Squeeze them until the pips squeak
In uncertain times it is a natural reaction to make sure your investments are working as hard as you are – so how do you go about that?
- Get yourself organized. Get up-to-date statements on all your investments, summarise them on one sheet, and find out how they have performed since inception. This might sound like common sense, but if your life gets busy you may just give the annual statement a glance, even file it, but when did you last give them a good look?
- Find out the fees you’re paying on your investments. On savings (money market) that is fairly straightforward, but in Unit Trusts etc it is a little more complicated. Get your financial planner to help (if you have one). If you have an investment on an insurance platform, it might be difficult to tease out the fees but one way to do it is to get the fund fact sheets and performance of the underlying unit trusts (or use a resource like sharenet.co.za) and plot these against your statements. The difference is the fees you can’t find. While you’re at it, if you have insurance platform investments, find out if you’ve still got ‘early termination fees’. These are the remnants of the commission the broker was paid (up front for the full term of the policy) when you took out the policy. There are platform /admin fees, asset manager fees and advisor fees. What range of fees are reasonable? (LISP) Platform/Admin fees should run less than 0.5%. Brokers are permitted to charge up to 3.5% as an upfront fee, and 1.5% as an ongoing fee. The ‘new norm’ is zero upfront fee and 1% ongoing annual fee (decreasing as the sum gets over R5m). The asset manager fee is where you have wriggle room. For similar performing funds the asset manager fees can range from 0.5% to 2.5% (and performance fees tacked on that too). Be careful if you have ‘fund of funds (FOF)’ in your portfolio, these are unit trusts made up of other unit trusts and so have costs on costs and might be difficult to determine exactly what you’re paying. Even an unnecessary 1% on a R1m investment amounts to R10,000 a year, R100,000 over ten (without considering any growth on that investment).
- Temper both your greed and fear. We all know the sinking feeling when an investment we didn’t buy soars and makes their investors a pile of cash (Bitcoin?). The worst thing that you can do is give in to your greed and join the stampede, the chances are you’ll get in near the top and watch paralyzed and mortified as it sinks, probably getting out when you’ve lost a chunk of your original investment. If you enjoy the rush of speculating, make sure it’s excess funds that you won’t miss if it all disappears. If you have a solid plan, then don’t give in to your fear either. If you switch in and out of different investments every time there is a little wobble, you’ll end up putting a hole in your investment.
- Your investment cannot work miracles, are your expectations realistic? The law of abundance is all well and good, but you have to get off your derriere and actually take action and make the income to add to your wealth in order for it to grow meaningfully.
- Put a plan in place and stick to it, reviewing it at least annually. Your Financial Planner can give you the structure, you have to provide the discipline. If you’re battling to focus on a plan, try a financial bullet journal. Make the progress toward your goals visual and tactile. Each bucket of investment should have a clear objective, time-line and asset allocation. It is obviously easier to get your financial planner to help you do this – but with research and if you have a passion for investment, it is possible to do this yourself. Getting rid of broker/advisor planner fees are low hanging fruit when you’re cutting costs – do they add value to your wealth? Some research done in the States indicate that have a financial advisor planner can make a 3.5% annual difference to your wealth portfolio, increasing the longer they are involved. I am a planner so of course I’d say that but you can read about it HERE: and follow the links to the original research.
- Be careful of thinking you know everything. Again, this might sound like common sense, but going through a phase of ‘not knowing what you don’t know’ (unconscious incompetence) is a natural step on any learning curve. When it comes to investments and economics, always assume that things are changing and will continue to change and try and build in both flexibility and resilience in your portfolio. Stay curious, and while you might delegate the responsibility of managing your portfolio to a specialist, never abdicate. Just because something has worked well in the past, don’t assume it will in the future. Remove emotion from your decision. Diversification is key – and increasingly this applies to your income and not just your investment.
- Hedge your bets. I know the term ‘hedge funds’ has a dodgy reputation for the average investor, but a smart portfolio has built-in natural hedging – you don’t have to get into shorting, derivatives, options or the like. Having some offshore exposure or local stocks with offshore exposure is a natural hedge against the devaluation of the Rand. Money market and bonds with their fixed income component will buffer your investment against a nasty correction in the stock exchange. Don’t just have a range of asset classes, have a range of sectors too. There is no point in having a diversified asset allocation but a chunk of your stocks are in one sector like resources or property. All the asset classes go through cycles (even interest rates) and often opposite to each other. By diversifying your portfolio you can add resilience in bad times.
- Make your portfolio tax efficient. Know your annual interest and CGT allowances, but also consider tax free savings accounts, retirement funds even endowments (with caveats that your financial planner will be able to explain to you.)
- Be careful before you lock away investments in Retirement Annuities (RAs) or endowments. If you’re an entrepreneur, a small monthly contribution and a large annual top-up of funds that are excess to your needs is a good strategy. RAs give you great tax breaks but if you’re under 55 they cannot be touched. If you emigrate you’ll have to do it formally ( financially through the Reserve Bank) if you want to liquidate it (and you’ll be taxed). I am not a fan of any investments on an insurance platform because of nasty ‘early termination penalties’ so if you have them, stick to the ‘contract’ but don’t add any more than you need to.
Action: De-stress your finances by giving your wealth portfolio a thorough analysis, then make a plan and stick to it. Careful not to throw the baby out with the bathwater – check for termination penalties or Capital Gains Tax.
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Author Dawn Ridler ©