available you can weather unplanned expenses without taking out expensive debt. You can also take advantage of other wealth opportunities quickly and without eroding your other wealth caches. If you put your cash with a major financial institution or in a product that spreads the risk across a number of institutions you are going to be okay. You are unlikely to lose the capital. What percentage of your wealth portfolio should be in cash? This is going to vary according to the economic environment but 3 months, after tax household expenses plus 10% is a reasonable rule of thumb. This is right across your wealth portfolio. Your retirement fund for example will have at least 10% in cash – but is ‘unavailable’. If you have a ‘blended’ unit trust (a flexible or moderate mandate for example) then there is probably a cash component there too.

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9 Things Smart Investors Do

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lavender
It’s in their behaviour, not luck

1. They know their limitations. Investment is complicated, even new financial advisors will shy away from giving investment advice or recommend safe, well known funds. The more you know about investment though the scarier it becomes – but that is way better than thinking you know everything. There is nothing like being unconsciously confident. Unless you’re prepared to spend a considerable portion of your week keeping up with the global trends, tax implications, regulatory changes, economic indicators etc get a trusted advisor to give you a hand. That advisor can do due diligence on the Unit Trusts or Shares that you buy, investigate the fees on the platforms you use, investigate the investment philosophy of the asset managers you want to use, divert your funds into the right types of investment and alert you to macroeconomic changes. I know that paying your advisor a fee is a grudge, but regulations are changing to make it a win-win. In return for that fee you are entitled to feedback and ongoing monitoring of the appropriateness of that investment. As much as a fee will erode the investment, believe me, a park-and-leave approach to investing can be even more dangerous. I continually come across investments that have been in place for 20 years or more and not even keeping up with inflation.
2. They know that you can’t buy respect: Keeping up with the Joneses is probably one of the most toxic behaviour traits when it comes to wealth accumulation. Wealth is what is left after you have consumed your income. It is as simple as that. There is no point in seeing yourself as a smart investor if you don’t leave yourself anything to invest with at the end of every month. If you worry what people will think about the car you drive or the house you live in, perhaps you need to spend some time with a shrink or a coach and not on property.com or going for test drives? Read more

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