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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.

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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.

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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.

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.

Summary

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.

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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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.

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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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.

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?

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.