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Investing Offshore – First Ask Why

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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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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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Pay-off Debt, Invest or both?

in Debt, Investment Leave a comment
do it anyway

Do it anyway…

One of the most common questions I am asked is “Should I pay off my debt or Invest?” Logically, the answer is simple, pay off expensive debt before you invest, but this doesn’t take human behaviour into account and in the long term can result in someone ending up with no investments.

 

Why? Debt has a habit of being continually paid down and built up again, despite the best of intentions. So basically, unless you have never built up debt again having paid it down, invest anyway. This blog will give you one way to do that – sensibly.
In this uncertain world, you have to look after number one – you and your family. Keeping yourself ‘liquid’ is a very smart move. We are quick to forget a short nine years ago when the credit crisis really hit and banks stopped lending money – to anyone. Even “access bond” accounts were frozen. Going even further back into the 90s, interest rates went over 20%, doubling and tripling bond repayments. How would you fare if that happened again?
You’ve probably heard the phrase ‘pay yourself first’ numerous times – but what does that really mean? Does it mean you invest and your creditors must wait? No. It’s important to preserve your credit rating (some employers look at this too.) It means that you put yourself in the position that you get rid of the albatrosses around your neck, and gradually take back their share of your pie.

Cleaning up your act so that every month you put something into investment is a phased approach. It’s like all good intentions, if you want the habit to stick, you start to do something PHYSICALLY – but you don’t go all out or you – and your goal – will burn out. This is why I like the step-by-step approach. Putting your money on ‘diet’ is like going on diet to lose weight, you can’t go ‘cold turkey’ – money has to be spent on necessities and food has to be eaten so you don’t die – but you’re not going to die if you stop smoking, drinking or spending on luxuries – even if it feels like you might.
Step 1: You need to know what your present status in broad terms – what your ‘liquidity’ looks like. In other words how much money you have left after all the fixed and regular payments have come off, including your credit card payment (irrespective if it was in full or partial) from the previous months. If there is nothing or you’re going deeper into debt every month, you have little option but to dig deep into those expenses and find out what or who is poking holes in your wealth bucket. The lowest hanging fruit is day-to-day expenses. You have to break the cycle and find the best way to do it – for you. If you’re this far down the hole, you need to stop digging. Take out the cash needed for the bare minimum of day-to-day expenses and don’t touch your bank account or cards for a month or two. This ‘cash diet’ can break unhealthy habits pretty quickly.

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Debt – Love it or Hate it?

in Debt, Investment Leave a comment
debt

Love it or hate it, just understand it before it kills your wealth

At some time in our lives, (usually early on) debt is unavoidable, especially for high ticket items like houses or cars. Depending on how you were brought up, it was either dead easy or as scary as hell. As time goes by we get used to it, so the next debt we take on is easier, and if we’re too complacent or have a run of bad luck then it can spiral out of control. Debt isn’t just a number on your balance sheet, it often has a physical effect on you. Obviously it is going to depend on your risk appetite, but usually, the more debt the more stress you take on. Some people relish in that stress, but they are in the minority.

We are often sent mixed signals about debt, especially if we are in business. ‘Leveraging’ (which is just a fancy word for debt) is seen as ‘smart’. “Use other people’s money” we’re told over and over, so how do we fix our relationship with debt, get it into perspective and understand ‘good’ and ‘bad’ debt?

For a start, if you’re in business and you have limited liability then leveraging your business is often smart and necessary so you can gain critical massJust be aware that banks have cottoned onto this ‘limited liability’ and directors now have to sign personal surety for any ‘accommodation’ (yet another euphemism for debt) you’re given (read the small print). They prefer it if that surety is backed up by a physical asset too of course so if you don’t pony up when they ask, they can just take your house. Lose/lose much?

Being in debt early on in your life is like being on diet, you can’t eat nothing or you will die, so you have to find a happy balance. Of course, everyone’s balance is going to be different, but again, like weight, there is going to be an ‘acceptable’ zone. If you decide to have zero debt ever (and don’t have a trust fund to live off) then you may wait decades to get onto the property ladder. Owning your own home is not a necessity, far from it, but let’s look at when it is sensible, and when not. A mortgage bond is made up of two components, interest and capital. These days even the banks will split this up on your statement. The interest is rent, the capital is your investment. If you rent, then your payment should not exceed the interest portion of a new bond. Why a new bond? As time goes on, capital is built up in the asset and the interest portion comes down until the last few years when it is almost all capital/investment. As a landlord you usually want the tenant to pay off the entire bond, interest and capital, and more often than not that is what happens. A landlord will justify the rest as ‘risk’, with good reason. Regulations are not landlord friendly and defaulting tenants are on the rise. So, basically, if your rent is more than the interest on bond you could get on that property you should get your own. Having your own rental property is a whole different topic, but you can read about it on my blog HERE (or HERE or HERE - it is a pet topic of mine).

When deciding what is good and bad debt there are two things to take into consideration, the interest you’re paying on that debt and what percentage that debt is of your annual income. It is also important to read the small print in that debt agreement and make sure you’re not tied into something for years with no escape clause (without penalties). If you’re unfamiliar with ‘cheap’ or ‘expensive’ debt it’s time to do a bit of research – it will only take minutes but will save you thousands in the long term , thousands that you could be ploughing into your wealth.
The Reserve bank sets the ‘repo rate’, at the moment it is 7%. Prime interest rate is usually 3.5% above this, i.e. 10.5%. That is the bank’s ‘margin’ aka profit. One can usually get a ‘prime’ interest rate on a mortgage if your deposit or equity is more than 80%. Do you know what yours is? Credit card debt is usually around 18% which is clearly ‘expensive’ and should be avoided at all costs. Personal loan interest rates can get much higher than this – up in the high 20%s, and payday loans as much as 500%.

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Fixed Income

in Behavioural finance, Financial Advisory, Investment, Retirement funding Leave a comment
fixed

What to do when you’re on a fixed income. Preparing for the eventuality.

The phrase ‘fixed income’ strikes fear into the heart of anyone anticipating retirement. The last thing any of us want is for that income to run out before we do. Making sure that doesn’t happen takes years, and decent investment advice, but irrespective if it is at age 65, 70 or older the chances are new ‘active’ income is going to stop flowing in and you’re going to have to start using ‘passive’ income (from whatever source). Thriving when your income is fixed (in other words just keeping up with inflation) is often a challenge especially when some aspects of your expenses exceed inflation (like medical aid) and force you to cut back. There is a limit to how you can ‘sweat’ those assets without exposing them to significant risk, so often consumption has to give. This is the ‘harvest’ period of your wealth lifecycle that you have been preparing for all your life.

Fifty years ago retirees were not expected to live much beyond 10 years after retirement at age 65, today you can easily live another 30 years, and this brings a whole slew of additional pressures to your fixed income.
The wealth equation goes like this:- Income minus Consumption equals Wealth. At retirement we are probably not adding to the Wealth side of the equation, so it must be managed properly and sustainably because it is going to feed back into the income – a closing of the wealth ecosystem/lifecycle as it were.

Before we get onto the consumption side of the equation, make sure that the fixed income is going to be structured properly. Diversify! Have a number of pots of wealth on the go, flexible investments, stock portfolios producing dividends, pensions/annuities, rental portfolios etc. If the ‘fire’ goes out under one of those pots temporarily, you aren’t going to starve. None of the pots are fireproof, especially not your own company if, like most entrepreneurs, you’ve poured all your investment into that. Every entrepreneur needs to have either an exit strategy that realises the wealth you’ve poured into the asset, or a solid succession plan that can produce an active/ passive income by way of dividends, director’s and consultant fees.
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The Myth of Passive Income

in Behavioural finance, Estate Planning, Financial Coach, Investment, Portfolio Management, Retirement Leave a comment
<Palm seeds
If it was that easy we’d all do it

Everyone clamours after passive income. The thought of having money flow into your account, day and night with no effort, is intoxicating. Thousands of bestsellers have been written about it, but don’t be fooled, it is also very hard to do properly or quickly. In one way or another, most of us trade our time for money. Time is finite, therefore the income that you can earn from it will also be finite. With true passive income you invest some time (often lots of it) and capital (often lots of that too) and come out with an invention on which you can earn royalties, a book or training program that earns you ongoing income or set up a website and sell ‘stuff’ that you buy cheap and mark-up and make a profit or start building a property rental portfolio. None of those are easy, and often the money you earn from it, unless you really have hit or spend a massive amount of time on promotion, is minimal for years.

The ‘on demand’ economy has opened up new avenues for passive income that are worth exploring. If you have a spare room and don’t mind the invasion of privacy, then AirBnB might work for you and bring in a couple of thousand rand a month. If you put that in your bond, you’ll pay it off years earlier. You can do the same by picking a house that has a cottage and renting it out. If you have a decent car, you could also become an Uber driver or hire someone to use the car while you are at work, or in the evenings (when demand is often higher) – delegation comes with it’s own problems of course.
Second jobs are not passive income, they are just more of ‘bartering your time for income’, instead of getting overtime at work. On the positive side though, some of them can be very rewarding. It is becoming increasingly easy to sell your crafts/art/hobbies. Distribution costs keep coming down and the value of handcrafted items going up. So while this might not be ‘passive’ income, it can be satisfying second income doing something you love and usually do for free.
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