Author: zombie

Don’t you hate when you go to someone looking for a quick answer and all you get is – “Well it depends”

“It depends” comes with the territory in investment and financial planning unfortunately. Some clients like the fact that I have strong analytical skills and can consider investments under various scenarios, others just want the quick and easy ‘in-ten- words –or- less’ type answer.

My answers almost always fall into the category of “It depends”. My wife has adopted a firm zero-tolerance policy towards this type of answer but I would argue that it is often a necessary evil. When I answer a question with “it depends”, it is because I am trying to offer a more comprehensive answer or I am trying to better understand where the question is coming from.

I think a good way of illustrating why I adopt this approach is to consider a basic case study which covers the concept of REAL RETURNS in investment planning.

I think it is one of the most important concepts that an investor needs to grasp when considering long term investment options. Earning real returns is in fact the only way to create wealth. A real return on your investment is what you have left over, from the face value or’ nominal return’ that your investment delivers, after you have accounted for fees, taxation and inflation.

I would suggest that the nominal return is a PERCEPTION and the real return is the REALITY!

Looking at a basic case study:

THE PERCEPTION:

I invest R100 000 and earn a 15% nominal return. That means after year one, my perception would be that I have R115 000 sitting in my investment account or that I have made R15 000.

THE REALITY:

Suppose that I pay an advisor to help me manage my investments. We use an administration platform or two to access the investments she chooses. Those investments may involve buying funds which themselves carry a management fee. Altogether let us assume my fees amount to 1.60% of the portfolio value each year.

For simplicities sake I deduct the fee at the end of the year, so I would pay R115 000 x 1.60% = R1840 in fees, leaving me with a portfolio value of R 113 160.

Then SARS takes a look and notes that the entire return is in the form of income; that my marginal tax rate is 30% and that I have used up all my allowances for the year. 

The taxman wants his share, calculated as R13 160 x 30% = R3948, which leaves me with R109 212.

Oh well at least I have made R9212…That’s not too bad is it?

Well yes BUT “it depends” – If inflation is averaging 7% a year that means my rent that cost R100 000 last year now costs me R107 000. So you are really only better off by R2212. (R109212 – R7000 – R100 000 = R 2212). But if inflation is averaging 9% (incidentally this is more realistic) then I would be left with a not very impressive R212. (At least its positive though)

So next time you ask me if 15% is a good return on investment or not, I am afraid my answer will have to remain “It depends”.  It depends what fees you are paying; it depends what your marginal tax rate is; it depends how you have earned those returns (income or capital gains); it depends on the investment vehicle you are using and it depends on how much your cost of living is likely to be going up year after year.

Annoying isn’t it!

Tips to try and reduce the gap between reality and perception in your investment plan:

Maximise your nominal returns over the long term – Understand the implications of your asset allocation decisions and align this to meet your investment objectives and not your tolerance for risk. In other words, for a long term investment horizon you need to take enough risk to achieve your goals and earn real returns.

Minimise your fees – If you don’t need advice then don’t ask for it. If you do, then use someone who you trust, who seems to have your interest at heart and who charges a fair fee. Hint: White Investments offers an advisory service which attracts a once off upfront fee.  You can incorporate low cost passive funds into your portfolio strategy to reduce asset management fees. Different administrative platforms charge differently depending on the funds you choose – do some research on what suits your needs best.

Minimise the tax you pay on your investments – Invest don’t trade. Capital gains tax is likely to be a lot less than your marginal rate of tax which would apply to income returns (cash, bonds, property and equity trading activities). Utilise the tax free accounts which are coming into effect in South Africa in 2015. Save in retirement vehicles (Retirement Annuities, Pension Funds), where appropriate, as the returns are tax free and you get to deduct contributions within certain limits. Use your interest income allowances each year (Currently R23800 per individual under 65 and R34500 for those over 65 years of age).

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

If we are honest with ourselves, achieving our future financial goals is more often influenced by personal psychology than by mathematical ability. If we are not making ends meet each month, not saving for retirement or we are swamped by debt, it probably has nothing to do with our inability to master the skills of addition or multiplication and everything to do with our personal psychology and the impact emotions have on the decisions we make when it comes to money.

Why is it that we commonly think about saving as a sacrifice? By not saving are we not in fact sacrificing our future wellbeing?

Why is it that we often spend two or three times more on car payments than we save towards our retirement?

Why is it that when we are investing for our retirement in 25 years time we always want to know which asset class will perform best over the next 12 months?

Why is it that we are more inclined to buy into an investment that has doubled in value than we are to buy into one that has halved in value?

Why is it that we often have most of our committed saving & investments in cash when we know that it is the least likely asset class to beat inflation over the long term?

Why is it that we struggle to commit to even the most basic common sense elements of a financial plan- Is spending more income than we earn each month a mathematical or emotional deficiency?

I think it is fair to say that we are emotional beings and we require emotional intelligence to successfully manage our money.

Every financial decision has its roots in our personal psychology and emotions. From the car we drive, to the clothes we wear, to the house we live in, the holidays we take and even the school we want our kids to attend. Our personal psychology drives us to seek recognition and approval. Our society is consumer and status obsessed – we are because we have. Buying what we want now makes us feel like we are living life to full.

Unfortunately, the strong desire to be perceived as successful often comes at the expense of making good financial decisions. Somewhere deep down I believe that we all know this to be inherently true, yet we continue to plough on as we are, in the hope of a big windfall like the lottery or inheritance to tide us through – a strategy based on hope rather than reality.

We are also often fooled into thinking that money solves money issues. Frequently as peoples income grows so does their spending habits and cost of living. You earn more, you spend more or you can afford to service higher debt levels.

Understanding our psychology towards money and changing our behaviour is the most likely path to successfully solving our money issues.

Financial planning and life planning are essentially interdependent – they cannot be tackled separately. So when seeking to put together a financial plan I would encourage you spend a large proportion of your time focusing on your personal psychology and use that to identify what is really important to you, what you want to achieve in life and what you are going to need to do to get there.

Each of us is different and our own personal circumstances and backgrounds will dictate what motivates us and what we find most important to us in life. Our financial plans must reflect that.

A simple exercise to help you get started may be to imagine you visit your doctor, who tells you that you have only 5 to 10 years to live. You won’t ever feel sick, but you will have no notice of the moment of your death.

What will you do in the time you have remaining? Will you change your life-and how will you do it?

Under the above scenario I know that I would want to spend much more time with my family. I would want to watch my baby boy grow up and make sure he knows how much I love him. I would want to travel more with my wife and share more of what this beautiful country has to offer. I think I would probably focus more on the things I have in my life and less on the things I feel I don’t have.

Unfortunately the stark reality is that I would not be able to stop working to do these things. In fact I would have to double my efforts and focus my attention on securing a more stable financial footing for my young family for when I am no longer around. I would have to focus on securing the immediate needs of a basic roof over their heads, a source of income for their basic living costs and my little boy’s education. I can assure you I would care less about the car I drive, the clothes I wear or the address of the house I live in.

In fact it seems I should already be living my life this way… don’t you think?

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

I often speak of getting the basics right when it comes to investing and how that can make a significant difference to your final net wealth position.

A common metaphor that captures this concept rather nicely is “picking the low hanging fruit”. In other words doing the small and easy things to tweak a portfolio or investment plan that involves little real effort to exact a meaningful change.

The reason I mention this metaphor is that I was having a conversation with someone who had recently completed an annual review with their advisor and was bouncing some of the proposed changes off of me.

Without going into any detail or giving away any personal information I thought I would share what I perceive to be a great example of how to pick some of that proverbial low hanging fruit.

The proposed strategy shift was going to involve moving some underperforming collective investments into a straight forward ETF or tracker fund – so far so good and it sounded sensible to me. Then he went on to say that the proposed investment tracker was going to be the Satrix 40. Without wanting to step on any toes I suggested that he should ask his advisor why he should not opt for the RMB Top 40 tracker instead. After all it was exactly the same product, with exactly the same underlying index , the only key difference was that the RMB fund charges less than half the annual fee that the Satrix product does. (0.19% TER for RMB versus 0.45% for Satrix*).

The advisors answer was surprising to me : “The products are the same, RMB is not going to do any better than Satrix and if it does then it will be marginal – So no, I do not think we should consider RMB.” He went on to illustrate his point by highlighting that the 1 year performance of the RMB fund was 25.32% versus Satrix at 24.94% – so a mere 0.38% difference and therefore insignificant.

We can do a quick ‘back of the envelope” assessment of why that statement is not only blatantly factually incorrect but also represents a costly missed opportunity for his client.

First mistake: The advisor was probably complacent about the fee amount because returns from the South African equity market have been phenomenal in the recent past. Admittedly 0.38% of 25% is only 1.52%. But what happens when equity market returns revert to their long term average of about 12.5% or even worse, the stellar performance in recent years (and the toppy current valuations), translate into lower single-digit returns in the years ahead?

It is hopefully clear from the table above that if the performance differential remains unchanged (as is likely given that it is almost entirely the result of different Total Expense Ratios between the funds) but the market return falls, then we will have gone from giving away a mere 1.5% of returns to almost 10% of your returns. Does this still sound ‘marginal’?

Second mistake: The advisor has seemingly forgotten about the concept of compounding. The annual differential of 0.38% may seem small at R3800 a year for a R1 million portfolio. But when compounded over 10 years* the impact on the final value of the investment portfolio will look something like this.

Yes, that’s a difference of almost R 75000 over the 10 year period. Still marginal?

In my mind that is at least a year’s worth of private school education fees for my little boy right there…. not marginal at all. Also, it is worth noting that over time periods longer than 10 years this number will only get bigger.

Third obvious mistake: The financial advisor is probably charging the client a fee of at least 0.5% a year, on the value of the overall portfolio. So the 0.38% performance differential between the two funds equates to about three-quarters of the advisors overall fee. If I was going to offer a 75% discount on my annual fee I’d hope that you did not consider that to be marginal? In fact you are clearly almost getting free advice as RMB is subsidising your advice fee to a large extent.

I am not in the habit of criticising other advisors as there is rarely ever only one right answer when it comes to investment planning. There are however certain things which are not open for interpretation or debate and in my mind this advisor’s conclusion is not only incorrect but it is short-sighted, uninformed and inefficient. A tracker fund by definition is going to deliver the index performance less fees – so in truth the RMB product is likley to ALWAYS deliver better performance than Satrix as long as the current TER differential remains. 

This client deserves better and we at White Investments will always strive to provide the best solution no matter how seemingly insignificant the marginal benefit of the low hanging fruit may initially appear. We understand that over time these small incremental differences can stack up meaningfully. 

*Source: the respective fund factsheets from the product providers as at 31.03.14
**The portfolio value assumes an initial investment of R1 million, earning 12.5% per year, with advisor fees of 0.5% and a platform fee of 0.7%.

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

White Investments – Tax Free Savings Solution Brochure (download pdf)
For all you need to know about using your tax free allowance – Questions and answers

As things currently stand the only accounts that allow you to earn investment returns free from the clutches of the South African Revenue Services are retirement vehicles (Retirement Annuities, Pension Funds, Provident Funds and Preservation funds).

However, the SA Treasury is planning to launch what is being called a ‘tax incentivised savings account’ which will allow you to save and invest tax-free outside of retirement products. I am sure there will be a much smarter name for them by the time they arrive but you would do well to start thinking about how best you can use them to maximise your financial wellbeing in the future.

To this end I provide some insight into the basic structure of the new accounts and potential ways of incorporating them into your future investment strategy and financial planning process.

Key Features :

Should be available to South African residents from 01 March 2015.

All returns within this account will be tax free, including dividend withholding tax.

Contributions to the account will be limited to R30 000 per year – this number is likely to increase with inflation over time. If you do not use the allowance one year you cannot carry it over to the next year.

Contributions to the account will be subject to a ‘lifetime limit’ of R500 000 per individual – that’s about 16 years worth of contributions if the annual limit remains at R30 000.

Any money withdrawn from these accounts will still count towards your lifetime limit – So if you contribute R300 000 then withdraw R100 000, you will still only be able to contribute another R200 000 over the remainder of your lifetime. This feature is designed to keep individuals from dipping into their savings for impulse buys and the like.

You will be able to invest in a variety of asset classes including; bank deposits, RSA retail bonds, ETF’s and other collective investments. At this stage it is envisaged that dealing in individual shares will NOT be permitted within these accounts. The idea behind this move is to discourage speculation and to promote long-term investment and savings behaviour.

An individual will be able to open up two of these accounts per year as long as they stay within the R30 000 annual contribution limit. This exists so that you can split a portion of the allowance into an interest bearing account, like at the bank, and a portion into investments which offer capital growth potential, like an equity ETF.

Key benefits:

Higher compounded investment returns: Tax free returns can significantly boost the future value of your investment portfolio as it allows a greater proportion of your nominal investment return to be reinvested and therefore compounded over time.

Higher tax free income: This account will boost the potential for greater tax free income both before and after retirement (See our simple case study below). Individual rebates, retirement funding allowances, interest income allowances and now these tax free savings accounts can be combined to significantly enhance the tax efficiency of your overall financial plan. Even for the ‘wealthy’, the R30 000 annual allowances may not sound like much but they will compound over time and are likely to result in meaningful investment portfolio’s over the long-term.

Trading strategies are more attractive – If your investment strategy requires more frequent rebalancing, these accounts can help circumvent the trading gains and even future capital gains implications over time. Note this is not to suggest speculative activities are encouraged in an investment account.

Life cycle planning opportunities– One can use these account’s differently depending on the stage of your life when trying to minimise the greatest tax burden. Before retirement you may find investing in higher growth assets (like equity ETF’s) is useful in this type of account to maximise your final portfolio value. When you enter retirement you may want to switch the focus to interest bearing assets in this account so as to maximise the after tax yield on your fixed income investment allocation. 

Asset Allocation decisions – Capital gains tax is lower than income tax and dividends withholding tax, so if you plan on investing in a multi-asset portfolio for longer than the 3-year horizon (the generally accepted time period to hold an asset for gains to be recognised as capital in nature) you may want to keep assets that will attract capital gains tax in a separate investment account. You can then potentially reserve the tax free account allocation for income producing assets, such as property or bonds, which are likely to incur the higher income tax charge. 

Practical case study:

Two individuals, J and Z, are keen to get their investment portfolios going. They both decide to make annual R30 000 investment contributions, paid in full at the start of each year, for the next 16 years. They both expect to receive a handsome annual return of 15% after fees and they both have a marginal tax rate of 35%. (We’ll assume all of their returns would be taxable at the marginal rate). J opts to use Treasury’s new tax incentivised savings account, while Z thinks it’s a waste of time and opts to invest in a normal investment account at his broker.

After 16 years the value of the J’s tax free portfolio would be a little over R2.2 million versus  Z’s portfolio (which incurs tax) which would only be worth around R1.29 million. That means J now has an additional R911 000 in his account after the 16 year period purely as a result of using the tax free account.

Now suppose J and Z reach retirement and both want to use their funds to provide an additional income. As we have seen above, J’s account will have a much higher value as a starting point but very importantly the income generated from this account will remain tax free, whereas any income from Z’s portfolio will continue to be taxed at the individuals marginal tax rate.(Probably a lower rate in retirement – let’s say 25%)

If we assume that J and Z’s lump sum investments can earn 8.25% a year in income and that all deductions and allowances have been used so that the income from these two options is taxable at the individual’s marginal tax rate -What would the monthly incomes be for the two?

That’s right, J continues to enjoy tax free returns and is now earning more than twice the monthly income relative to Z who essentially did everything identical in terms of investment strategy but he just used a different (taxable) investment vehicle.

The above example may be simple but it captures the essence of the opportunity that these new accounts represent.

I lived in the UK for almost 9 years, where they have operated similar products (Individual Savings Account’s or ISA’s) for some time now and can say from experience that this type of account will potentially provide a big boost to your financial planning armoury over the long run.

If you start putting some money aside now you will be ready to contribute the full amount by March next year and ensure that you maximise the opportunity to compound your TAX-FREE returns in full from day one.

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

I had a few responses following last month’s article which dealt with loan offerings from one of the country’s largest banks. The common theme that resonated throughout the responses came in the form of a question: Is there a perfect financial solution?

The short answer is no – But you can mix things up to get a risk/return profile that comes as close as possible within the confines of realistic expectations. Each individual’s needs and therefore investment objectives are likely to be somewhat different. Each individual’s willingness and ability to take on risk is also different, so not all investments solutions can be equally suitable.

It is a common albeit unrealistic expectation to want to achieve equity-like returns (highest of all asset classes over time)  but only want to take on cash-like risk (zero or none) . In other words wanting all of the upside but none of the downside risk – The investment holy grail so to speak.

There are ways of structuring a portfolio or investment solution which minimises the downside risk, or indeed eradicates it, while offering the potential to participate in any gains in the stock market. BUT the price you pay to limit your downside risk comes in the form of limiting the upside growth in your investment. Let me say that again – You can only structure an investment to limit your downside exposure by sacrificing some of the upside potential.

Many of the big banks and investment houses sell these products under the banner of “Retail Structured Products”. They are frequently complicated and difficult to understand, combined with the fact that they are usually quite expensive.

What if I told you that I can structure an investment solution for you that is neither expensive nor complicated and has the following characteristics:

•   It is 100% Capital guaranteed *
•   It allows participation in the future performance of the stock market. (JSE Top 40)
•   It offers tax free returns**
•   It has a very high probability of beating the current returns from your savings account at no additional risk to your capital.
•   All  fees are included.
•   It has a very good chance of beating current CPI inflation***

The ‘pay-off’ or potential return profile of this solution looks like this:

How to interpret this data:

If the JSE Top 40 Index over the next 5 year period delivers the same returns as the last 5 years (19.6%) then the clients return will be 12.3% per year on average for each of the 5 years. That would be a cumulative return of 78.5% in total over the period for an investment solution which is guaranteed not to lose any of the initial capital.

If the JSE Top 40 Index returns the long term average (since 1900) South African equity market return of 12.5% a year,  then the client will have earned 9.6% per year on average at the end of the five year period.

If the recent rampant stock market performance is not sustainable and is likely to be lower by half in future years (let’s say 9% returns a year for the next five years) then the client can invest in this solution and earn a marginally lower 8.4% a year with a capital guarantee in place – Sounds almost too good to be true?

Even if the JSE top 40 Index delivers a flat or zero return over the five year period, the client will receive an average annual return of 5.8% over the period. I bet that beats just about any variable rate savings account currently available at any bank or in any money market fund.

If the JSE Top 40 were to lose 20% of its value each and every year for the five year period, the client would still receive an average return of around 2% a year for the period or a cumulative 10.7%.

WOULD YOU WANT TO ACCESS SUCH A PRODUCT?

White Investments can set up an investment solution that does just what I have outlined above for a once off upfront fee with zero hidden costs or ongoing management charges.

What investor would this investment solution suit?

Those who have missed out on the stock market performance of the last 5 years and are worried that the same will happen in the next five years.

Those who are not willing to lose any of the initial capital that they invest but would like to have some exposure to the stock market.

Those that think the stock market is overvalued and want to protect themselves from the downside risks while maintaining some exposure to the asset class.

Those that think recent stock market performance cannot be repeated in coming years and while not expecting a major correction, feel the returns are likely to be only around half as good in future years.

Those that have had money sitting in a bank savings account earning little or no returns and are able to commit the money for a 5 year period.

Who should NOT sign up for this solution?

Those that believe the stellar annual average South African stock market returns are likely to continue for at least the next five years on average.

To Find out more:

General inquiries: info@whiteinvestments.co.za

Specific inquiries: dominic.white@whiteinvestments.co.za

Conditions apply:

*You are guaranteed to at least get all your initial invested money back. However, you must be willing and able to invest for a minimum period of 5 years. If you seek to exit earlier than this then the capital guarantee falls away and you may get back less than you initially invested.

** Returns will be free from income tax assuming the investor does not use any of their existing annual interest income exemptions and that taxation legislation does not change for the worse relative to current tax rules in the next five years. There is a limit as to the amount which can invested on a tax free basis and this will depend on the age of the investor and the timing of the investment at initiation.

*** Current CPI inflation is 5.6%. If the JSE Top 40 index does not deliver a negative annualised return over the 5 year period you will receive a return in excess of this number. Please note CPI inflation could very well rise well above this level over time and CPI may not be a fair reflection of your personal rate of inflation.

All income earned through the life of the investment is reinvested. So this solution would not be suitable for income investors or those relying on a steady income from their investments.

Capital gains tax may be payable at the end of the term.

The return profiles outlined above use an after fee return expectation on the JSE Top 40 Index.

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

That was the  large font header, highlighted in the bright red corporate branding colour of one of South Africa’s big four banks (Lets call them ASBA),  that greeted me when I opened my post recently.

The purpose of the letter was to offer me the opportunity to apply for a loan of between R3000 and R150 000.

The brief write up that followed included the phrases “Life is full of little stresses…” and “you’ll be happy to know we are here to help.”

On the back of the page was a large table outlining the loan amount options including the total amount repayable over various periods ranging from 12 months to 7 years.

The fixed rate loan for R5000 heads up the table and so this is what I have opted to do the basic calculations on. According to the table I could borrow R5000 and in 12 months time I would owe R8113.14.

Those lending terms equate to a grotesque 62.26% effective rate of interest being charged for the year. To perhaps put this into context, the highest rate that same bank will pay me for a fixed deposit on my savings, for the same amount of money, over a 12 month period, is currently 5.3%. (No I have not left out an additional digit pre the comma.)

The total value repayable includes an “initiation fee” of R1140 – yes that’s almost 23% of the original loan amount. It also includes a monthly admin fee of R57 or R684 for the year – another 13.68% of the value of the original loan.

Now it is important to note that this bank is operating well within the legal framework of the National Credit Act and is not doing anything illegal by making this offer.

However, I could make a relatively strong argument that ASBA is really NOT trying to help and an even stronger case that this particular offering does not even remotely meet the definition of PERFECT FINANCIAL SOLUTION. I will concede that there is a good chance it will change your life (as they promise) but it is almost guaranteed not to be in the way most of us would envisage.

This institution has recently spent many millions of Rand’s on their latest advertising campaign which carries the catch phrase PROSPER – these campaigns tug at your emotions and go to great lengths to make you believe that they care about you and your financial future. But it is in their actions that we need to measure them, for therein lies the true nature of the beast. It raises an obvious question about this bank and the industry at large – Is this offering representative of the quality of all services and products on offer?

In a country where poverty is so prevalent and education levels are often not where they should be, product offerings like this should be highlighted and shamed. For surely it’s only the desperate, poor and uneducated that will even contemplate entering into this sort of contract. Surely this behaviour will only ensure that the poor get poorer and more desperate.  The long term ramifications of this pattern can be observed by looking to the north of our borders where poverty and disillusionment have lead to some rather desperate actions by governments to stay in power. We are approaching our own elections in May, which marks the 20 year point in the journey of a post apartheid South Africa. We need a prosperous and educated population to take this country to its true potential. Does this type of product represent the progress we need to achieve this dream? I think not.

We at White Investments aspire to offer a service that is honest and transparent but more than that, we want you to succeed and we want to utilise our investment knowledge and experience to partner with you in that success. 

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

As mentioned on our Facebook page in January, the South African Reserve Bank recently raised interest rates for the first time in years. I wanted to take this opportunity to expand on the subject and to provide some practical insight on how this impacts your personal finances and the way in which you should potentially deal with your financial strategy/plan.

Impact on outstanding debt:

When you borrow money, in whatever form that takes; bond on the house, vehicle finance, personal loan or credit and store cards, you pay a rate of interest which is in some way linked to the official interest rates set by the SA Reserve Bank. You’d do well to consider this interest rate your ‘cost’ of money. As interest rates rise the ‘cost’ of the money you borrow therefore goes up and the payments you are required to make monthly also go up.

The official interest rate set by the Reserve Bank is called the ‘Repo rate’ and this currently sits at 5.5%. The loan rates we typically receive however, are linked to another rate called the ‘Prime Rate’ which is currently set at 9.0%. Your home loan and vehicle finance will usually be expressed as prime plus x%.

Ideally individuals would pay down (reduce) their outstanding debts when interest rates are low or the cost of money is cheap. But inevitably ‘cheap’ money is marketed aggressively by lending institutions (banks, stores and personal loan companies) during these periods and consumers use this as an opportunity to use loans/credit to buy things that they need, want or, as is often the case, things they neither need nor really want.

It is important to understand how changes in interest rates affect the affordability of the things you buy so that you do not find yourself losing your possessions when the inevitable interest rate cycle turns as we have seen evidence of with last month’s rate hike.

Example:

If you have a bond on your house with R2 million outstanding and you pay 11% per year currently, a 1% increase in interest rates will see your monthly bond payment increase by almost R1,200 (R14,300 per year). If at the same time you have a car loan outstanding of R250,000 and you currently pay a rate of 12% on this, then a 1% increase in interest rates will equate to a monthly increase of nearly R140 (R1,680 per year). Ignoring any other credit card, store card or personal loans you may have, that means you will have to come up with an additional R16,000 per year to cover your debts.

Even after the 0.5% increase in interest rates in January we are still at very low levels historically. The average interest rate since 1998 is around 13.5% but this includes a brief spike out to around 24% (yes 24%) when Chris Stals was trying to defend the Rand by raising interest rates. So even if rates only go back up to a more normalised 8.5% from here, that is another 3% or close on R50 000 per year extra you will need to come up with to service your house and car payments.

Tips to consider:

Make sure that your decisions today reflect the strong possibility/probability of higher interest rates from here.

Pay down your existing debts, preferably the most expensive first which are likely to be store and credit card debts and then tackle the larger ones like your vehicle and eventually the house.

Start to live within your means and do not incur further debt, especially for non-essential items.

If you have stores cards with an interest free period, make sure you pay down other debts which are currently incurring interest payments first.

If you have outstanding short-term debts consider wiping these out before you start an investment or savings account, as the interest you are charged is likely to be well ahead of any real returns you will achieve from your investments in the current environment.

If you are considering new purchases then make sure you factor in further rate hikes when considering the monthly payment affordability. If you do not know how to work that out find someone you can trust who does – Hint: this is unlikely to be the sales person trying to close the deal with you.

Interest rate hikes and your investments:

We would need to write an essay or two to properly cover the impact of interest rate hikes on your investment strategy and portfolio in any detail but a few general thoughts to consider:

Equities/Shares – Because interest rate hikes are usually the result of inflationary pressures, periods of interest rate hikes are frequently associated with positive equity market performance (At least initially). Companies are generally expected to grow sales and profits ahead of inflation assuming they can pass on cost increases to their end consumers. The exceptions to this rule would be companies that have excessive amounts of debt on their balance sheets for reasons similar to those of individuals that we touched on above. The local share market may also be damaged by an outflow of foreign investors attracted back to their home markets by more attractive interest rates.

Bonds – Rates hikes are generally negative for bond investors as bond prices will fall as interest rates go up or in anticipation of interest rates going up. Put another way: If someone offered to pay you 6% for the next three years if you lent them R100,000 today but you expected in one year’s time that you could lend that same money to someone who would pay you 9% why would you lend them the money now?

Furthermore, Inflation serves to reduce the real returns that you receive from fixed income investments (excluding inflation-linked bonds). If inflation goes up, fixed investment income payments/coupons (like most bonds pay) become less attractive in real terms and people sell bonds causing prices to fall.

Cash – The rate or return you receive on cash savings should go up with interest rates. Of course you still need to be aware of the real return that cash provides rather than the face value or nominal return (before inflation). If you earn 6% interest on your cash investments and inflation is 6% then that is the same real return (0%) as if you earn 12% on your cash investments and inflation is 12%. All investments should focus on earning real returns to create wealth.

Property – Most property investments are funded by long-term debt so when interest rates go up their costs go up. Property returns (rentals) can usually be increased in line with inflation so the attractiveness of property when rates go up depends on the ability of the property companies to increase their rental income ahead of costs (interest payments). Typically, property investments (prices and rental yields) offer good protection or insurance against rising inflation.

Retirement income – Pension payments (annuity rates) are linked to long-term interest rates so higher interest rates should translate into better annuity rates offered by the main insurers (Income payments in retirement). Once again however, it is important to ensure that the annuity product you choose in retirement, increases payments in line with, or ahead of, the inflation rate or the general increase in the cost of living.

If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at info@whiteinvestments.co.za

You can use our Personal Finance Spreadsheet to help you calculate the impact of a change in interest rates on your monthly re-payments here. 

For the vast majority of us, looking after our finances should not be difficult from the perspective of being overly technical  or complicated – It merely involves getting the simple ‘stuff’ right.

But the truth is that most of us find looking after our hard earned money very hard. What makes it so hard is that it’s a slow process, it requires patience and discipline. It requires planning and dedication. It requires us to swim against the tide of instant gratification and competing with the Jones’……. it requires common sense and a long-term focus. It requires us to develop a financial maturity to control our own behaviour and habits. 

Most people have good months/years and bad months/years in terms of earnings, yet they very rarely save anything during the good times and almost always land up resorting to using credit cards in the bad times. This is a pattern that is repeated time and again and some of the most common habits exhibited in all of these instances include:

i)                    No budget so no idea where the money really goes

ii)                   No discipline or attempt to avoid temptation and instant gratification

iii)                 A strong desire to keep up with the “Jones’” or the perception of wealth

iv)                 No real concept  of the opportunity cost of their spending habits

Perhaps some of the things we should be contemplating on our way to getting the simple ‘stuff’ right include:

Disciplined spending – forgo the instant gratification of the consumer driven world in which we live. Spend less on clothes, buy a cheaper car, eat out one or two fewer times a month. Of course if you have no idea what you spend your money on, it just seems to evaporate each month, you should consider drawing up a budget and monitoring your expenditure. The extra cup of coffee when you are out or making your own lunch to take to the office or quitting that hectic smoking habit all fall into the category of doing it smarter.

Disciplined saving – pay yourself first each month. Put money aside as part of your non-discretionary expenditure – that means rank it as high as food on the table and a roof over your head. If you wait to save from what is left over each month, chances are you will find nothing left in the coiffeurs. If you put it away via debit order at the start of each month you will probably find that you make ends meet on the lower amount and your savings ticks up nicely before you know it.

Saving is contagious by the way. Once you start to make it your mission your habits tend to change and you are driven to do better. All manner of savings become apparent like getting rid of memberships you do not use, cancelling subscriptions you don’t actually read, seeking out the best cell phone options, being more price conscious at the super market or bottle store, making sure you are on the lowest fee option at your bank and when your insurance expires, shopping around for more competitive quotes.

Avoid short-term debt and live within your means– If you have store and credit card debts you need to pay them off as a priority. Learn to live within your means. Spending more than you earn each month is mathematically unsustainable and will eventually catch up with you. You need to consider what and where to cut back if you land up living off credit cards at the end of each month.

Focus on the Long-term – compounding of real returns over long periods is what will ultimately generate wealth from your investments. Unfortunately this means you will have to accept some downside risks in the short-term to capture greater upside returns over the long term. Remember that money you spend today has an opportunity cost associated with it too – not only do you not have that money to spend in the future but you will lose out on the potential compounded returns you could have earned had you saved and invested it. Sacrifice now will pay dividends long term….literally.

So it becomes clear that our financial well-being or ‘destiny’ is inextricably linked to the behaviour we display each and every day. Try to be more aware of your thoughts, your actions and your habits with respect to money matters as these form your character or behavioural patterns and ultimately determine your financial well-being.

Change your habits & change your financial destiny: The 2014 savings challenge

Change your money habits and get rewarded next Christmas.

Become conscious of what you spend and prepare a budget if you don’t have one. Set up goal – I would suggest start small. Think of something you really want but can’t go out and buy for cash right now. Keep it in the region of R1200 to R10000 and make it the Christmas present to yourself in 2014, should you reach your target.

Stop wasting, identify and change some of your worst habits, show some more discipline, get motivated and put away a little extra each month. It might not make you wealthy over the next 12 months but it should help you to begin the journey to better financial management and a brighter financial destiny.

 Please contact White Investments if you would like to learn more about the ways in which we can partner with you to a more secure financial future. E-mail: info@whiteinvestments.co.za

I am contacted by many people during the course of the year who express a desire to set up an investment plan (retirement, kids education, wealth creation) but many do not follow through, in most instances, because ‘life just gets too busy’.

So this holiday season why not sit down and list some financial goals you want to achieve in the next 12 months, 5 and even 10 years from now and commit to actually implementing the plan in 2014. Keep the tasks manageable, or bite-sized, rather than aiming for some overwhelmingly impossible full financial revolution. Get the ball rolling slowly now and make sure yet another year does not pass you by without making progress.  

A few thoughts to ponder over the holidays:

What happened in 2013

Did you follow through with your plans you had at the start of the year? If not why not? Can you still achieve any of them before the year is over or can you make some good headway so that 2014 becomes a year of real action? What areas can you improve on?

What to do with the annual bonus

If you are coming into some additional cash towards the end of this year (annual bonus or recent tax refund from SARS), and you want to protect it from those impulse buys that tend to accompany the festive season, you could consider contributing an additional ‘top-up’ lump-sum to your retirement plan (or starting a plan if you just raised your eye brows at that suggestion).

If you do not contribute to any form of retirement savings product through your employer you can contribute up to 15% of your taxable income to a retirement annuity fund which will further reduce your tax bill for the year ending February 2014.

Let’s say you expect to earn a bonus of R20 000. If you take that money and spend it all on Christmas festivities then come the end of February 2014, you will pay income tax on that amount at your marginal rate as per SARS tax tables.

This means if your marginal tax rate is 30% you will pay R 6000 to SARS and only effectively have had R14 000 to spend.

However, if you opt to take a prudent approach and contribute the money to your retirement annuity, you can pay the full R20 000 into your annuity fund. Essentially, SARS contributes the R 6000 you would have paid them in income tax, into your retirement plan.

Of course this R20 000 will be locked away for your retirement up until a minimum age of 55 years old but all the investment returns you earn up until retirement will also be tax free.

Wipe out short-term debt ASAP

If you have outstanding short-term debts, make a plan to reduce those as quickly as possible in the New Year before considering investment options. It’s usually really hard to earn real returns (after inflation, fees and taxation) in excess of the cost of your short-term debt.

Invest in Knowledge

If you do not have additional funds available to invest at the moment then perhaps you can use some of your time and energy this holiday season to invest in your financial knowledge. Read some personal finance magazines or newspaper sections, books or websites – the more you learn and the more financially literate you become, the more motivated you will be to action your plans rather than let another year fly by.

 Finally, as we enter a new era for South Africa, without the physical presence of Nelson Mandela to inspire us, I hope we can take some lessons from his life, have the patience and motivation to overcome seemingly insurmountable obstacles and create a better future for ourselves (both individually and as a Nation).

I wish you all a very peaceful festive season and a 2014 filled with success and happiness.

Dominic White

So in the spirit of checklists here is my list to help you identify why you DON’T need an investment advisor:

1.    You understand how to identify and define your investment goals.

Sounds simple enough but we are not just talking about identifying a bland statement like:

 “I want to save for my children’s education!”

We mean knowing how to measure the future value of those objectives so that you have a clear target to aim towards.

For example: Education at a public primary school level (Grade 0-7) today costs around R133 536.00 and the cost of education goes up on average by 8%* a year. By the time my 6 month old starts school his primary school education, it is therefore likely to cost me R211 905.00

You repeat this exercise for his high school and tertiary education needs and we are looking at a combined cost of about R1 370 000.00 over the next 18 years. Of course if we want to send our boy to a private school this figure is likely to jump to R 2 132 000.00*

2.    You know how to calculate what you need to do to reach those goals.

 So I now have a figure to aim towards but do I know what it is going to take to get there?

How much must I save and what returns will I need to earn from my investments to reach my goal?

The answer will depend on a number of variables some of which include:

Whether I am making a lump sum investment now or whether I will be making monthly contributions on an ongoing basis. Of course it could be a combination of both.

EXAMPLE: I have no initial lump sum and I can afford to put away R1000 a month. I decide I want to save for my son’s public high school education which will start in 12 years time and it is estimated to cost a total of R306 000 for the five years at an estimated R61200 a year.

I will therefore require an average return after fees and taxes of 11.16% assuming I make my contributions at the start of each month to get to my target of R306 000 in 12 years time.

 Of course this means I will have saved for the entire high school fee at the start of the five years when in reality I will only be paying out R61200 a year. This not only simplifies the calculations but this is probably a more prudent approach as I will probably change the asset allocation once I have reached my goal so as not to land up with any shortfall as a result of market movements during the fee paying period.

3.    You know which asset classes will provide you with the best chance of achieving your required returns.

So I now know that I must target an after tax and fee average return of 11.16% each year for the next 12 years to reach my goal.

But which asset classes will give me the best chance of achieving that return and what are the risks associated with each option?

Average returns from shares or equity investments in South Africa have historically been around 12.5% a year since 1900. For bonds and cash that return drops to 6.8% and 6.0% respectively.

It becomes fairly clear that if I opt to invest in cash and bonds then the probability of me achieving my goal is very low indeed.

However, if I invest in shares or equities which deliver the best long term returns, I must accept that over shorter time periods, share returns can deviate from this average quite substantially. This means shares become less and less suitable for objectives that are short term in nature. (Less than 5 years)

The bottom line is that I need to take on enough risk to achieve my investment objectives but I need to understand the risk-return profiles of each asset class to manage my expectations over the short term.

 4.    You know the tax consequences of your investment activities and can structure your strategy accordingly.

As mentioned above I need an after tax and fee return of 11.16%.

That means that I must try and minimise the tax I am charged on my investment returns to maximise my real returns.

Basic rules would be to try and avoid income tax in favour of capital gains tax where possible. This means avoiding trading in and out of investments – the general rule is that if I hold an investment for 3 years or longer before selling it I will pay capital gains tax which is likely to be significantly lower than my marginal income tax rate.

I know I will pay dividend withholding tax on any dividends I receive and income tax on any interest from cash or bonds.

I must make sure I utilise tax allowances on interest income and capital gains as well as any special provisions the Treasury allows for specific types of investment like Retirement Savings.

 5.    You know which are the best or most appropriate product providers and or platforms to use to implement your strategy.

I must decide if I am going to manage my investments directly myself or if I will be ‘employing’ a professional fund manager to do the job for me by buying into a unit trust or fund.

For direct stocks and ETF (Exchange Traded Funds) investments I will need to open a stockbroking account. This may also be the most cost effective option for large once off lump sum investments.

If I opt to go the route of investing in funds or ETF’s there are platforms called LISP’s (Linked Investment Service Providers) where I can buy into a number of funds from different investment managers or else I can go to an investment management company and buy funds directly from them. Investing in funds or ETF’s is probably the most sensible option if I am planning on making monthly contributions.

Each different option will have different costs associated with them and I will need to understand what these are.

6.    You know how to translate your strategy requirements into specific products in a cost efficient manner.

So now I know what type of investment I want and what type of asset allocation I will need to achieve my return objective, I must identify which product (fund) or products will provide me with that exposure.

There are literally thousands of funds available to me over a variety of different classes and I must know how to indentify ones with the appropriate asset allocation, performance target and fee structure to help me meet my objective.  Importantly, my required 11.16% average return must be after fees have been taken into account.  

Balanced Funds (High equity, Low equity), pure equity funds, flexible funds, fixed income funds, money markets are just some of the categories of funds that I can look at which will give me an indication of the type of asset allocation I can expect from each.

 7.    You have the patience and discipline to stick with your investment strategy during the tough times.

Patience is required to give my strategy a chance to work. Frequently we highlight a 10 year investment objective and invest in long term assets accordingly but at the first sign of a sell-off in year one or two we abandon our plan and return to the safety of cash. This type of mistake results in a buy high and sell low pattern which is incredibly wealth destructive and is likely to derail any long term investment strategy.

I must therefore be able to avoid emotional decision making and have the discipline to stick to my plan when short term market fluctuations have me feeling like things will never get better. This is equally applicable when we make large short term gains and the temptation is to sell and try and time the market for better re-entry levels – typically we never get back in.

Discipline also involves putting money away for investments on a regular basis and delaying the instant gratification of new cars, more clothes, expensive holidays or bigger houses.  

One of the single biggest challenges in successful investing is not in identifying the right strategy to achieve our target but in actually executing the strategy as we should.

 8.    You understand how to monitor and amend your strategy to your changing needs.

Over time I will receive a myriad of investment reports informing me how my investments are performing. I must be able to monitor and understand these reports so as to measure the success of my investments in the context of my plan.

I must make sure that any deviations are within the expected limits and that if I have employed active fund managers that they are earning their fees by outperforming the benchmark after fees.

If the circumstances of my life change (Like I have a second child) I must know how to adjust my existing strategy to take account of my changing circumstances.

If I cannot make payments as a result of some unforeseen event I should know which products or savings to cut back on without compromising my long term strategy if possible.

 9.    You have the time and motivation to keep up to date with the options available in an ever changing industry.

The market is constantly changing. There are better products available to us retail investors today than there were just a few years ago.

I need to invest in my investment and product knowledge on a regular basis if I am to stay in touch with the changing trends and ensure I get the best out of my hard earned cash.

10.    You know how to combine individual investment goals into an overall financial plan that ensures your objectives are prioritised to maximise your chances of success.

Linking all my individual investment goals into one common sense approach is essential. I should view all of my investment decisions as part of an overall plan and be able to prioritise accordingly.

For example, it may be more prudent for me to plan and save for public school education rather than private school if it means I can also contribute sufficiently to my retirement savings. After all my child would probably rather not have the burden of looking after me in my twilight years whether he has a private school education or not. And of course I can always amend my strategy should my circumstances change along the way.

Does it make sense to invest R1000 a month into an education savings plan, trying to earn 11.16% average return, while I am carrying store and credit card debts of R25000 being charged 24% a year (which equates to about R2600 a month repayments if I want to pay it off in a year)? Perhaps I should focus on paying down that debt as quickly as possible and then commit the larger payment to the education fund for a longer period.

I must also be conscious of minimising the chance of any single event (market or otherwise) completely derailing my families well being. I should have appropriate insurance in place, whether that is health insurance via medical aid or life and disability cover for those unforeseen events that may occur.   

Conclusion:

Investment Advisory Service’s like the one we offer at White Investments do cost money. If you are able to confidently and competently carry out the tasks identified in the checklist above then you can save yourself from any additional advisory fees. But if you are not able or willing to spend the time getting to grips with your investment planning requirements you must ask yourself if a good advisor is not actually worth the additional investment.

* Source: Discovery Holdings/ Discovery invest from Moneyweb article January 2012

 Please contact White Investments if you would like to learn more about the ways in which we can partner with you to a more secure financial future. E-mail: info@whiteinvestments.co.za