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.
The reason an ‘objective’ is important for an investment is that it will dictate the ‘asset allocation’ of the funds and the ‘flexibility’ of the investment. If it is short term, then the investment should be conservative so that capital is not eroded. The longer the funds stay invested, the less conservative the asset allocation should be, and take advantage of the high growth areas like equity and property. Yes, they could temporarily lose some capital, but in the long term you’ll have got growth above inflation. (You can read more HERE about Asset Allocation).
If the funds are for an ‘emergency fund’ then a savings account makes the most sense. It needs to be highly flexible (in other words, the length of time it takes to liquidate the investment) and have some certainty. You could always invest it in high equity to double the growth, but if the investment is running really well, it will hurt to disinvest. The ‘riskier’ the investment, the higher the emotion. The gambler’s high. Rental property is a great investment, but costly and time consuming to disinvest from.
Endowments in their various forms used to be a popular form of medium term saving, but for the average person the cost is just too high. If you’ve been following my blogs you’ll know I am not a fan of endowments unless you’re a high net worth individual or it’s for a Trust. Endowments are often structured as ‘education policies’ – but there are smarter ways of doing it. If you want to start an education policy, take out a Tax Free Savings account (TFA/TESA) in the name of the child – rand for rand it is going to way outperform an endowment. You can read more about TESAs or TFAs HERE. Just please make sure there are no early termination penalties (still allowed and only used on insurance platforms). TFAs are also good long-term investments for retirement (which was the original objective). At retirement you need 2 types of funds: An income and the occasional lump sum. On retirement you get a 1/3 lump sum from the investment, which can be invested for the occasional lump sums required, but considering that we are now more likely to live 20-30 active years past retirement and not just 10, there will be an increased need to replace cars for example. One very worrying trend, is the significant medical aid shortfalls and co-payments that are required, often running to tens of thousands of rands. That is over and above double digit medical inflation.
Very little saving for medium term objectives take place today. If someone wants a new TV, lounge suite, iPad or holiday, they are much more likely to ‘buy now pay later’ in one way or another. Most of this credit comes at 20-28%pa, but people are undeterred. When I was in the UK recently I was completely flabbergasted that every second ad on the TV was for short-term loans with APR’s (Annual percentage Rate) of up to 1000% advertised as though there was nothing wrong! People must be taking them out or they wouldn’t have the money for all the advertising. Insane instant gratification. There is no quick fix to this behaviour. The culture of saving has been eroding over decades and it often takes a severe financial setback for an individual to change their behaviour. It is only when it is a battle to keep the lights on, mortgage paid and food on the table that priorities shift and once the person comes out the other side they are usually determined for that never to happen again. A financial safety net is suddenly much more comfortable than changing houses or cars every few years (two of the biggest drains on wealth and capital).
Action: Without fracturing your investments too much, there is a lot to be said for having your short, medium and long term goals in different ‘silos’ because the objectives and hence structures are quite different. It is a balance between consolidation and segmentation. Ideally your investments should be sufficiently consolidated that you, or your advisor, can manage them easily but segmented into the different objectives to either preserve capital or get growth. Using a tool like ‘Just One Page’ can help ( Read HERE for more)
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Author Dawn Ridler ©