Financial freedom

Financial freedom sets you free

If you want to be financially free as early as possible, it might help you to know what other financially free people have in common.

Worried about dying young

Most of the people I have met who have retired early had an overriding fear that they would retire at 65 and then pass away within a year or two. Most of them had an experience where their fathers or other family members had this bad luck and it created a lasting impression. In many instances this fear was the main driving force for many of their other decisions around money. If you want to achieve financial freedom early, you need to find a source of motivation that will enable you to prioritise this goal so that you can avoid many of the wealth traps that prevent others from getting ahead.

Get and stay married

It is remarkable how many successfully retired people have only been married once. Almost all of them work on their financial goals as a team. Money is rarely a source of conflict in these relationships. This is enormously helpful and you always have a willing “training partner” to keep you motivated to reach your financial goals.

Happy with what they have

Financial freedom is different for everybody, some people will be happy to live on a monthly amount of R30,000 while others cannot get by with anything less than R200,000 per month. You need to find a way to be happy with what you have and not constantly want more. People who earn a lot of money but are never happy with what they have, are NOT going to achieve financial freedom…ever. This is one of the keys to financial success, it is easier to save and build up your investments if you are not constantly paying off your credit card because you HAD to go on that wonderful skiing holiday like your friends did last winter.

Parents showed the way

Successful retirees did not necessarily have wealthy families and nor were they particularly financially sophisticated but very often their parents were prudent with money. They instilled an ethic in their children that saving was important. Many of these successful retirees had to work for pocket money as children. Sometimes it was part-time jobs during holidays or working around the house. Very few of them were simply given everything they wanted. This is a wonderful lesson for parents today.

Money not a source of trouble

Finally, they tend to live a stable and predictable financial life. Almost all of them planned their major expenses carefully and they rarely use debt. Vehicles are purchased with cash. Credit cards are cleared monthly and they have money saved for emergencies. They tend to budget consistently and save every month. When asked about how they dealt with financial shocks, I was surprised to learn that they had less financial emergencies than most other people. On the surface it might seem like they were lucky but I realised that they tend to plan for rainy days. If they had a financial setback they worked really hard to re-establish their emergency funds quickly so that they could deal with any new problems.

Financial freedom takes a lot of sacrifice and hard work – it is possible for anybody.

June 2015 investment markets update

June 2015 investment markets update

The current state of the SA and International markets can best be described as ‘volatile’. May 2015 was bad month for investors, the SA stock market fell by 4% during the month, while a balanced portfolio lost between 2.5% and 3.0%. Almost all asset classes lost money in May however most portfolios will still show positive growth for the year to date. This is very typical of the volatile times we are seeing at present.

Over the past 12 months, the JSE All Share Index delivered a total return of 8.5%. This is significantly lower than the past five year’s annual growth of 17.5%. It is likely that investors can expect 8.5% per year for the next few years rather than 17% because the markets need to normalise again. This is what happens when the markets perform exceptionally well for a sustained period. Investors basically borrow future growth and will need to repay it sooner or later. This is exactly what we are seeing now. The long-term growth of the JSE (since 1900) was about 12.5% ​​per annum. When you have enjoyed a decade of 17.5% growth, it is only logical that you have to experience growth closer to 8.5% somewhere along the line.

If we look at the US index of the 500 largest companies, since 1960 it has only happened in three years that the market did not at some point lose 5% during the year. Deutsche Bank points out that the market on average decreased by more than 10% every 357 trading days (approximately every 18 months). We have already seen more than three and a half years without such a 10% decline. This is the third longest period since 1960 without a 10% decline. Add to this that the US markets are currently about 12% above the long-term average valuations and you can expect more volatility in the months ahead.

What does this mean for investors?

Very little, except perhaps:

  1. Even at a lower growth rate, shares (as a growth asset class) still outperform the other asset classes when it comes to growth above inflation, although investors should temper their expectations and realize that this growth will not be a straight line.
  2. If you want to invest new money, do it over a period of time (phasing it in monthly over 12 months) so any decline gives you the opportunity to buy in order to lower levels. Remember, it is important to start investing than trying to guess when the “time” is right!
  3. If you want money withdrawn from the market, you can go ahead and do not wait for higher valuations – you might get a rude surprise

Investment markets


Investment markets


Four great future variables

If you like to make predictions and believe you can do it better than the rest of the market (that is, the other seven billion people who share this planet with you), then these are the four major variables that will determine the future (according to a recent McKinsey & Co. report):

1. Urbanization in emerging countries

As recently as 2000, 95% of the Fortune 500 companies (the largest 500 companies in the world) were based in developed economies, primarily in North America and Europe. By 2025 (when the Chinese economy could be larger than the US economy), there will be more large companies (with an income of more than a $ 1 billion per year) based in emerging countries than in Europe and the US combined. The world is rapidly urbanising at about 65 million people per year (it comes down to eight new cities the size of London every year). This means that more than half the world’s economic activity will be generated in the 440 largest cities in emerging countries by 2025. It is only about 10 years.

2. Accelerated technological change

It took 50 years for half of the US population to be connected to a telephone. It took radio 38 years to reach 50 million listeners, while China’s mobile text- and voice-messaging service, WeChat, has more than 300 million users and it is only a few years old.  Five years after Apple introduced the iPhone, there were more than 1.2 million apps, which were downloaded 75 million times. Less than 20 years ago only 3% of the population on Earth had access mobile communication. Today there are more SIM cards than people in the world (more than 60% of people have mobile phones and more than 30% of mobile Internet access). Suddenly companies like Uber, Alibaba and Whatsapp are changing the world around us.

3. New old people

More than 60% of the world population currently lives in countries where population growth is under 2.1%. This is the percentage growth that is needed to keep the population constant, taking natural death in to account.  In Germany it is expected that the current working population of 54 million will decrease to 36 million in the next 45 years. The question is how this will affect the capital base and economic activity in Germany and Europe. Add to this that people are older and lead more active lifestyles which leads to a greater life expectancy, then this older, more active population will play a major role in future economic activity.

4. Interconnectivity

Everyone will trade with one another. The time when world trade largely took place between the US and Europe is over. To give one example, China’s trade with Africa has grown from $9 billion in 2000 to $211 billion in 2012. More than one billion people crossed borders in 2009, over five times the number in 1980. This movement of goods and people will mean that contact and trade between people, countries and companies will be much more integrated.

In the South African context we can add the black middle class, which has grown considerably. In 1994 there were about 350,000 black people who were part of the middle class (they made up 10% of the middle class). Currently there is an estimated three million black people in the middle class, this means that more than 40% of the total South African middle class is black. Most of these middle class people live in the larger cities (just under 90%), with the same aspirations as any other citizen. As our population becomes urbanized from the current 64% to an estimated 70% of the population in the coming decades, this demographic phenomenon will shape the economic and political landscape in the next decade or two and not the person in the “Rondalia replica” official residence.

We are often pessimistic about where the world is going and how the world is deteriorating. In the year 1800 there was no country where the life expectancy more than 40 years, today there is no country where the life expectancy below 40 years of age. In South Africa, life expectancy in 1800 about 34 years, today it is closer to 58 years, although still well below the 80 plus mark, in among others, Japan, Australia and Spain. This is partly due to successful immunization programs, better nutrition and antibiotics.

The current drought in California (studies reckon the worst in 1200 years), where large dams are empty, boats are stranded on dry land and mighty rivers are so small that you can jump over them, has people reconsidering the use of water. An interesting article in the New York Times asked the following question:

Which of the following use the most water:

1. A 10-minute shower?

2. A handful of nuts?

3. A batch of laundry in a washing machine?

4. A Hamburger meatball (“patty”)?

The answer is quite unexpected. A 10 minute shower uses 90 liters of water, the handful of nuts about 40 liters, the bundle of laundry almost 130 liters, but a 100-gram hamburger meatball (“patty”) uses almost 1500 liters of water in its production. This is specifically because proteins (in this case the cattle), drink a large amount of water. To take this further, an egg use almost 200 liters of water while a liter of milk “consumes” about 880 liters of water to be produced.

Take these numbers and add them to the urbanization and growing middle class figures mentioned above, then it simply means water will become increasingly important, not to mention the role of the farmer.

Here is a link to the article to which we refer.

SmartRand provides investment advice online




The established personal investment firm, Galileo Capital, is the financial advice company responsible for the investment advice provided by SmartRand. Galileo Capital is a registered financial services provider (FSP), approved and regulated by the Financial Services Board (FSB). (FSB license number 21239.)




B.Comm (Hons)

Investment Management


Theo Vorster

Theo is the chief executive officer of SmartRand and Galileo Capital. He has been in the financial services industry for 25 years.

  • He was the managing director of the largest private client stock broking firm in South Africa.
  • Theo hosts his own television show, Sakegesprek met Theo Vorster, on DStv’s kykNET channel.
  • He is a regular investment commentator on a variety of media platforms.


B.Soc Sc (Economics)

PG. Dip (Financial Planning)


Warren Ingram

Warren is an executive director of Galileo Capital and is responsible for all wealth management and retirement planning services.

  • He has been in the private client financial services industry for 15 years.
  • He was most recently employed by HSBC Bank (Plc) in South Africa, where he was responsible for their wealth management division.
  • Warren is a regular investment commentator on a variety of media platforms.

SmartRand (Pty) Ltd is a joint venture between Galileo Capital (Pty) Ltd and Unplugged Investments (Pty) Ltd. Technology services are supplied by Twisted Toast Digital (Pty) Ltd.


Get advice.

Email SmartRand:

Follow SmartRand on Twitter

Like SmartRand on Facebook

Email SmartRand:

SmartRand is a Galileo Capital and Twisted Toast Digital initiative.

Find us on Google+

Retired reader’s question about capital

I answer a retired reader’s question about capital

The question

eggs 600x400I retired at 60 with a 20 year investment horizon, now 12 years later should my horizon be eight years, or still 20 years? Obviously at some stage I could start drawing on capital (or need to).

From “Baffled Pensioner”

My Answer

This is an issue that affects many retirees and can often be a source of real distress as they see their capital dwindling. When you determine your investment horizon for retirement, you need to take into account a few different variables. Firstly, I don’t believe you can retire at age 60 and only plan for 20 years of post-retirement life. We have a substantial number of clients who are already in their 80s and a few who are already in their 90s.

We currently plan for the person to live until age 100 when we do our retirement plan for individuals.

This might seem excessive but our clients who are already in their 90s prove the point that people are living longer and you cannot simply rely on the actuarial tables which indicate an average mortality age of 78. It is well known that middle and upper income people are living longer due to the benefits of modern medicine.

Health and longevity

If you are already 72 years old, you need to take a realistic view of your health issues and your family history. This might seem like a very morbid point, but it is still important. For instance, if your parents and grandparents lived to a ripe old age and you are in good health at age 72, it is highly likely that you might still live for many years. This means you certainly cannot plan for only another eight years, unless your health is very poor. Sorry, I know this is morbid.

Drawing on your capital

When you are retired and you find that the income your capital generates is not sufficient to meet your needs, it can be very frightening to start drawing on your capital too. This does not mean that you are necessarily in dire straits; well diversified investment portfolios can sustain some capital withdrawals over the long term.

As an example, if you have R3m invested, which provides you with your retirement income, you can draw a maximum of R240 000 per year. This amounts to 8% of the R3m. This level of withdrawal should ensure that your capital lasts for a substantial period of time, i.e. potentially 20 years or longer until it is exhausted. If you are drawing 4%, your capital might last indefinitely. A withdrawal rate of 12% is very high and you will definitely erode your capital quite rapidly. In fact, I think you will be fortunate if it lasts 15 years.

You need to be appropriately invested

If you are drawing a high income percentage from your capital, i.e. more than 8%, you cannot really afford to take significant investment risk. This means you need to invest in a cautious or moderate portfolio rather than a balanced or high equity investment. This might seem counter-intuitive. But a higher growth portfolio carries more risk and you cannot afford to lose money during a stock market crash, because you will accelerate the erosion of your capital. Ideally your investment should have a maximum of 35% to 40% in shares so that you can still get some inflation protection.

If you are only drawing 5% from your capital on a yearly basis, you can invest in a balanced or high equity portfolio. This means you can have up to 70% in shares. In good years you will get significant capital growth, which will compensate you for the bad years where you might experience a significant loss. Because you are only drawing 5% of your capital, it is likely that your money will still be able to recover after a market crash, even if it takes a year or three.

If you are drawing more than 12% of your capital every year, you should rather invest only in high interest income funds or RSA Retail Bonds, because you cannot afford any stock market losses. You need as much guaranteed income as possible. You should also try to limit your monthly costs as much as possible and find alternative sources of income or capital. For example, if you still own your home, you should consider selling it and renting a small apartment instead. This will free up some capital and limit your monthly expenses as you will no longer have to maintain your home.

Rand Weakness SmartRand

JSE protects against rand weakness

Given the significant rand weakness over the last few weeks and the very recent losses on the JSE, some investors are starting to wonder if they should ratherRand Weakness SmartRand invest their money overseas and away from our volatile economy. This type of thinking is very similar to what was experienced in the early 2000s when rand weakness was apparent against all  major currencies. Many thought rand weakness would continue to the point where the currency had no value.

History proved  those who sent money out of the country to protect against rand weakness at that time made a mistake. Doing so this time might repeat the error.

The JSE protects against rand weakness and US inflation

With the recent rand weakness and all the negativity surrounding the South African economic and political situation, I am often asked whether investors should simply invest their money overseas. This is a completely understandable question. But it might not be your best investment strategy to protect against rand weakness. In my view, unless you think Zumanomics will destroy the SA economy, you must maintain a sizable investment in the JSE to ensure long-term investment success.

Many of the biggest companies on the JSE earn the majority of their money from outside of SA. This means any rand weakness will  increase profits, which is positive for their share prices in the longer term.

The fund managers that I believe provide the best investment research, Cannon Asset Managers, created the graph below. It shows the return of the JSE in US$ (green) against the US inflation rate (blue) and the US stock market (red). As you can see, even with the recent rand weakness and the sharp drop in the JSE, SA investors are still handsomely beating the US inflation rate, as well as the US stock market, over the last 10 years.

The graph is interesting because it shows the JSE has beaten US inflation and the US stock market over all the preceding 10-year periods from 2006 until now. (You can also see the JSE underperformed in the 10-year periods from 1997 to 2006.)

Rand weakness in perspective

Compiled by Cannon Asset Managers. Source: Bloomberg

Given this information, even the most hardened afro-pessimist would have a hard time arguing that it is always better to invest outside of SA to protect against rand weakness. For me, the graph further illustrates the value of a properly diversified portfolio of shares to give you exposure to the JSE and offshore markets. The primary reason for this diversification is to protect against stock market events that are totally unpredictable, but massively damaging to investors.

How much must I invest offshore?

If you plan to spend your life in SA, I feel you should have an offshore investment allocation that equates to 20% to 40% of your net wealth. It’s important to note that you can get a lot of this offshore allocation via local unit trusts, exchange traded funds (ETFs) and even some of the pure rand hedge shares.

If you are planning to spend a large portion of your time (and therefore your money) outside SA, you should invest 35% to 70% of your money offshore. More importantly, you must invest a significant portion of this money directly overseas, i.e. using your offshore allowance. In so doing you can access the money from overseas when required.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?

With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.

Complex investment products

Complex investment products: Caution is advised

Be wary of complex investment products

Over the last few weeks I’ve had an increasing number of enquiries from readers about a new complex investment product offered by a life assurance company. Complex investment productIt offers access to low-cost, indexed investments with a fee structure that will apparently benefit investors. This is the latest in a long list of complex investment products created by life assurance companies to attract new investors. While I enjoy getting questions from readers, I always take a deep breath when they ask about new products from insurance companies.  I know that I will have to trudge through mountains of marketing-speak in trying to decipher if this new product will really be good for investors. So far, I have found that some of these complex investment products are better than others. But none of them have been compelling enough for me to place my or clients’ money in them.

Complexity is not an ally

If an investment product cannot be properly explained on one A4 page, you need to be very careful. If it takes a brochure of more than 10 pages, be extra cautious. It may just be a complex investment product. I am not implying that you are being scammed, but rather that there are potential pitfalls that you need to investigate and avoid, especially with complex investment products. The law does not protect you if a complex investment product provider can prove that you have been fully informed about an investment. This is why insurance companies issue massive contracts with their products and remind you repeatedly to read them. If anything goes wrong in future, they can simply refer you to clause 607 on page 724.

To me, simpler is always better with investments.

With complex investment products you, be aware of the implications of these products’ intricacies, as well as the usual investment risks. These are difficult enough to understand on their own. I cannot convince myself that complex investment products issued by insurance companies are totally favourable to you. I am more certain that they are good for the complex investment product provider. After all, they use teams of actuaries who spend time calculating probabilities of events and how the company can profit from them. I prefer to avoid dealing with investments created by actuaries because they understand the odds better than I do. I am not sure that I will always benefit to the same extent as the complex investment product provider.

Investment costs are declining

We all know that investment products have been too expensive for too long. Thankfully, I believe the tide is finally turning in consumers’ favour.

You can now buy a unit trust from an insurance company for a total annual fee of 0.59% per year, with no additional administration fees and a minimum debit order of R200 per month. (Don’t believe me? – Check out the SIM equally weighted Top 40 fund.) You can invest yourself, which means no initial fees or advice fees to insurance agents.

Five years ago I would never have dreamed of seeing one of SA’s largest insurance companies offering this type of investment. I feel this is a better bet than the Satrix Investment Plan, because I think the administration charges are too high for smaller investors. There are also high quality asset managers who will manage share portfolios for 0.50% per year and unit trust companies that will offer diversified unit trust portfolios with annual fees of 0.35% (to investors with more than R10m to invest). These are the fees that were being charged to multi-billion rand pension funds a few years ago.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?

With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.

Economic growth is unrelated to stock market performance

Economic growth cannot predict stock pricesWill it surprise you to know there is almost no relationship between economic growth and  stock market performance? If you are spending time worrying about economic growth when making your investment decisions, it’s likely you are wasting your time.

Warren Buffett, during his most recent shareholder’s meeting, told investors he has never made an investment decision based on what he thinks economic growth is going to do. One of the greatest unit trust fund managers of all time, Peter Lynch, remarked: “If you spend 13 minutes a year trying to predict the economy, you have wasted 10 minutes.” This might seem surprising to most. It seems intuitive that investors must have a good “feel” for the direction of  economic growth, because companies will either be operating with economic tailwinds or struggling with difficult conditions. If the economy is doing well, one would expect more opportunities to make profit, which should translate to rising share prices.

It’s not about economic growth, or the economy itself

There is a great study by Holger Sandte, Chief Economist at WestLB Mellon Asset Management, in which he covers a range of topics about how share prices and economic growth relate. The finding that is most interesting to me is that there is absolutely no relationship between the direction of share prices and  economic growth.

I can partially understand this finding, because the stock market is forward-looking. It’s always trying to anticipate what’s going to happen. Therefore current prices are based on investors’ future expectations.

In contrast, economic growth data is always historic. It can only tell us what has already happened. If we believe stock prices are forward-looking, it might make more sense to see if share prices relate to economic growth data from a later date. For example, will this work if we review the direction of the stock markets from January to March and compare this data with economic growth from April to June? Sandte’s study could not find a meaningful relationship with such a delayed comparison. In other words, economic growth data is interesting, but not relevant to equity investors.

If economic growth is not, what is relevant?

Consumer confidence is a totally different matter. According to Sandte’s study, there has not been a prolonged period of time when US consumer confidence and share prices have moved in opposite directions. If consumers are feeling confident, it will translate into rising stock markets over time. The good news for investors is that consumer confidence is regularly measured and published in the US and many other countries around the world.

In South Africa the respected Bureau for Economic Research at Stellenbosch University publishes the Consumer Confidence Index, which you can obtain from their website. The survey has been done since the 1970s. It provides reliable insights into the general population’s thoughts about their own economic well-being.

It’s concerning to note SA consumer confidence dropped substantially from December 2012 to March 2013  and is currently at a nine-year low point. This might not bode well for our stock markets, unless things change to make South Africans feel more positive about their financial futures.

I think there is some merit for sophisticated investors to monitor consumer confidence. But only as one of a few key indicators. However, I would not rely on this as an absolute guide to our stock market’s long-term performance. Markets move so quickly  it’s impossible to invest successfully by anticipating what people are going to feel or how they are going to spend in the short-term (periods shorter than two years).

Most of us don’t have the time to research and monitor these indicators properly. It’s better to focus on buying the index, or quality companies that can adapt to all economic growth conditions. You should always ensure your overall portfolio of investments is sufficiently diversified to survive all market conditions.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?

With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.

Woodstock for capitalists

Warren Buffet’s Woodstock for capitalists

Woodstock for capitalistsWoodstock for capitalists is what Warren Buffett calls the annual chat he and partner Charlie Munger have with Berkshire Hathaway shareholders. It’s astounding to think 35 000 people went to Omaha in the US recently to listen to 82-year-old Buffett and 89-year-old Munger. More so when you consider these two guys have been partners for 54 years in the fifth biggest company in the world: Berkshire Hathaway, which is purely an investment company. The pair answered questions for six hours, ranging from the state of the world economy, to investment strategies, to advice for business success.

It’s impossible to sum up a six-hour Woodstock for capitalists session in a few pages. Instead I’ll try to highlight a few of their main points to show the logic of these two investment icons. To present this summary in a sensible way, I’ve divided the discussion into themes and looked at selected key points under each. Note that this is in no way a complete summary, and I have put it together by combining several sources.

What went down at Woodstock for capitalists

State of the US economy

The US economy has been in a worse position than it is today, for example, following WWII, after which it recovered well and grew for decades. “We’ve encountered far worse problems than we face now,” says the pair. “This is not our toughest hour.

If the US economy manages to increase its rate of growth, most of the current problems will solve themselves. Buffett says the problem will then fade into “insignificance”.

Greece and the EU

Buffett is critical of the decision to include Greece in the European Union. “It’s like putting rat poison into whipped cream,” he says. “Greece is not a responsible country.” But he says while it will take a bit longer, Europe will eventually solve its economic problems.

Decisions on the basis of macro-economic considerations

In the 50-plus years they’ve worked together, Buffett and Munger say they have never taken a decision on the basis of what is going on in the economy, or what the economic forecasts are. If you say you know what’s going to happen, then you haven’t don’t your homework, you’re simply uninformed and haven’t done enough research. At Woodstock for capitalists they explained: “If you’re not confused, you don’t understand things very well.”

Investment decisions

If you’re not in control of your emotions, you shouldn’t be managing your own investments. Investment decisions must be made on rational grounds, not from a behavioural or emotional departure point.

“We’ve always tried to stay sane when other people – a lot of them – go crazy. That’s a competitive advantage. When people get scared it’s very hard to deal with them. People get fearful en masse. When we see falling prices we see opportunity.” They also emphasise: “You can’t afford to go with the crowd on investing.”

When it comes to forecasts, their opinion is clear: “You can’t make a lot of money trying to think what is going to happen tomorrow.”

If you’re not a professional investor…

Ensure you are in a diversified portfolio. The best thing to do is to use low cost index funds. The investment industry is good at shifting capital from the investor to the fund manager. The best way to overcome that is in an index fund. The basis for this is that costs are lower and few fund managers actually manage to beat the index.

Interest-bearing investments versus shares

Buffet refers specifically to the US. but many of the principles can be applied to South Africa. He feels sorry for people who invest in interest-bearing investments. “For 90% of my life it has been better owning equities,” he explains. This means exposure to growth assets is critical for long-term growth.

Advice for successful business management

Here Buffet focuses on three points:

  • Manage cost and keep it low
  • Build your brand
  • Make sure your clients are happy

When asked a critical question about their investment in the motorcycle group Harley-Davidson, Buffet comes back to focus on branding: “Any company that gets customers to tattoo ads on their chests can’t be all that bad.”

The long-term nature of investing

Charlie Munger supports Warren Buffett when they explain long-term investment isn’t three or five years. It’s longer than that. Noteworthy is that a person aged 89 isn’t worried about what’s going to happen in the next three to five years.

On children, wills and inheritances

The pair recommend you share your will with your children when they are in their 30s. Buffett emphasises the behaviour of parents determines their children’s future It’s about them knowing about their inheritance, not the amount of the inheritance. The way parents work with money determines how their children will work with money.

Making an investment

Whether you only buy 100 shares in a business or the whole business, you must regard any investment as if you are buying the whole company. Buffet adds you must be prepared to pay a premium price for a quality business. “Paying up for an extraordinary company is not a mistake,” he emphasises. Buffet and Munger also believe in allowing businesses to manage themselves. “We’re decentralised almost to the point of abdication,” they said at Woodstock for capitalists.

Life advice

  • To young people the pair says: “Start developing your track record as early as you can, one that is a product of sound thinking.”
  • On career choice: “You have got to work where you’re tuned in. I have never been successful at something I did not like.”
  • Munger says: “The game of life is the game of everlasting learning.”
  • When it comes to expertise, they advise: “Knowing the edge of your competency is very important. If you think you know more than you do, that’s looking for trouble.”

Practicalities: What does all this mean for investors?

I believe Warren Buffet’s Woodstock for capitalists is a tune serious investors can listen to:

  1. Ensure you are not emotional when it comes to investment decisions. It’s better to consult a good financial advisor, who isn’t emotionally attached to your specific circumstances. One who will give you rational advice.
  2. Use cheap index fund solutions if you are not a professional investment manager.
  3. Don’t pay too much attention to macro-economic factors. Don’t rely on your ability to predict the future. The first step towards financial fitness is an executable, realistic plan that you can stick to. A plan like that helps you focus in uncertain times. It reminds you why you made certain decisions in the first place, if you doubt yourself. That’s why it’s preferable to enlist the help of an expert personal financial planner. It helps you focus on what you understand and make a success of it.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?

With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.

Winning the lotto means responsibility

Winning the lotto

Winning the lotto comes with responsibility

Over the last few weeks there have been many people winning the lotto. A lot of them won big. Two lucky people shared a jackpot of nearly R60m. I have met a few lotto winners over the years and most of them have sad stories to tell about their “good fortune”.

In the USA, nearly 70% of the people winning the lotto are broke within seven years. I expect South Africans winning the lotto have the same experience. Sadly, there are real risks involved in winning the lotto. Suicides, murders, drug addiction and divorces are common themes in the stories of these previously ordinary people whose lives were ruined by a big jackpot. My first piece of advice to a big winner is: DON’T TELL PEOPLE.

Take things slowly

Take two or three months after winning the lotto to think about what you are going to do before you do anything with your winnings. If possible speak to people who are wealthy and find out how they live their lives. You can learn a lot from other people’s experiences. Don’t repeat their mistakes. Get used to the idea of being wealthy and try to plan your life ahead before you start splurging. Don’t quit your job immediately, as this is a sure sign to all your friends and family that your life has changed. If you really hate your job or your boss, try to develop a plan for what you are going to do with your time before telling the boss where to stick it. It will seem strange to most. But the combination of real wealth and boredom is very dangerous. Remember, there is no rush to do anything with your money. It’s not going to disappear if you take a few months to start making investment decisions.

Stick to things you know

The fact that you have been lucky enough after winning the lotto does not mean you have suddenly become an expert investor or business owner. When you have large sums to invest, it will not take long for people to offer you opportunities to buy into private businesses, buildings or property developments. These are the situations where you should exercise extreme caution. If you are interested in becoming an entrepreneur, make use of experts who are paid to recommend you properly, rather than commission earning agents who want to sell you something. More importantly, take all the time necessary to arm yourself with information so that you can protect yourself from bad investment decisions after winning the lotto.

Your action plan

I realise that after winning the lotto, it will be impossible to convince you not to spend some of it. Give yourself a spending budget For example, if you won R50m, you could allocate R10m to discretionary spending. Here are some sensible examples of how to spend this money:

  • Pay off all debt, including home loans
  • Pay off debts for children or parents. If you want to share your good fortune with them
  • Buy another home, if desired
  • Buy assets that have a long history of appreciating in value

After winning the lotto, try not to:

  • Spend millions on expensive cars. These will cost a fortune to insure and will lose value rapidly
  • Donate lump sums to family and friends. Rather give them a source of monthly income that continues for the rest of their lives. History has repeatedly shown that very few people can handle the swift transition from relative poverty to instant wealth.

Create a cash safety net

Set up an emergency fund that equates to six months’ of expenses. This should be used to cover unforeseen expenses only.

Create an income generating income base

If you want to make sure you can live off your remaining capital for the rest of your life, you will need to invest it so that you can earn a sustainable income from your capital. This income will need to increase with inflation. You must be careful about how much you spend, relative to the value of your remaining assets. Try to draw a maximum of 4% per year from your capital (e.g. 4% of R40m), as an annual income. If your capital is invested in a diversified portfolio of shares, bonds and property, it should continue to grow by more than inflation even after the effect of your income withdrawals. You should invest a minimum of 60% of your capital in productive assets, such as shares and commercial or listed property.

An annual income of 4% of R40m equates to R133 333 per month. From this money you will need to pay income tax and give to any friends, family and charities. Don’t plan to spend it all on yourself. Try to draw a smaller percentage in the beginning. This gradually gets you used to your new lifestyle.

Get an estate plan

There are many examples of people winning the lotto being knocked off by family members who wanted their share of the pie. This may sound like the plot of a bad movie but this has happened on many occasions in the past. In order to prevent this temptation, make sure you have a proper will that specifies where the money will go on your death. I would also seriously consider starting a trust. If on your death, your assets are left to a trust managed by independent trustees, there is little point in crazy relatives ending your life prematurely… There will also be little chance for them to squabble over your money, such as the greedy grandchildren of a certain famous man we all love.

If you feel the burden of managing this money is too much to deal with, you can consider placing the money in a trust immediately. Then appoint professional independent trustees to look after your interests for you. This is an option used by many very wealthy people around the world. Just make sure you have the right mix of trustees, who are paid in the right way. As an example, I prefer one accountant, one lawyer and one independent investment expert. More importantly, all of them are paid a fixed monthly fee and they cannot earn any money directly or indirectly from the capital of the trust. This tends to keep everyone honest and focussed on their jobs.


I believe it is nearly impossible for people to adapt to becoming instantly wealthy after winning the lotto. Especially those who have not had much experience with wealth. Those who are best able to cope are usually not motivated by material wealth. I think our lotto must follow the American example. Winners are not given all the money at once. They are paid an annual amount for a long period. For example, if you win a R50m lotto, you are paid R1m per year for 50 years. This gives you time to get used to the idea of being wealthy and limits your ability to make catastrophic mistakes with all your wealth.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?
With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.

Property investment

Property investment: Is it a good idea?

Property investment, good idea or not?

Property investment ins-and-outs

South Africans have a fixation on residential property investment, because we are told from a young age that we have to own a home. So, when we start work we duly buy a home and embark on our lifelong property investment adventure. As we grow older and have children, we buy a bigger house with a larger mortgage. This carries on until we retire and decide to look for a smaller home. Hopefully this time without the need for a mortgage. Many of us never stop to question whether there is a better way to use our money.

The table below shows the long-term growth of all the main asset classes in South Africa and how they have beaten inflation. The growth is calculated annually over very long periods of time. We look at long-term growth because it eliminates the distorting effect of short-term events and therefore gives us a proper perspective on these investments. Where does property investment fit in?

South African asset classes: Performance over the long-term

Asset Class Indicator Long-term annual growth above after inflation*
Shares All Share Index 7,6%
Residential Property Investment ABSA House Price Index 1,5%
Listed Property SA Listed Property 6,5%
Bonds All Bond Index 2,0%
Cash STefI Call 1,0%


Compiled by Galileo Capital. Sources: I-Net, Nedgroup Investments and Absa

*Updated annually since 1900 to 2012, or longest available period.

From the table above we see the best performing investment (asset class) is the share market. Over the long-term it has beaten inflation by 7.6% per year, while listed property investment is the second best performing investment. It beats inflation by 6.5% per year. Residential property investment, in contrast, has only beaten inflation by 1.5% per year since 1966 when the index was started.

The growth of residential property investment as indicated in the table does not take into account the buying and maintenance costs of property. These include transfer duties, bond registration and legal fees. In addition, you will need to pay an estate agent 3% to 7% when you decide to sell. There are also the costs of owning your home. This could average as much as 1% of the value of your home per year. This may seem high. But you need to keep up your home and garden and pay rates or levies.

While most people view a residential property as a low risk property investment, there are some risks to consider. For example, suburbs can go through cycles where the area declines, e.g. Hillbrow or Sea Point a few years ago. If this happens, you may struggle to get a reasonable selling price for a property and rental income will also decline substantially.

You also need to consider the value of the capital that you have tied up in your home that effectively does not “work” for you. An example of this would be a cash-strapped, retired person who lives in a R1 million home that is paid off. The retiree could sell the home and use the R1m to generate more income, which can partly be used to pay rent. The rent on a property investment valued at R1m can be less than the income generated by a properly diversified investment portfolio worth R1m. In addition there will be no maintenance costs. These are be for the landlord’s account. This free up even more money for the retiree.

Financially, it often makes more financial sense to invest your money in growth assets and only rent a home. However, financial considerations are only one of the factors that influence your money decisions. If you are in a sound financial position, you may derive emotional security from owning your home. This cannot be underestimated. Property investment may just be the right thing for you, under these conditions.

Get advice

Will you have enough money when you retire? Thinking of investing? Wondering how to repay your debt? Where to invest your money?

With a dizzying array of asset classes, asset types and more information than anyone can possibly process alone, why not speak to one of our expert financial planners? Get advice that’s tailored to your unique financial situation now.