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Eat right. Exercise. Live longer… Die Poor

in Asset classes, Retirement funding Leave a comment
peony
Longevity isn’t for sissies

Every year we get a greater understanding of what shortens or prolongs life. Medical research finds ways of extending life and life expectancy increases – to universal celebration. This increase in life expectancy has to be funded in the retirement years. In countries that have decent government sponsored pensions this is causing a severe problem, exacerbated by the slowing birth rate. In effect in those countries they are using pension contributions from the young to pay the old, because estimates made decades ago as to how long people would live were way out. This is all going to implode one day.

In South Africa, where most working South Africans will have to make their own provisions for retirement, and cannot rely on the government safety net, this problem is right on our doorstep. The retirement models that many financial planners use, still assume that we will live maximum 20 years past retirement age of 65. In other words 85. These models assume total capital consumption because preserving capital makes the required savings ratios out of reach for most struggling families.

Unfortunately it is much more realistic to assume that you will live 30 years past retirement. There is another growing trend that is going to impact this even more. Families are postponing having children into their thirties, and even their forties. This means they will have dependants will into the traditional ‘accumulation’ years, perhaps right to the edge of retirement. It’s an uncomfortable fact that children put a significant dent in your consumption and makes it very difficult to top up retirement savings. If couples that delay starting family are doing that high accumulation and retirement saving before children, then there wouldn’t be an issue, unfortunately most couples are consuming much of that income on travel, leisure and lifestyle assets. It is going to take 20 years for that problem to become really apparent, but if you fall into that demographic I recommend you sit down with your financial advisor and plan out a happier outcome. The good news is that the proportion of your income you need to put away is going to be fraction of what it would be in your fifties.

Wealth is what is left after you have consumed your income. So it is simple, if you want to increase your wealth, increase your income or decrease your consumption.
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The Danger of Investment Risk Profiles

in Asset classes, Behavioural finance, Risk profile Leave a comment
petrea
Weapons of mass wealth destruction

In terms of the regulations in financial advisory (the FAIS act), every advisor is obliged to determine the ‘risk profile’ of their client. Many advisors and brokerages have interpreted this to mean a canned questionnaire, now decades old, originally established by certain insurance providers. If you’ve ever taken out an investment policy with a broker you’re probably familiar with the form. There is increasing concern that this questionnaire is used as a blunt instrument, mostly for ass covering if everything goes pear-shaped. Even at the Financial Services Board it is recognised that thought and care needs to enter the equation too.

The reason these profiles are required is that rogue brokers in the past sold high risk investments to pensioners who lost all their money. Is the current format going to fix the problem? I don’t think so, it I time for a rethink.

I have made no secret of the fact that I think these questionnaires are dated, and in the hands of an inexperienced broker can be a weapon of mass wealth destruction. What have questions on short-term insurance excess got to do with investment risk appetite today? If a client has a decent emergency fund, but actually has a conservative investment profile, the fact that he or she takes a higher excess because he or she can afford it, is irrelevant. Asking questions like “Would you rather invest R20k, and potentially grow it to R50k or maybe lose it all” or (in the other box) “Grow it to R25k, but not lose anything” – is probably going to skew the results to gamblers and others.

Interestingly robo-advisors use a variation of the risk profile questionnaire to place their clients into funds, but in the US they are coming to realise that this does not constitute ‘advice’.
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Investing – What’s the point?

in Asset classes, Financial Plan, Investment Leave a comment
scilla
Investing without a goal or objective

I think most of us switch off when we are admonished by the media, advisors and especially government to ‘save, save, save’.Ironically, if we really all did it, Western economies would be in a whole lot of trouble. Up to 70% of the GDP in the ‘developed’ world is made up of consumer consumption. In the East, governments like China are trying like mad to stop the populace saving so much and start spending. We all know that there is a ticking time bomb out there, especially in countries like South Africa where there is no real ‘pension’ or welfare safety net to speak of. Instant gratification is rife, from the ultra-wealthy to the poor, facilitated by easy credit. Retirement seems like a long way off, and we have plenty of time to catch up (or feel it is too late). We might mistakenly believe that the thousands we’re ploughing into our mortgage is actually an investment (don’t believe me, read HERE).

Part of the problem is that investment is often compulsory – it is deducted from the salary and it is the price of accepting the job. In effect, it becomes a grudge saving. It is little wonder then that 90% of provident and pension funds are cashed in when someone moves job. The huge backlash from Cosatu and workers when it became apparent that the government was hell-bent on preserving the retirement funds was to be expected (exacerbated by the misinformation that they would lose those funds altogether). Hopefully compulsory pension and provident preservation will come sometime – the cashing in of compulsory savings like this will result in a welfare time-bomb in the future. The State pension is R1350 a month, not even close to a living wage.

Retirement funding is usually the biggest ‘investment’ we need to make on a monthly basis. Believe it or not, if it is a compulsory deduction they are doing you a favour. A long-term objective is always the hardest for your brain to wrap itself around. Retirement annuities that penalise you for early termination act the same way – but that is entirely incidental. Those penalties are there because they have paid upfront commission to brokers, it has nothing to do with helping you. The one thing retirement annuities get right, that group pension and provident funds don’t, is that you cannot withdraw from it before age 55.
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5 easy ways to sabotage your investments

in Asset classes, Investment Leave a comment
red and white tulips
Hard truths

After the very nice bull run since 2008 that should have seen a doubling or tripling of an investment, you’d be forgiven for thinking it is going to last forever. The debt crises of 2008 left deep scars on the emotions of most investors who saw 30% or more of the capital in their investments evaporate. Just prior to the crash of 2008 there was a feeding frenzy on the stock exchange – a lot of that from individual investors. The smart investors were already starting to sell out of stock portfolios in Nov 2007. What I am seeing now is much of the same sort of behaviour, especially from individual investors, and it is time to take a step back and make sure you’re not putting those hard-earned investments at risk.

Buy high, sell low : This phenomenon can be explained by the new acronym, FOMO. Fear of missing out. The stock market breathes in and out, that is just in it’s nature. Sometimes it hiccups, jumping up and down by a few percentage points for no reason. Occasionally, just like us, it heaves a heavy sigh and sheds some 10, 20, 30%. It’s going to come sooner or later and the longer the bull-run continues, the probability grows. When individuals wake up to the fact that everyone in the stock market has doubled or tripled their money, FOMO kicks in. More often than not these ‘inexperienced’ investors will buy shares online, get involved in day-trading or (more sensibly) buy ETFs or other trackers – Of course prudently saving stockbroker or advisory fees of 1%. Winning! Those financial ‘nannies’ (like me) might have been as silly as to try and tell you that stocks are a long term (8 yr plus) investment and try and get you to make your investment less ‘aggressive. What! And leave all that money on the table! Then the market turns, and those investors hang on and hang on hoping for a turn around, until they can take it no more and bail.

Allowing greed or fear to rule your decisions: Many people will get to the later years in their life and wake-up to the fact that they have not made enough provisions for retirement and fear kicks in. There are a number of ways to remedy this. You could start saving more – slow and painful but effective. You could lower your expectations for retirement – again painful but hopefully far enough in the future for you to ‘get used to it’. Finally, you could tweak your asset allocation (cash, bonds, property, stocks – read more HERE) so that you get more growth. Painless! Yay! Of course there are limits, both to its effectiveness and prudence. Can you afford to put a 30% hole in your capital in the short to medium term? If you’re 10-15 years from retirement then yes, you can probably afford to make your investment much more aggressive. Less than that? Not so much. Given the choice between a painful and an easy choice, easy is going to win – unless you step in and recognise the actions of the greedy demon whispering in your ear.
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Alternative Retirement funding

in Asset classes, Retirement, Retirement funding, Saving, Tax Exempt Savings Accounts Leave a comment

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Not just a one trick pony

Back in the days, (I am not sure how ‘good’ they were, really), most people knew they would have a ‘pension’ to retire from, usually determined by the number of years they worked at an organisation. Those ‘defined benefit’ pensions are almost all extinct – along with lifetime jobs. Employees now change jobs as quickly as every 3 years (research has shown that 4 years is optimal unless you’re being promoted). Sometimes the companies have retirement savings (pension or provident funds) sometimes not. On resigning from a company 95% of those employees are cashing in their retirement funds, and 5 years down the line rarely have anything to show from it. Entrepreneurs that start their own company rarely have retirement savings – they hope to work forever or find a buyer for the company. That isn’t a retirement plan it’s a vague hope. Moving in with the kids isn’t a retirement plan.

There is a massive retirement funding gap looming. As a proportion of the total working population, relatively few have active retirement annuities (RAs). Why? If you took out a retirement annuity on an insurance platform, because you were being sensible and in a job that didn’t have a retirement fund, only to change jobs and have a compulsory fund – you were stuck with your head between a rock and a hard place. Either continue to pay the premiums, even if necessities had to suffer, or take a 30% (or 15% post 2007) penalty snot-klap. That only has to happen once for someone to lose all faith in the system. In other words there is zero flexibility! It is a product designed for the 1950’s when you were in a lifetime job. Quite frankly insurance company RAs should come with a surgeon general’s warning in 50 font on the cover. “Warning. This product can cause an allergic reaction to insurance companies.”

RAs, structured properly and on a flexible platform with no penalties, are a first rate investment. I am not going to go into that here, if you want to read more about them you can do so HERE. Modern retirement funding shouldn’t start and stop with traditional savings ( RAs, pension and provident funds and preservers). We are living in an ever changing environment and our funds need to be more flexible.

Because we are living longer than when RAs were first conceived, we are not going to just need a ‘fixed income’ but lump sums as well. In the past people were expected to live 10-15 years post retirement. Max. Today living 25-30 more years is expected to be commonplace. Not only are we living longer, but we are fully functional, active and independent longer – driving cars, going on holiday, working longer etc. A car could be expected to last say 10 years post retirement – but what happens after that? A retiree is not going to get finance, they have to have the lumpsum. Similarly when downsizing a house. The duties, fees and commission in moving a house can run into hundreds of thousands. Gaps in medical aid widen every year, and the 4 digit above inflation increases can devastate a fixed income. Have a look below:

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Smart Investor or Clever Dick?

in Asset classes, Investment Leave a comment
slipper
DIYer beware

When it comes to being an investor, especially if you prefer to DIY, there is a fine line between being smart and being an idiot. If you stuff up the tiling in your bathroom because you were basically clueless, you can dig it up and redo it in less than a week. You don’t have that luxury with investments – you’ll never get that precious time back. There is a fine line between being smart and silly; where is that line?

You need to understand the difference between investing and gambling. Believe me there are plenty so-called investments that should require a gambling license. Anything that smacks of a ‘get rich quick’ scheme, irrespective of the number of testimonials, is likely to be a ‘get poor quick’ scheme. Anything that is ‘leveraged’ – in other words you only have to put up a small proportion of the investment, but if the trend goes against you, you have to pony up the full amount. Day trading, options, derivatives and all those other fancy products are prime, but probably obvious examples. The odds on those sort of schemes are worse, way worse, than a casino.
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