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Smart Investor or Clever Dick?

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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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Just one page – Consolidated Wealth

in Asset classes, Financial Advisory, Investment, Risk profile, Wealth Ecology Leave a comment
Keep it simple but not stupid

For the average person, investment can be confusing and stressful, usually resulting in a number of unhelpful scenarios – from a multitude of investments all over the place (under the guise of ‘diversification’) to none at all. In a number of blogs I have recommended a single page summary of all investments, with all the important information, this can become the cover page for your Red File (the one ‘go to’ financial file – look under ‘Organise’). The ‘one sheet’ for investment summaries I have used for my clients has evolved over time, and the latest iteration is now being rolled out, and am letting those of you that aren’t lucky enough to be a client to have a look behind the scenes if you want/can DIY.

Ideally all your investments should be on one page, not just the ones your financial advisor looks after for you – in other words your savings accounts, unit trusts and stock portfolios should be there too. Why? It’s important to look at the entire investment portfolio holistically, and to determine the ‘asset allocation’ – this is the split between the big 4 asset classes – Equity, Property, Cash and Bonds. The blend of ‘asset classes’ is going to affect the riskiness of the investments (the chances that you could lose chunks of capital in the short or medium term) as well was the potential ‘returns’. The ‘asset class split’ can be got from the fund fact sheets, and these need to be checked once a quarter. My excel sheet ‘looks up’ these splits from a master fund fact sheet I have and change every quarter. one sheet

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What the ETF!

in Asset classes, Investment, Tax Exempt Savings Accounts, Wealth Ecology Leave a comment
The passive aggressive investor

Exchange-Traded funds (ETFs) have been around for about 20 years, and are becoming increasingly popular not just with individuals, but with institutional and retirement funds too. In a nutshell, an ETF will passively ‘track’ and index by buying and selling shares in the same ratios that are found in that Index on the stock exchange (South African ETFs, some offshore ETFs do not physically have to hold those shares). The ETFs are quoted on the exchange and move in price during the day, just like a stock. These indices are ‘groups’ of shares, for example the AllShare index (all the shares on the JSE) or the Resource index (the resource funds). More and more ETFs, using increasingly specialised indices, are being added all the time.

The allure of an ETF is that it gives you the same return as that index, without having to buy the underlying shares (which would be prohibitively expensive). While there are collective investments that might mimic the index, the ‘active’ manager will usually change the allocations to try and beat the ‘average’ – and justify his fee. ETFs are passive. There isn’t an asset manager fiddling with the allocation. Its role is to be average. Because these are true ‘trackers’ and the asset manager doesn’t have to think, just follow, the costs are significantly reduced – and that is where the benefit is. Ironically, because the costs are so much lower than Collective investments, this ’average’ is usually way above ‘average’ for the sector in real terms.

In some respects the asset managers in the South African market are lucky because the (usually) double digit growth makes the odd one or two percent they charge less noticeable than their American or European counterparts where single digit growth is more common. If you’ve only made 5% in a good year, you’re not going to be impressed with a 2-3% fee being taken off it! These fee concerns have resulted in the massive popularity of ETFs offshore, and my recommendation to anyone investing offshore is that they use ETFs and not funds. Interestingly Discovery’s Dollar fund investments (which like the life cover will pay offshore, and uses the R1m annual allowance to pay for the premiums) uses ETFs for the investment portion.
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‘Tax-free’ isn’t a magic word

in Asset classes, Investment, Tax Exempt Savings Accounts Leave a comment
Look before you leap

With the addition of the new category of ‘tax-free savings’ and some of the advertising from the major providers, it’s time to throw in a bit of caution and underline what they are not saying.
There are a number of so-called ‘tax-free’ investments out there, the truth is it’s mostly tax that is deferred or paid without you noticing, not really tax-free.

The best place to start an understanding of what is tax-free is to look at your tax allowances on your income tax return every year:

  • Interest: The annual allowance this year is R23,800 per annum. In other words the first R23,800 you pay in interest isn’t tax, thereafter it is taxed. Doesn’t sound like a lot does it? At 6% interest (which is generous and usually only comes with notice period handcuffs), your investment would have to be R396,666. This is fine but perhaps a little on the high side as a ‘safety net’ equal to at least 3 months after tax expenses.
  • Capital gain from growth on investment: Capital gains tax (CGT) is worked out at 33.3% of the gain multiplied by your marginal tax rate. Capital gains from traditional investments occur when units of a collective investment (unit trust) or stocks from your stock portfolio ( or underlying your collective investment) are sold. The annual allowance is R30,000.


Savings accounts: Either as cash (available immediately) or call accounts (varying notice periods) will produce interest payments, which can be tax free up to the limit above. Endowments, probably my least favourite type of investment, are ‘tax-free’ when they mature – only because they are taxed at 30% within the fund. This doesn’t allow you to use your annual CGT or interest rate allowance. If your marginal tax rate is below 30%, then this makes even more sense. The only people who benefit from endowment structures are individuals that have maxed out their interest and CGT annual allowances and have a marginal tax rate over 30%. They also make sense for trusts that have a 40% tax rate.

Retirement annuities (RA): These have fairly complicated taxed and tax-free components. Within limits, you can claim back your premiums from tax, giving you a refund of up to 40% of those premiums. This is really significant! On retirement however tax will be imposed. The first R500,000 of the one third is tax free, thereafter it is tax at increments up to a maximum of 36%. The compulsory annuity that you have to take with the rest is taxed at income – and the impact of that is going to depend on just what that income is at retirement. There is one other little ‘tax-free’ component that you may not know about. Within the investment there is no tax levied, and even the dividend withholding tax is rebated back. This means that if you have the same amount of money, invested in identical funds – one in a and the other in a ‘Discretionary investment’ ( just a normal collective investment not an endowment) then the retirement fund is going to do better.
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Checklist for Financial DIY

in Asset classes, Disability, Dread Disease, Economy, Estate Planning, Financial Advisory, Financial Plan, Investment, Retirement funding, Short term Insurance Leave a comment
You need to find out what you don’t know

Partially as a result from pressure from the regulatory bodies like FAIS, and partially as a result of the evolution of Financial advisory into a profession as opposed to a brokerage, clients can now choose what sort of ‘advice’ they want to receive, and whether or not they want or need a relationship or merely need an ‘order-taker’. Even within the ‘Financial Advisory’ basket there will be a wide range of experience and qualifications that you can choose from, as well as the choice between a ‘linked’ agent (only one provider) or an IFA – Independent Financial Advisor. Many advisors today have professional qualifications, like a ‘Certified Financial Planner (R) ‘ designation, that is similar to other professionals like Chartered Accountants and requires an extensive examination process in order to be accepted.

If you feel that you don’t need financial advice, I am not going to try and persuade you otherwise ( in this blog anyway). There are loads of things I do myself. I am not going to call out a repair person when my washing machine won’t empty, I know it’s probably a sock or something blocking the outlet. I replaced my broken garage remote receiver for R100, saving myself a R650 callout fee for doing 2 minutes work (and probably having them tell me my motor was also broken).There are so many tools and resources out there on the web, that it is more than possible for you to competently look after your finances, if you’re prepared to do the homework and aren’t in a hurry.

Step one: You need to find out what you don’t know. This is moving from being ‘unconsciously incompetent’ (when you don’t know that something exists, so you can’t possibly be incompetent) to finding out what you don’t know (so you are now conscious that you’re incompetent). If you try and do all your own finances when you’re in either of these boxes, it will end in tears.

Step Two: Learning what you need to know, slowly becoming consciously competent in order to DIY. This isn’t going to take five minutes. Insurance providers can take someone straight out of matric to qualified to give ‘life’ advice in 3 months (full-time study) but that really just covers the basics and those advisors have to be under supervision for two years. So here’s a study list:

Medical aid: Don’t bother, and the providers probably won’t let you. The commission is so minuscule that unless the broker specialises in big corporate medical aid schemes, they are probably going to look after you as a service because they manage your investments or life portfolio. You only ever need a broker to help you change plans annually and if a claim goes pear-shaped and it needs to be escalated to an Ombud. Changing medical aids is a mission, you have to be seriously annoyed to go down that route. Investigating which plan within your medical aid to use just needs a few hours reading, and some calculations of your current use.

Short-term insurance: The direct and call-centre providers (the ‘DIY’ providers) have made massive inroads into this market, usually on the promise of ‘bonuses’ for not claiming.You might get a paragraph on your needs so that they can tick the box to comply with the FAIS act, but not much else. These bonuses are deliberately only paid every 4-5 years. They are ‘golden handcuffs’, you aren’t going to want to move in case you lose the bonus. You’re also likely to ‘self insure’ some claims so as to protect your bonus. In South Africa, the likelihood of not claiming on anything for 4-5 years is small. Now that you’re stuck for 4 years, you might just find that your annual increases start hurtling out of control, and the cover was never cheap to begin off with. Don’t be sucked in by ‘cheaper’, it is likely to be ‘cheap and nasty’. Ask for a detailed line by line comparison with your existing cover. Don’t just look at the bottom line, what are you giving up? Compare excesses, exclusions (especially on geysers and water damage, how they replace (especially jewelry), ‘averaging’, security requirements, payout on jewelry not in a safe when stolen. A broker will give you this line by line comparison.

Life cover: Before you get on the phone and buy some life cover direct these are the sort of things you need to know:

  • What your life needs are: your debt plus the ‘present value’ cost of caring for your dependants (you can work this out on a financial calculator).
  • Funeral needs: Is there liquidity available or does this need to be provided for? Should it be separate or will the provider give an early payout.
  • Temporary disability needs : Salary replacement after tax, waiting periods, in-claim increases,claim criteria, term (24/36 months?), occupational loading
  • Permanent disability : Salary replacement or the discounted cash flow of all future paychecks to retirement. How additional income is treated (passive and active income), claims criteria, effect of occupation and ability to do nominated occupation on claims. Lump sum requirement. What a termed policy means. Retirement age and its effect on premiums.
  • Dread disease – if you have medical aid, this is a want and not a need.
  • If affordability is an issue, what is the most important and why. Where do you cut and where not.
  • Your existing/proposed and group benefits need to be considered. If you’re over-insured on disability, the excess will be confiscated.
  • What premium pattern are you going to use – level or age rated, and what are the long term implications of this.
  • What annual increase are you going to put in place, and how does this impact the premium over time. With some providers a 5% annual increase in the benefit results in a 7.5% increase in premium, compounded over time.
  • What are the general exclusions, and what specific loadings or exclusion might be imposed on you.
  • As an individual, not working with a broker, you may not be able to get comparative, commission-free quotes from the top providers.
  • Who you should make a beneficiary and why. The difference between ‘property’ and ‘deemed property’ in your estate.
  • If there are any ‘investments’ linked to the life product – what is the small print? How can you lose it? Would it stand alone as a good investment? – project the value through to retirement, mimic it with an ordinary investment, moderately invested.

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Just a couple of percent…

in Asset classes, Investment, Regulatory environment, Saving, Tax Exempt Savings Accounts Leave a comment
Expenses eating your investments?

One of the controversial areas in investment is still fees. Regulatory bodies have been aggressively forcing asset managers to disclose fees in a manner that is easily understood by their investors, but concurrently there should be an education program so that those investors, especially the smaller unsophisticated investor, to understand what fees are being charged, and for what. Everyday I come across clients who either are completely obvious to the fees that they are being charged – or assume that the advisor or broker gets it all. The requirement for the disclosure of Total expense ratios (TER) was introduced in April and July 2007. (The Life assurance industry doesn’t call it TER, they call it ‘reduction in yield’)

On any quotes you now get, the fees have to be clearly and prominently displayed, and broken down into the 3 major categories: Platform ( admin) fees, Asset manager fees and Financial advisor fees. The really grey area is ‘performance fees’ – but more about that later. These are collectively measured under what is called TER – Total Expenses ratio, expressed as a percentage. Total costs divided by total assets. Unfortunately in South Africa this is not an ‘all in fee’ and some costs are still ‘hidden’.

Platform or admin fees are the fees paid to the ‘platform’ aka financial institution who is ‘housing’ your investment. This could be a LISP provider (Investec, Alan Grey, Momentum wealth etc), an insurance company (Liberty, Discovery etc) as well as banks and a variety of other Financial Service Providers.

Asset manager fees are paid to the managers of the collective investment or stock portfolio that you have chosen to invest in, for example Coronation Capital Plus, Investec Equity or Stanlib Property. Those asset managers buy the investments that are the core of the investment. A stockbroker is usually also your asset manager. Collective investments are large pools of shares which allow individual and small investors to get the advantage of diversified investments (in equity, property, offshore, bonds, cash) without having to buy the shares themselves. If you want to build your own diversified share portfolio, it will take hundreds of thousands. Most experienced stockbrokers, for example, will not take on a portfolio that is less than R1m. “Fund of Funds” have got a bad reputation for high fees, and are rarely referred to as such anymore, but believe me, they are still there, in full force. Instead of buying the underlying shares in these collective investments, they buy other collective investments and bundle them into one – and charge their own asset manager fees on top of that (of course). The problem is that if the ‘asset manager’ fees in the collective investment can’t be negotiated down, those fees start to spiral out of control.
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