The Seasons of Wealth – Winter

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A wintery economy brings chores and opportunities

We are surrounded by cycles, some fast, others so slow we never see a change in our lifetime, but they are there. Climate change, for example, has been happening for millenia – it is nothing new (pollution is though of course). Somehow, every time winter comes round, especially a nasty cold front, we are caught unawares – gas bottles empty, no beanies and only salad in the fridge. The markets also go through cycles, while less predictable in timing than the four seasons, they keep on happening. Right now, for us in the Emerging markets, the winds are decidedly cool and the returns flattening, soon to turn negative for the year-on-year if it keeps up this pace.

Just like the winter season, we can pretend it isn’t happening, climb under the duvet and wait for the thaw, or we can take advantage of the opportunities it will bring.

Review your investment garden for better times in the future
When your garden is looking bleak and all the leaves are gone, it is often a good time to check that your garden plan is on track. Are all your risks covered, are your investments aligned with their objectives and your long-term plan? Many of the shares in our market have been overpriced, and as the market cools you could just pick up some bargains that have the potential to give you really good returns going forward. If you buy equities at the top of the market, it is like buying a ‘ready to eat’ avo, it can turn to expensive brown compost in the wink of an eye.

Keep your perennials alive
Some investments have a short-term objective – emergency fund or a deposit, but most of them are intended to be perennial, be there for many years. Gone are the days of ‘buy and hold’ – even the most robust of perennials have to be kept an eye on – once it is fully mature it is often too late to try and shape it. While your house is considered a ‘lifestyle asset’ and rarely liberates much equity in downsizing – it does do a number of positive things – it pegs your ‘rent’ (no 10% escalation clause – just interest rate changes, up and down) and it replaces paying rent post-retirement, so in effect it is part of your ‘pension’. Let’s put it this way, if you were to retire tomorrow you would need about R5m to generate rent of R20k pm, increasing at inflation for 20 years. Times are tough – but pay the bond first. (Please check that all bond correspondence is going to the right address and not the address on the bond – if you signed the bond before you moved into the house correspondence might be going to the old address – all legal in terms of the small print. Don’t assume because your bank details and statements are going to the right address that this ‘Domicilium citandi et executandi’. If you want to preserve the wealth in your property, buy once and once only. Every time you move you write off hundreds of thousands of Rand of that value.

Prune your portfolio
There is a difference between diversification and a dog’s breakfast. While every portfolio should be diversified across asset classes, onshore/offshore and investment vehicles(RAs, flexible, tax-free accounts etc), when you have bits and bobs all over the place it is very difficult to determine if they are aligned to your objectives. Investment is not simple. There are tax implications, regulatory requirements and caps, market volatility, layers of fees, economic and political impact and implications. If you have a small garden project like spraying your roses, then, by all means, do it yourself, but unless you have professional expertise, installing a solar-powered, biofiltered, chlorine-free ‘natural pool’ (on my wish list) then get professional help. Investment is no different. In the legal profession, the saying goes ‘the person who represents himself in court has a fool for a lawyer’.

Bring tender investments back indoors
Many of my favourite plants thrive outdoors in summer, but unless I shelter them in winter they die. If you have investments that cannot afford to lose their capital value, then you need to pay some attention to these as the economy cools off. This might be an investment for a loan redemption or your pension. Equity is traditionally where you get most of the ‘sweetness’ in your portfolio – and like life, this comes in spurts, often with large droughts in-between. The kicker is that if you’re not ‘in the market’ you will miss out on these spurts of growth. Bonds and cash might be much more boring, but they will preserve your capital. This is the investment manager’s secret sauce I guess – how to blend the assets.

Move your trees
When trees have shed their summer leaves and the sap is moving very slowly, that is the best time to move them. That is one of the reasons you can buy ‘bare root’ roses and fruit trees in winter and even have them sent through the post – once transplanted will immediately establish in spring and summer. Your ‘big tree’ investments are probably either growing very slowly or shedding value right now, and so the impact of the fees on the investment will be most keenly felt. Get an ‘Internal Rate of Return’ or ‘Effective Annual Cost’ (EAC) report done on your investments. These reports will give you a good idea of exactly how your investment is performing (net of fees) and the costs you are paying. I recently drew an EAC report on an insurance platform for a client and the fees came to 5.8%! Don’t be dogmatic about your investments, remove the emotion and be guided by professional advice. let the numbers do the talking.

Action: When markets cool off warts in your wealth portfolio become more obvious, but it also presents opportunities. Don’t hibernate, roll up your sleeves and dig in.

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