Money lessons for children

Money lessons for children will help them the rest of their lives

Personal financial planning onlineMoney is an integral part of modern living and children who grow up understanding money will have a real advantage in life. It is up to parents to teach their children about money. This should start early with money lessons for children. Our values around money are established at a very young age. It is important to start teaching with money lessons for children. Good money habits for children should be taught from the moment they can speak, because it will be nearly impossible for them to change these habits when they are parents themselves.

What you need vs what you want

We need to assist children to understand that their financial resources will always be limited. Very often parents try to give their children everything they want, especially with high demand items such as smartphones and tickets to the latest music concerts. Use your kids’ demands for these items as an opportunity for  money lessons for children. If they want a smartphone, help them to figure out how to earn and save enough money to buy one rather than just buying one for them. This should include doing extra chores at home to earn additional money; this establishes the principle of extra work leading to more money. In addition, you could help them to open a savings account where this money can earn interest until they have sufficient funds to buy the phone they want. You might even teach them how to start a small business to earn money to buy the things they want. The lessons involved are numerous: marketing, negotiating prices, scheduling workloads and determining what resources are required.

Budgeting basics

Don’t shield children from the real cost of food, clothing and luxuries, they will need to understand these costs when they live on their own. You could start to involve them in your budgeting decisions e.g. what the family spends every month and how this relates to the family income. Teaching your children how to budget is nearly as important as teaching them to read, it should be second nature by the time they leave school. Try to impart knowledge about money without burdening your children with guilt. When times are tough, try to use the situation as an opportunity to explain how the family will adapt and more importantly how to develop a plan to work yourselves out of your situation. These are all excellent money lessons for children.

Investing for the future

By the time your child is in high school, you should be discussing how their savings should be invested. Very few young adults know anything about investing. They might have heard of concepts such as unit trusts and shares but they have limited understanding of what these are. Take the time to explain these concepts to your children and start investing some of their money into a unit trust or Exchange Traded Fund (ETF) such as Satrix to teach them real-life lessons about investing.

Tech them to fear debt

One of the most important lessons about money will be how they manage (and preferably avoid) debt. Try to raise children who have a fear of credit cards and personal loans. The one factor that most often leads to financial success is the ability to save and to avoid debt. Very few people manage to do this and that is why so few people are able to retire comfortably. Remember these useful money lessons for children.

Consistent discipline

Your children need to learn that financial success is achieved by consistently spending less than they earn. Teaching money lessons for children will do the trick. Achieving a balance between instant gratification and long-term discipline is critical. If your children have this discipline by the time they leave home, you will have given them a real head start in life.

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10 Tips for financial planners

Tips for financial planners

Tips for financial plannersHere are 10 tips for financial planners. Starting your career as a financial planner is an opportunity to create a life for yourself that few other people will be able to match. After nearly two decades as a financial planner – including eight years as a co-owner of a planning business, I am sure financial planning is one of the best careers for those who care as much about quality of life as they do about money.

My elderly industry colleagues regularly remind me that financial planning is the best job in the world. If we do our work correctly, we materially improve peoples’ lives in a way that few other professions can. We are able to set up long-term relationships with people that changes lives. These tips for financial planners will help you as much as they’ve helped me.

To me, you should focus on these tips for financial planners that will guide you over your entire career.

1. Build Life-long Relationships 
Try to become a trusted advisor to your clients and make sure this relationship lasts for life. With a long-term focus on relationships, you will not be tempted by short-term objectives that could compromise your advice. I always tell our new advisors to be the client’s personal financial director. Some of my longstanding clients will call me to ask my advice on what motor vehicles to buy. I have no value to add in this decision but they value my opinion and they know that vehicles are a big expense and so must be accounted for by their financial planner. I don’t mind these queries because it is another opportunity to talk to my clients and always leads to improved goodwill.

2. Put Your Clients First
In everything you do, try to put the client first, above your own financial considerations and if necessary before your employer’s priorities. This is especially true if your internal “integrity radar” is alerting you to a potential problem. You might change employers on many occasions over your career but you always take your reputation with you, if you compromise your integrity, you will become the ultimate loser, not your employer. You can only lose your reputation once, it will never recover and you will need to find a new career, probably as a used car salesman.

3. Pursue Success, Not Money
Financial planning is not about the money! This is not the career to get-rich-quickly. If that is your aim, please find another career, preferably outside of financial services. There are great financial planners who have accumulated significant personal wealth but this is a by-product of their success in their careers. If you research the world’s most successful business leaders e.g. Bill Gates, Steve Jobs, Warren Buffett and Richard Branson, you will see that they did not start out to get rich. All of them had a bigger goal, their wealth was a consequence of their success in their chosen fields. If your primary aim is to get rich, you will be tempted to take shortcuts at the wrong time. This is usually how problems start.

Good financial planners are not product sellers, products are simply tools for implementing good advice. There is nothing wrong with being a product seller unless you try to disguise product selling as financial planning. You should always focus on providing the right advice for the client, even if it means that you do not earn money from selling a product. Over time, your good advice will lead to personal financial success.

4. Don’t Make Predictions
Financial planning is not about predicting what is going to happen in markets. If you deal with money, clients often expect you to be able to tell them where stock markets are going in the next few months, what interest rates will do and what is going to happen in the currency markets. You will be tempted to appear knowledgeable so you might give them a prediction based on some research you recently read. Statistically, your prediction is likely to be wrong and this is going to damage your credibility with your client. I often appear on financial shows on TV and radio which leads people to think I have a special insight into financial matters. I am normally asked what is going to happen to our currency or stock market in the next few months and people are always surprised when I answer, “I have no idea”. Predictions about markets always make for interesting conversation but they will inevitably be wrong. Being constantly wrong is not a great way to build your professional reputation. Rather be honest and tell people that you have no idea what is going to happen and neither does anyone else.

5. Specialise in a Financial Planning Area 
The fifth in our list of tips for financial planners deals with specialisation in a specific aspect of financial planning. You can choose to be a generalist – even this is a form of speciality as there are very few competent generalists. My preference is to specialise in one area and become deeply knowledgeable about that aspect of financial planning. I chose investments for high net worth individuals as my area of expertise and I always focus on this area. If a client requires estate planning or insurance advice, I am happy to refer them to another specialist.

6. Don’t Sell Time 
Leverage yourself and don’t sell time. Professions such as lawyers and doctors tend to sell their time by the hour. There are a limited number of hours that one can work in a week which means you either have to work every hour of every working day or charge massive hourly fees if you want to earn well. I prefer to work on retainers so that I am not forced to sell hours.

7. Build Yourself a Public Profile
Write, present and educate people about money. Try to build a public profile as a knowledgable person in your chosen field. Write regular articles and get them published where possible. The internet is a great forum for getting published and you can use your social media profile to “broadcast” your articles. Try to get on the radio and TV as often as possible and always make yourself available to the media. Journalists are not good at forward planning so they will usually contact you at VERY short notice for an interview. Don’t complain, rather make it as easy for them to call on you as often as possible. You will quickly become their default contact which will guarantee you exposure.

8. Build Your Interpersonal Skills
Work on your interpersonal skills, especially client coaching skills. Technical knowledge is important but it is only the first step, there are many technically knowledgable people in our industry but very few of them can impart this knowledge to financially unsophisticated people in the proper manner. They usually resort to jargon which either intimidates clients or confuses them.

9. Always Be Available
Always be available to your clients when they look for you, especially if you have to give them bad news. Investment advisors tend to hide from their clients when markets are falling which is a cardinal sin. Always return calls and emails within one working day. This builds trust with clients and reminds them that you are there for them and will look after them, no matter what is happening.

10. Choose Clients that You Can Relate to
The last in our list of tips for financial planners is to choose clients who you can relate to on a personal level. If a potential client makes you uncomfortable at the start, pass that client to someone else. I have always regretted taking on clients who I did not “gel” with at our initial meetings. When stock markets or other circumstances work against you, it is important that you have a good relationship with your clients so you can work through the bad times. If you make an outright error, it is often possible to recover from this by being honest in your communication with your client. Some of my best client relationships were built on my recovery from a mistake. My clients always knew that I was acting with integrity and the mistakes were honest ones. More importantly I alerted them to the error as quickly as possible and I ensured that I rectified my mistake quickly.

In summary, use these tips for financial planners. If you protect your integrity at all costs, focus on your clients and their goals and develop a long-term game plan for your career, you can build a wonderful and constructive life for yourself, your family and your clients.

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Don’t get caught by unit trust fund managers

Personal financial planning onlineAs a close observer of the unit trust industry for nearly 20 years, I still struggle to find a balance between my faith in unit trusts as investments and my cynicism about unit trust fund managers. For instance, I really have to try not to laugh when I meet new product providers who promise (with a straight face) that they will provide great service and fantastic returns at low costs. All in the best interests of the investor, of course.

I think some of them actually believe their own stories. Which makes it even harder for me to keep a straight face, because we all know that their first priority is to generate profits for themselves. Here are some examples of how these product providers deal with unsuspecting retail investors.

Funds doing badly? Launch some new ones!

In a recent report by Morningstar Fund Research (2012: Annual Global Flows Report) I was surprised to see that more than 80% of all new money invested in unit trusts in 2012 went into funds that have been in existence for less than three years. This was for all new investments into all unit trusts around the world. I was surprised, because more than 80% of the world’s money is invested in funds that are older than three years. So they have a measurable track record.

Why have new funds attracted so much new money? I believe the answer is simple. Older funds went through the 2008 financial crisis, which severely dented their investment track records. Unscrupulous product providers know that retail investors place heavy emphasis on recent past performance. They therefore simply launched new funds in 2009 and 2010. These new funds benefitted from the market’s inevitable recovery after the crash, giving them a great starting track record. Unsuspecting investors can easily be convinced these new funds are being managed by a new generation of genius fund managers. This is why they attracted most of the new investments in 2012.

The financial crisis is certainly not the only cause for fund managers to launch new funds. If one sector of the market starts to perform particularly well, they will often launch a new fund with a catchy name to take advantage of this trend. One SA fund manager launched a fund based on “40 cutting edge companies” selected by a magazine. This was done to take advantage of the tech bubble formed from 1997 to 2000. The fund was launched in September 1999, six months before the IT sector peaked.

Nearly 13 years later the NASDAQ index (the one to watch for all things tech related) is still more than 30% below the levels seen at the peak in 2000. There are more examples of this behaviour. Have you noticed how few small company/emerging company funds still exist in SA? There used to be many of these funds, when small caps were the flavour of the month.

Fees

Not long ago I had a meeting with one of SA’s large unit trust fund managers. They told me clients who invested via their parent company will pay significantly higher fees than my clients, if I decided to recommend their products. The reason for clients of the parent company to pay higher fees? To protect margins of the parent company. This will be good for my clients. But once again thousands of investors are paying more than they should, simply to keep profits high in difficult markets. I am not surprised the SA Government wants to regulate fees in the savings and investment industry.

Another favourite trick for fund managers is to charge performance fees. This is such a fabulous concept. Managers earn money when their investors earn money. Why is this a problem? Because most fund managers charge annual fees in addition to their performance fees. In my view, you should either earn a performance fee or an annual fee. Certainly not both. This seems like a one-sided bet that enables fund managers to earn money irrespective of their performance. I think investors should be charged a fair fee for good performance. Nothing more.

There are some good unit trust fund managers

Before you think all unit trust managers should be placed in Purgatory, along with bankers in Britain and America, I should tell you that there are some good fund managers. Sadly in South Africa most of the great ones are getting a bit older and less focused on managing money. This means you cannot simply rely on the old favourites anymore.

To help, here are some pointers for choosing good funds:

• Cost: Try to invest in funds that have the lowest cost in their category. Avoid performance fees where possible.

• If you are investing in actively managed funds, invest in owner-managed funds. Or ensure the fund managers have a large portion of their personal wealth invested in the fund. This tends to focus the mind.

• Give a preference to focussed investment companies rather than insurance company unit trusts. There are some great unit trust fund managers who work for insurance companies. But they are in the minority.

• Track record is important. I like funds that have been in existence for 10 years or longer. Unless the funds are indexed, in which case their track record is irrelevant. A fund that is older than 10 years, beating its benchmark, is probably going to repeat this performance again.

• Are they consistent in applying their investment philosophy and do you understand it?

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Uncertainty and volatility must not scare you

Uncertainty and volatility can seem scary… don’t let this worry you

Uncertainty and volatility can seem scaryThe devaluation of the rand. Labour disputes in the mining and agricultural sectors. Concerns about our economic future. These issues all unsettle investors. The fact that the stock market performed well in 2012 is amplifying the fear. Investors worry the market cannot continue going up for longer. Should you be worrying about uncertainty and volatility too? What should really worry you; uncertainty, volatility or inflation?

Volatility is not risk

I always get grumpy when I read marketing material from fund managers. They brag about the low volatility of their funds as if this means their funds are somehow less risky than their competitors’. It’s hogwash to equate uncertainty and volatility to risk. Especially if you are a private person who needs to make smart, long-term investment decisions. If you want to generate real capital growth, pray for uncertainty and volatility. Investments with no uncertainty and volatility are either very low risk and stand little chance of beating inflation, or these are Ponzi schemes.

Uncertainty and volatility give opportunity

Where would you rather invest your money today, in platinum miners or the listed property sector? I’m sure many people prefer listed property. The returns have been great (especially last year). There is a good chance these companies will generate income and profit in the next few years.

What about platinum? The unions seem hell-bent on destroying their source of employment in a lethal game of chicken to get higher wages for a reducing number of employees. Some platinum miners are even being publicly targeted by Government. This is never a good sign for investors. However, if forced to allocate money to only one specific sector today, I would consider platinum miners and not listed property. There is good value in these miners. They have no international competition, so they have a natural monopoly. The uncertainty and volatility facing the sector is precisely what creates the investment opportunity.

Manage uncertainty and volatility, don’t avoid it

Most international markets, including SA, have performed well recently. Uncertainty and volatility has reduced and most equity investors are in a comfort zone. This is probably a good time to start worrying. Complacency coupled with equity investment is never healthy. The chance that equity markets will generate reduced performance in the years ahead is increasing. It will be difficult for most asset classes to beat inflation over the next three to five years.

Am I saying you should sell out of equities? Definitely not. I do recommend you diversify your portfolio across a range of sectors and asset classes. No-one knows if the stock markets will continue to run for the next year or three. I prefer earning dividends and not interest on cash. Optimally diversify your assets  in volatile conditions as an effective strategy.

The best investors never invest with absolute conviction. They realise the stock market will always do the unexpected in the short-term. This means they don’t bet the house on one particular strategy. Smart investors allocate some capital to one strategy. But if they’re wrong, they will have capital allocated to other strategies too. They do not take unsustainable losses. Absolute conviction with investment is always fatal to capital growth.

Inflation is your real risk

Over long periods of time the effect of inflation on your money is your real concern. If you don’t invest in productive assets such as shares and commercial property, you are guaranteeing the value destruction of your capital. This is especially true if you invest in cash and other “low risk” assets, because you want to avoid uncertainty and volatility. This is not a good strategy for long-term investing.

Productive assets are by their very nature volatile. Ideally you should focus on the income from these assets. If the income they generate increases faster than the inflation rate, the volatile nature of the capital invested is not relevant. It’s one of the reasons why Warren Buffett avoids IT companies. He cannot predict their income in the next 10 years. Therefore he allocates his capital elsewhere.

If the markets take a beating in the next year or two, I will probably increase my allocation to shares beyond my normal targeted percentage. But I will always maintain some asset class diversification. Just in case.

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A financial services career is a great choice

Here is some advice about a financial services career

Advice about a financial services careerIf you want a career that is challenging, mentally stimulating and fulfilling, consider a financial services career.

After nearly two decades in the industry, including eight years as co-founder of a financial services business, I have watched many people succeed beyond their expectations. But many have failed, sometimes spectacularly. Here are some pointers that will help you become successful and avoid failure in a financial services career.

  • Be an advisor

When you’ve decided upon a financial services career, try to become a trusted advisor to your clients. Ensure this relationship lasts for life. With a long-term focus on relationships, you are not tempted by short-term goals. These could compromise your advice. In everything that you do, put the client first. Even before your employer’s priorities. This is especially true if your internal integrity radar is alerting you to potential problems. You might change employers on many occasions over your career. But you always take your reputation with you. Never compromise your integrity. You will be the ultimate loser, not your employer.

  • Relationships

Be happy and proud of the work you do in your financial services career. Remember, it’s always about people. Try to work with people and companies you admire.

  • Money isn’t everything

It’s not about the money! A financial services career is not a get-rich-quick scheme. If this is your aim, find something else to do. Preferably outside of financial services.

There are people who have accumulated significant personal wealth in financial services. But this is a by-product of their success in their careers. If you research the world’s most successful business leaders (Bill Gates, Steve Jobs, Warren Buffett and Richard Branson), you’ll find they did not start out to become rich. All of them had a bigger goal. Their wealth is a result of their success in their chosen fields. If your primary aim is to get rich, you will take shortcuts at the wrong time.

  • Don’t predict anything

If you manage money in a financial services career, clients often expect you to tell them where stock markets are going in the next few months. What will interest rates do? Or, what is going to happen in the currency markets? Statistically, if you tell the future it will be wrong. This is going to damage your credibility. Being constantly wrong is not a great way to build your professional reputation. Rather be honest. Tell others you have no idea what is going to happen. Neither does anyone else.

  • A public profile helps with a financial services career

Build a public profile for yourself. Write, present and educate people about money. Create a reputation as a knowledgable person. Write regular articles and get these published. The internet is a great forum for getting exposure. You can use your social media profile to broadcast your articles. Try to get on radio and TV often. Always make yourself available to the media.

  • Get skilled

Work on your interpersonal skills, especially client coaching skills. Technical knowledge is important. But it is only the first step. There are many technically knowledgable people in our industry. Very few of them can impart this knowledge in the proper way.

  • Be available

Always be available to your clients. Especially if you have to give them bad news. Investment managers in financial services careers tend to hide from their clients when markets are falling. This is a cardinal sin! Always return phone calls and emails within one working day. This builds trust with clients and reminds them you are there for them.

In summary, when you embark on your financial services career, protect your integrity at all cost. Focus on your clients and their goals. Develop a long-term game plan. In this way you will build a wonderful and constructive life for yourself, your family and your clients.

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Practical advice on how to save

The starting point to becoming wealthy is that you have to spend less than you earn. More importantly, you have to do this every month of every year so that you are accumulating capital on an annual basis. It seems rather obvious and is definitely common sense. But it is very difficult for most people to do this over their lifetimes. That’s why so few people are able to retire in a comfortable financial position.

Here are some real-world tips on how to save your money, from people who have succeeded in retiring well.

Shopping

People who earn a good salary and still find themselves in financial difficulty every month usually struggle with their shopping habits. More to the point, they struggle to control the impulse to buy items they can’t afford. If you are serious about saving, you need to plan your shopping in a structured way. You need to resist the urge to splurge.

Plan your shopping so that you buy non-perishable items in bulk. Try to shop for these items every six months. Goods such as detergents and toiletries are much cheaper when bought in bulk. By buying in bulk you will save money and also reduce the number of trips to the shops per year. This reduces your opportunities to spend.

Unless you inherited money or have a wealthy life-partner, it’s not possible to be a disciplined saver and a fashion victim at the same time. South Africans love to show off. We buy the most expensive cars and wear the biggest brands; all with money we don’t have. No wonder the luxury brands love our market. We are addicted to conspicuous consumption.

If you want to be financially free, you have to break this habit. When you shop for clothes, buy them out of season. For instance, buy your summer clothes at the end of summer (or even better, in autumn), when all the stores have big sales. Try to avoid buying branded goods, they are always over-priced and are often equal in quality compared to cheaper, unbranded clothes.

Debt

If you are funding your lifestyle with debt, you are making the shareholders of banks wealthy and limiting your chances of becoming financially independent. This is especially true if you have credit card debt, personal loans or overdrafts. In order to break this debt cycle, you need to eliminate this debt. Start by listing all your debt with the percentage interest you pay on each.

Pay off your most expensive debt first. Move on to the next most esxpensive debt. In future, try to avoid all bad types of debt. These include store cards, overdrafts, personal loans and credit card debt.

Bank charges

Review your bank charges annually to see if you have the most cost efficient pricing package at your bank. Similar to cell phone contracts, you can buy service “bundles” from banks, so make sure you are using the best bundle to suit your banking habits. You should also shop around at different banks every year to see that your bank is offering you the best deal.

Food

Try to cook bulk meals on weekends that can be frozen in meal-sized containers. This saves on takeaways and restaurant costs. Bulk shopping for food is much cheaper than buying for single meals only. It takes a bit of effort and planning. But you can reduce your food cost substantially, especially if you currently live on fast foods.

Vehicles

Unless you are already wealthy or travel for a living, there is no need to buy a new car… ever. Most cars are so well constructed they will last five to eight years without a problem. Buying a one-year-old vehicle will save you nearly 30% of the cost of a new car.

Insurance

If you drive a car, you need vehicle insurance to protect you financially. I realise this is not going to help you become financially independent. But it could prevent a financial disaster. Here are some ways to save on insurance costs.

Increase the excess on your insurance. This will reduce your premiums significantly. Normally when you submit a claim the insurance company will ask you to pay the first part of the loss. This is called an excess. If you increase this above the minimum required amount, it indicates to the insurer you are willling to accept a bigger part of the risk. It also means you are less likely to claim for small items. Insurers will reduce your premiums substantially. If you pay your vehicle and household insurance annually, you will also get a discount on your premiums.

Budgeting tips

If you are struggling to budget properly, consider starting with an annual budget, rather than a monthly one. It is often easier to find gaps in your budget if you plan over a full year. Once you have a proper annual budget, you can break it into 12 monthly budgets that take into account your large, infrequent expenses such as holidays.

Here are some pointers to help

  • Plan your savings first. Aim for 15% of your total salary to commit to savings
  • Plan for your major expenses through the year
  • Necessities must not be ignored. You might be able to scale them down though, e.g. cars
  • Make use of personal budgeting tools. These can be found online and via some banks. My favourite is 22seven (now owned by Old Mutual plc)

Get advice

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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.

 

Is the JSE on the road to nowhere?

JSEThe one question I’m asked most often is: “Where is the JSE going next?”. The short answer is I have no idea and nor does anyone else. However, we can use history to provide some guidelines. More specifically, we can use long-term valuations of the JSE to give us our best indication of what to expect in the medium term.

Price/Earnings ratios are instructive

The index level of the JSE All Share Index is a largely meaningless number. In essence it shows the direction and speed at which all share prices are changing on a daily basis. Whether the index is at a level of 22 000 or 40 000 is not really meaningful to long-term investors. What is relevant is how quickly the index level changes over a period of time. For example, if the index drops from 40 000 to 30 000 over a period of six months, long-term investors should start getting interested because they might find bargains.

If the JSE All Share Index is trading close to all time highs, should we infer that the whole stock market is expensive? I don’t think so. Instead, I prefer to look at the price/earnings (PE) ratio of the market to determine when the JSE is starting to look pricey.

The PE ratio of the market tells us how many years of future profits will be required to pay for the price of the market today. The long-term average PE ratio of the market is 14, which means it will take 14 years’ future profits to pay for the market at today’s prices. The graph below shows us the PE ratio of the market from 1998 to 31 January 2013. The solid black line is the long-term PE of 14 and the two dotted lines (above and below the solid line), indicate when the PE has moved significantly above or below this average.

JSE PE Graph 1998 to 2012

JSE PE Graph 1998 to 2012

It is only when the market value moves above or below these dotted lines that I start to worry about the future direction of the JSE. If the PE rises above the top dotted line, it means the JSE is starting to become expensive. Therefore it is more likely to fall over the medium term than it is to rise. For investors it is a time to be particularly cautious with your money and perhaps consider taking some profits, especially if you are over-invested in shares. At current levels, the All Share Index is near 40 000. But the PE ratio is still below 16, which means it is not expensive.

This does not mean I think the market is cheap, far from it. I believe the market is cheap when the PE drops below 12. At present, some sectors of our market are very expensive and should be treated with caution. Most retailers and international companies are very expensive. New investments into these sectors should be made with great caution. Other sectors of our market are offering good value though. This is why the PE of the whole market is not too high.

Adrian Saville from Cannon Asset Managers points to commodity and domestic industrial firms that have been overlooked by international investors as sectors offering good value. Sectors that are currently in the news for all the wrong reasons, e.g. platinum miners, are offering great value.

We need to remember the PE ratio is an average. Real problems can be hidden by averages. Just like the man who was an average temperature, because he had his head in a fire and his feet in ice. I feel you should treat this market with caution. But there is still value to be found for patient investors.

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Optimists win

Will it surprise you to know wealthy people are generally happy optimists? Probably not. In fact, most of us probably believe affluent people are happier because they are wealthy. But most of us will be wrong. Those who have achieved a measure of success in their lives have generally been optimistic and happy over their entire lives. This is also true for achievers in the fields of business, investing and sport. Those of us who live at the tip of Africa in a turbulent country can learn from these achievers.

Happy people make more money

Happy peopleA recent blog post on The Wall Street Journal site (It pays to be happy, 4 January 2013) quotes new research that finds people who are consistently happy with their lives typically earn more than unhappy people. Happy people earn an average of R32 000 per year more than the average. More worryingly, those who are “profoundly unhappy” earn 30% less than the average. It proves the point that there is a link between wealth and happiness. But it seems the path to wealth starts by being happy. Unhappy people are less likely to prosper in their careers and therefore are also less likely to be wealthy. It’s interesting that people who are generally happy from the age of 18 to 22 tend to be more successful later in life.

Optimists

After years of advising wealthy individuals, I have always been surprised by how much more positive my wealthier clients are than those who are of average or below-average wealth. I used to attribute their positive outlook to the fact that they had money to solve any potential problems. But as I found out more about these clients, I realised I was wrong. When I started to ask my clients about their early lives and in particular how they responded to setbacks, I was always surprised by how positive they were – even from an early age. They tend to have a natural belief in their ability and feel if they apply themselves positive results will follow. This is particularly true for entrepreneurs who started their own businesses.

When you ask these entrepreneurs what made them successful, many of them attribute their success to their perseverance. It’s highly unlikely a natural pessimist would persevere in a tough business, when things are going badly, whereas optimists would. It’s no coincidence most CEOs of large listed companies are optimistic by nature. Many of them are accused of being cheerleaders who always focus on the positive, without much regard for the problems facing their companies. To some extent this is a valid criticism, but one needs to understand these CEOs do not view problems in the same light as pessimists.

Investing: Try being an optimistic realist

In my experience successful investors (meaning people who have done well over decades), are almost universally optimists at heart. However, they are not unrealistic or irrational in their expectations. When I meet new people and we discuss investments, I try to get an understanding of the person’s outlook on life.

Natural pessimists are often calm in the midst of an economic meltdown because they were expecting it. However, when the market is doing well, they are usually concerned about the next crash. This might seem like a sensible attitude to money (it is), but pessimists usually have limited wealth in their later years.

The cause is simple. As they have always been “sure” the markets will crash they have tended to under-invest over their lifetimes. This decision has inevitably cost them many opportunities.

Personally it’s my 2013 goal to approach investing and business with a realistic, but optimistic view.

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Investment advice for 2013

How to manage your investments and why predictions are a waste of time…

2013 200x300Every year I get asked to make a range of predictions including: what will the rand do, how will the JSE perform, will the residential property market recover and what will happen to the overseas markets?

Without fail, I try to explain that any prediction – irrespective of who makes it – is largely worthless. After I have explained why, some people look at me with a quizzical expression and promptly ask me to ‘guess anyway.’ If we look at what happened in 2012 as an example – hopefully we can see why investment predictions are a waste of time.

Best performing assets in 2012

According to the Economist magazine, the best performing asset class in the world in 2012 was Greek government bonds. These returned more than 80% for the year. Portuguese government bonds were a close second. I cannot recall many investment gurus predicting this. More to the point, you would be hard-pressed to find many globally diversified unit trusts that had a sizable allocation to either of these asset classes.

I am not critical of the fund managers who did not allocate 20% of their portfolios to Greek and Portuguese bonds; it would have seemed reckless at the time. However I believe it proves the point that you cannot formulate a proper investment strategy based on predictions. You will either be horribly wrong or miss out on the spectacular performers.

In terms of stock markets, it has been widely reported that the Venezuelan Stock Market rose by more than 300% for 2012 (not sure why the Economist missed this) whilst Turkey and Nigeria’s markets returned nearly 60%. Even Greece’s stock market outperformed South Africa’s with a return of 32%. I am sure that none of these sectors would have been on your Top 5 Best Ideas list for 2012.

How to manage your shares in 2013?

At current levels, the PE ratio of the JSE is 15 which means it is now slightly above long-term average value. The market is not very expensive yet, we have seen PE’s of 20 in the past. There are still pockets of value – resources and construction in particular – but one needs to be cautious about some of the other sectors including property, retail, industrials and financials.

I think valuations should play a crucial role in any new investment decisions for 2013 – even more than they normally do. If you have new capital to invest in the JSE, you should seriously consider phasing your money into the market over the next few months.

If you are a stock picker, aim for sectors of the market that are trading at or below their long-term average PE’s. The retail sector is near its highest valuations and cannot offer great value to investors at this stage. However if I were a long-term investor with exposure to retail shares, I would not sell all my shares at this time. I would rather be reducing my exposure so that retail forms a smaller part of my portfolio – below your long-term ideal allocation.

It is important to ensure that you are not absolute in your investment decisions. So, if the retail sector continues to boom for the next three years, you should still be able derive some benefit from the boom. However if it collapses in June you will still be in a good position if you have already taken some good profits in January and allocated them elsewhere.

Try to remember that more than 50% of your total equity return comes from re-investing your dividends over time. If you are out of the stock market completely, you are not earning dividends therefore you are limiting your potential returns in the long-term.

It is also important to watch the profits (earnings) and especially the dividends paid by the larger listed companies. If profits and dividends increase more than their share prices increase, the valuation of these companies will decline. This is obviously an ideal scenario and I am not convinced that this will unfold (especially for the retail sector) but it is not impossible.

To index investors

This is one of those times in the market when active stock pickers will be arguing that you are crazy to invest in the index when it is breaching all time highs on a regular basis. As an index fan, I think this argument has limited merit. There are great indexed investments that are still worth consideration. Personally, I like the ETF’s that limit your exposure to sector bubbles. For example equally weighted ETF’s and fundamental indices are worth consideration, especially if you phase your purchase into the index over time.

At all times, make sure that you focus on the cost of your investment, the lowest cost investments inevitably provide the best growth over longer periods of time. This is particularly true of ETF’s.

I am not normally a fan of offshore equity investments because I think your returns (when adjusted back to rand values) are muted. However the valuations of international markets are still low and do provide some diversification benefit to SA investors, especially if our market reaches PE’s of 18 to 20.

Although I am a massive fan of the listed property sector, I am very concerned about valuations. I would be very cautious with this sector.

In summary, try to maintain a balanced investment portfolio through this year. If you have firm views on the direction of the market, try to ensure that some of your investments will still do well even if you are wrong. This means having a diversified portfolio of shares and other asset classes.

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Be your own fund manager

Stock marketTrying to determine whether the JSE is expensive, what is happening to resources, where the rand is going and what further damage politicians will do to our markets is an impossible task. Many investors (and their financial advisors) choose to outsource control of their investments to fund managers of flexible or balanced funds. The belief (or hope) is that the fund manager has a better insight into the future than the rest of us. Frankly, I think these investors (and their advisors) are making a big mistake. Private individuals who control their own asset allocation in a rational and structured way will do much better in the next few years than flexible or balanced funds.

Fund managers make structural errors

Many credible fund managers (not all unit trust managers are credible) make two structural mistakes with their balanced or flexible funds over the long term. Firstly, they are usually under-invested in equities over longer periods of time and secondly, they are almost always under-invested in listed property. The usual explanation from balanced fund managers about their under-investment in shares is that they are protecting investors from potential losses if the stock market drops. A fund manager who remains conservative with equities in a balanced fund over the long term is more likely to keep his job because he won’t have a blow up in a 12 month period. This does not necessarily mean he is doing a good job for his investors.

Listed property is more interesting, it is very rare to find balanced funds with a large exposure to property companies. This is partly because the property sector is quite small in comparison to the rest of the stock market. However this is not the only reason. I have a view (not scientifically proven) that most balanced fund managers are equity managers at heart and are not fundamentally comfortable with listed property. They will take small positions at certain stages in a market cycle but for the rest of the time will avoid property. As you can see from the table below, an underinvestment in property (as shown by property unit trusts) was a very poor decision over the last five years.

Asset Class Index/Fund Name 5 year annualised returns
Shares All Share Total Return 8.14% per year
Property Average of all property unit trusts 12.21% per year
Property Best Property Unit Trust 16.18% per year
Balanced Funds Average Balanced Funds 7.14% per year
Balanced Funds Best Balanced Fund 10.08% per year

Source: Morningstar

One could also infer from the table that the average balanced fund manager was very risk averse over the last five years, in a time when interest rates were declining, which was great for local bonds and listed property.

Take control

For a private investor, there are few limitations on the portion of capital that you can allocate to any asset class. It is unlikely that a very large balanced unit trust will invest 15% or 30% of its capital in listed property because the property sector is too small. This would not be a problem for an individual and so it does not make sense to allocate the bulk of your capital to a balanced fund where you will be limited from investing in quality listed properties. Having said all that, I am not advocating that you place all your money in listed property – far from it. I feel you should create a structural asset allocation for yourself that is not determined by external factors. To start with, if you adopted a really simple approach to asset allocation, you could do the following:

Asset class Percentage Allocation
Shares 50%
Bonds 25%
Listed Property 25%
TOTAL 100%

 

The real benefit of this approach is that you determine your allocation to growth assets based on your own situation. It is only by investing in growth assets (equities and listed property) on a sustained basis, that investors will make the maximum possible return without taking excessive risk. If the stock market continues to rise, fund managers are likely to reduce their exposure to shares and listed property even further. This is because they are worried that the market might dip in the short term but a short term dip might not be relevant to you. If you bought quality growth assets at a great price, the fact that they fall for a year or two might be irrelevant if you are investing for 20 years. You might have bought the investments 8 years ago and so a 15% drop from current levels would be small in the context of your overall investment performance.

My preference would be to allocate portions of your capital directly to an equity fund, property fund and bond fund. You can then determine when to rotate asset classes based on your own goals rather than the fund manager’s.

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.