Monthly Archives: November 2016

The next ratings decision before investing

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know whether his advisor should have held back on making any investment decisions until the ratings agencies make a decision on South Africa.

Q: I just a made an investment of R400 000 via a financial planner who placed these funds within a unit trust portfolio.

My question is twofold:

Firstly, if we are downgraded to “junk” status, is there any possibility of me losing my investment or the investment not yielding the promised dividends?

And, secondly, should I have waited or should the financial planner have advised me to hold on with the investment, pending the outcome of the ratings decision later this year?

The first likely result of a downgrade would be further depreciation of the rand. This would be brought on by foreign investors selling their local assets and taking their money out of South Africa.

To understand how this would affect your personal portfolio, you need to look at the breakdown of the underlying assets and how the portfolio is split between local and foreign assets. A weaker rand means that the foreign holdings would look better, as they would be worth more in local currency terms. In addition, since many of our locally-listed shares are also rand hedges (around 70% of the market cap of the JSE), it’s likely that a large portion of your local holdings would also be protected.

On the other hand, some local assets would suffer as a result of rand weakness. However, since a downgrade would be a well anticipated event, it is most likely that the fund managers with whom your advisor has placed you have adjusted their portfolios accordingly.

Secondly, it is important is that you understand the difference between the long-term and short-term impacts a downgrade might have. Depending on your particular plans and requirements for this investment, your advisor should have selected funds that suit you for the time period you are looking to invest.

Financial services companies

July is savings month in South Africa. This is an initiative that is meant to encourage us all to be more serious about putting away money for our futures.

The premise is obvious. South Africa’s savings rate is abysmal and we need to do something to fix that.

However, many of the messages coming from financial services companies this year have not focused on the country’s savings habits. They have rather been about our spending habits.

Sanlam, for instance, has collaborated with rapper Cassper Nyovest and actress Pearl Thusi on a project called #ConspicuousSaving. The two, who are usually known for their big spending, have been posting on social media about doing things like home facials, clothes swapping or a haircut at a roadside barber to save money.

At a media luncheon in Cape Town on Thursday, Liberty also looked at ways in which South Africans might try to moderate their spending. Based on the findings of a survey conducted by Alltold, Liberty showed where consumers look to cut back to make their money go further.

The primary lesson from the study, entitled The Frugality Report, was that South Africans don’t like to compromise on their lifestyles. Even when they are spending less, they don’t want to cut anything out. They just look for more cost-effective ways of doing the same things.

This suggests that South Africans are probably too attached to the kinds of lifestyles they want to lead. They aren’t willing to seriously assess what they spend their money on and how much of it is really necessary.

In isolation, there is nothing wrong with highlighting these issues and questioning our spending habits. The first step towards financial freedom is always spending less than you earn.

However, it is only that – a first step. Only encouraging South Africans not to spend so much doesn’t really address the key issue of savings month, which is how to get more people to save more of their income.

Even if one of Thusi’s Twitter followers does heed the message and saves money by doing her own nails, buying second-hand clothes and turning down the temptation to buy a new handbag, what then? What does she do with the extra money that she now has?

This is where the financial services industry itself needs to do some serious introspection. It is simply not doing enough to make it easy and cost-effective for South Africans to save and invest.

Even acknowledging that this is not a simple thing to do, it doesn’t feel like too many companies are really trying very hard. The level of innovation in building simple, appropriate and appealing products is poor.

Even some firms that already have options that could be used to attract first time investors don’t market them as such. For instance, the Stanlib Equity Fund may be the only unit trust in the country that accepts debit orders of just R50 per month, yet I am not aware of any advertising from the company that has ever centred on this fact.

Easy Equities is a rare exception trying to make investing exciting and accessible, but why has it remained an outlier? Why aren’t more companies looking at ways to do similar things?

Many of them will say that it’s not easy when faced with the amount of regulation involved, and there is truth to that. However, this is not insurmountable. There are already online platforms that allow an investor to complete, sign and submit all the documentation they need for an investmentment online and simply upload their Fica documentation. It’s a process that needn’t be burdensome on the consumer.

Tips for parents and their child

With the start of 2017 looming, many parents may have started to consider the cost of their children’s school and tuition fees for the next school year. While families have a number of financial commitments to attend to every month, this is the time of year where school funds are often moved to the top priority to ensure that the family is financially prepared for the expenses that accompany a new school year.

Saving for a child’s education requires careful consideration and proper planning.

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Include education funding in the financial plan

It is important that parents include education funding in their overall financial plan. These expenses have to be accounted for as part of the monthly household expenses to determine how it will affect the family’s overall financial position. When it comes to developing financial plans, it is usually a good idea to consult a reputable financial planner who will be able to develop a solution for the client to ensure that they have provided sufficiently for their children’s tuition fees and related education expenses.

Planning is as easy as having a beer

Since interviewing Alta Odendaal a few weeks back I have become intrigued by this subject of behavioural finance and how small tweaks to your behaviour can make significant changes to your financial well-being.

On Sunday I sat down with one of my good friends over a beer and we ended up having a long chat about retirement and where we would both end up based on our current habits.

For background information, my friend is 10 years older than me, a teacher, earns 45% of my basic salary, has never owned property, has no children and carries no debt. In contrast I earn more, have a kid in a special needs school, have an active share portfolio, carry debt and more years on him to retirement.

We plugged our respective savings numbers into the 10X retirement calculator and we tried to work out who would come out better off based on current habits. Interestingly I will come in at half of my retirement goal and he will come in nearly 30% higher than his monthly requirements. For the purposes of our breakfast, we assumed a 60% income replacement ratio.

The irony is that I come in at nearly 50% below my required replacement revenue, despite sticking to the industry ‘rule of thumb’ of saving 10% of my monthly salary. Well this is a problem …

More scary for me was when I started playing with the investment assumption side of the equation.

Market commentators and financial planners have been warning us for a while, that we are in for a period of sustained lower returns. Booming local equity and property markets which have driven retirement plans for the last 20 years in South Africa are unlikely to repeat themselves in the near-term. If my average investment return dropped by 3% over the period to retirement, I knock nearly R800 000 off this particular Retirement Annuity (RA).

On its own, none of the above is new or news.

What it highlighted for me is that if you have a financial plan – and it might just be ‘be comfortable for retirement’ – you need to sit down and interrogate your financial plan on a regular basis. A simple example, but sitting down for a beer on a Sunday afternoon, lead to me interrogating my retirement. Yeah yeah I probably need a life – but I realised that I hadn’t set my one Retirement Annuity (RA) to increase annually. That small omission cost  me R150 000 in the long run.

Financial kick in the pants

  • Prepare an itemised list of all your expenses and divide the expenses into Group A, being fixed expenses, such as car repayments, other debts and payments you are contractually bound to pay monthly. Other discretionary expenses you are able to reduce or even cancel without suffering any negative legal or financial consequences such as entertainment, clothing, cable TV should be included in a Group B.Select certain Group B expenses you wish to reduce or stop [that gym subscription?), do so and allocate extra payments to shorten the outstanding payment periods (and reduce the interest payable) of Group A expenses or start a small rainy day account for those unexpected financial surprises. Which expenses should be reduced and in what order of priority will depend upon circumstances such as interest rates, tax deductibility, outstanding payment periods and so on. Always a good idea to consult a professional to assist you in making the correct decision.
  • Make an appointment with your financial planner to verify whether your life, disability, dread disease and accident benefits are adequate or surplus to your needs and whether recent product developments have resulted in more cost efficient and/or comprehensive cover being available at the same or at a cheaper cost to you. Planners are, today, required to provide you with comprehensive comparative information to provide you with the peace of mind that you are making a decision that is in your best interest.
  • Create a filing system (whether it be a lever arch file or a folder on your desktop for emailed documentation) for all your financial records such bank or credit card statements, accounts and invoices. This will save an enormous amount of time when a payment is in dispute. If you have other important legal documents, why not also save these using a similar format?
  • Request your short term broker to review your insurance to ensure that your house, car and other property is sufficiently insured against damage or loss.

Stay in shares after retirement

In this advice column Jamey Lipschitz from Sanlam Private Wealth answers a question from a reader who wants to know what to do with his share portfolio when he retires.

Q: I have a portfolio of blue chip shares worth around R7 million. I am 63 years old and will have to start using some of my savings to sustain me and my wife in three years time.

My concern is whether I should stay in shares or should I sell and invest in something else? I am worried about what the markets are doing, and need some peace of mind.

I will need around R700 000 a year, and I have some annuities as backup.

There are a number of important issues that someone in this position would need to consider.

Firstly, South Africa and most of the world is in a low-yield environment at the moment. Some countries are actually providing a negative yield on cash investments for the first time in history.

This has forced investors into higher risk asset classes like equities and property for the relatively higher yield they provide. At the same time, however, this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield on these asset classes have come under pressure as the prices have increased.

Secondly, even the current situation notwithstanding, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.

There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.

Thirdly, the dividend yield on South African equities is currently approximately 3%. That means that a R7 million equity portfolio would yield around R210 000 per annum. That is a shortfall of R490 000 every year on the R700 000 income required.