Wise words on investing.

I know that most people do not enjoy reading financial literature so I will save you the agony of doing so and give you extracts from stuff that I have read.

One of the best books on investing is a book called "The Intelligent Investor" by Benjamin Graham, the guy that taught Warren Buffett (the richest investor ever), how to think about investing.

Now the secret here (and what I love about it) is that he doesn't try to give you some magic formula to follow, he just gives you the fundamental truths.

Graham said that sooner or later, all bull markets must end badly.
- October 1987 US markets collapsed.
- Crash of 1929-1932 wiped 70% off the market
- 2008 Credit crunch saw SA shares drop 40% high to low.

The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism, sell into optimism and buy into pessimism.

He said that there is a persuasive argument for using the method of “rand-cost averaging” when investing into the market.

Graham observes that he has not known a single person who has consistently or lastingly made money by just following the market.

Graham observes that there is an illusion that shares in leading companies could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels.

Graham observes that you should buy your shares the same way you would buy your groceries, and not your luxury items (like perfume if you are a lady). Always ask “How Much?”

Buy companies that are trading not far above their tangible-asset value. (physical property and financial balances) Also called Book Value, NAV (divided by fully diluted issued shares).

Speculation is always fascinating. If you want to try it, put aside a portion of your money, the smaller the better, and never add to it.

Since you cannot predict the behaviour of markets, you must learn how to predict and control your own behaviour.

Ways of investing for the novice investor:

* Buy unit trust funds

* Give to investment manager to invest and manage

* Use “rand-cost averaging” to invest over time. (buy the same amount of shares every month over the period of investing) This is part of “formula investing”

* Diversify between Shares and Cash using a ratio of 75/25 after a crash and inverse as Bull market develops (re-balancing the portfolio).

Investing consists equally of three elements:
· You must thoroughly analyze a company, and the soundness of its underlying businesses.
· You must deliberately protect yourself against serious losses.
· You must aspire to “adequate”, not extraordinary, performance.

People who invest make money for themselves; people who speculate make money for their brokers.

People believed that the test of an investment technique was simply whether it “worked”. If they beat the market over any period, no matter how dangerous or dumb their tactics, people boasted that they were “right”. But the educated investor has no interest in being temporarily right. To reach your long-term goals, you must be sustainably and reliably right.

If you want to get to a specific destination you can get there by driving at a 120km/h, or you can get there in half the time by driving at 240km/h. If you survive, are you “right”? Should everybody try it because it worked? Trying to beat the market is much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.

Oscar Wilde joked that a cynic “knows the price of everything, and the value of nothing” As an investor you should focus on the value of an investment, not only on its price.

Stages of life and your investments.

Following on from my last posting, I want to outline the stages of your life regarding investment. During my early years in the investment industry, I was lucky enough to share time and space with 4 extraordinary people when it comes to filtering out the noise and getting to the essence of the matter.

In the 80's and 90's, financial advisers or "brokers", were trained to sell policies like any other commodity. They received very little training and were paid a commission based on sales, not value added to the client.

I was taught the reverse in the sense that my mentors focused on the philosophy of adding value to the client and the "sales" will follow.

One of the first things they explained to me was the 4 life stages of "Man" as far as preparing for financial success goes.


Age 0 to early 20's

During the first 2 decades of your life, the basis of everything that will follow in your life is established mainly via your parents. Some of us are not fortunate enough to have a stable upbringing and the road for them are a bit harder but never impossible.

During these years you are creating the most valuable asset you will ever have, your education. Without knowledge you will always have to play catch-up. I am not only talking about the pure theoretical knowledge we gain in school, I am also including here social skills, street smarts, experimentation with life and the respect we get for it from suffering failure and enjoying success.

Important stuff to do in this part of your life is to gain a healthy respect for money. Learn how to work with it from an early age by getting total freedom with your allowance and know that if you get the balance right between instant gratification and saving for a rainy day, you will one day live without having to worry. As you can see, this is where the parent plays a huge role!


Age early 20's to late 30's

The next 20 years or so of your life you have to dig in, build a career with the knowledge gained during the first 20 years and create a lifestyle you can afford. These are the "Duracell Bunny" years! You have Soooooo... much energy and if you can channel that into something you are passionate about, the sky is the limit.

This period of your life should not be wasted on procrastination. You have to be out there, working till all hours of the morning to become the best in whatever you are doing. You have to prove yourself and create respect as an individual in the world of independence. You have to be focused and take chances. If you lose money, you have enough time to make it back.

Success will not be measured by what you know, but how you apply it!

Financially the most important thing to remember if that at the end of this period, you should have established a lifestyle you can afford, and be debt free.

If you reach 40 and still ask the bank to lend you money to buy the latest model BMW or to buy a bigger house, you are spending money you should be investing in your children's first 20 years, or falling into the trap of never being satisfied with what you have got.


Age late 30's to early 60's

Usually you are settling down into a stage of your life where you can consolidate and start investing excess cash into a diversified wealth creating portfolio. You should implement an investment plan and stick to it. Because you are debt free, you can create wealth for yourself and not the banks. Doing some future cash flow projections and getting to understand your different investment options are crucial.

These are the high income years of your life because your skills are in demand and you have established a presence in the market. It is important to protect this potential income stream by taking out life and disability cover. Do not get tempted by "get rich quick" schemes and do not deviate from your field of specialization. Don't spread your attention too thinly by joining every club, society and committee you get invited to.


Age early 60's till death do us part

Never retire! You are entering the years where you should be "financially independent", meaning you have accumulated enough assets to provide you with sufficient income to sustain your standard of living without having to work.

Your ability to generate income by applying your wealth of knowledge and experience should be kept alive by doing something you want to do and not because you have to! These are the years where you can become significant by giving back to the community by sharing time, money and wisdom.

The golden rule here is to not lose what you have accumulated. You should have a plan of "wealth protection" in place and stay away from risky wealth creation ventures. By this time you should have established a relationship with a trusty investment advisor that can ensure that investment decisions are made without emotions.

In conclusion I want to mention that these 4 stages have no sense of time in real life. Some people start to give to others from the day they are born and others never have enough investments to be financially independent. Some people can retire at 30 and others can never drive a fancy enough car.

BUT if you follow the steps of, get an education, give it all you've got, consolidate in your specialized field and share your wisdom, you can live a happy life.

Failing to plan....

The best way to achieve something is by setting goals. When you set out on a long journey you have to start with knowing where you are going. This should be backed up by a "time/destination" plan (when are you going to be where?).

It is like the F1 qualifying sessions before the main race. The race track is divided into sections and if a car passes a specific point, they can calculate its relative position.

In the same way you can set goals for your financial life. At some stage you have to sit down and ask yourself "Where do I want to be and when?" I have recently spoken to 2 people about financial planning and was surprised by the attitude in the one case, and the level of unpreparedness in the other.

If your attitude regarding financial planning is that you do not need to think about it because you are going to work forever and earn an income to support your lifestyle, I want to make the following comments:

• What happens if you lose your job and can't find a new one because the economy collapsed, you are too old, you are replaced by better qualified people, you are replaced by a computer, and so many more!
• What happens if you are self employed and become disabled?
• What happens if you become ill and can't work for long periods of time?

My point is that there are many things that can go wrong.

If your attitude is that I am waiting for something to happen before I start planning, think again!

• Don't wait because you think that you are going to get married and that will sort things out!
• Don't forget about planning because you are still living with a bunch of people in a house or at your parents and the cost of living is seriously distorted!
• Don't wait for the dream job or salary increase, it may never come.

I believe you have to do the following: Understand what you need per month to support your standard of living. This will be the amount that covers all your costs (bond re-payments, food, education, social, sport, taxes etc.). This amount will change as time goes on but you have to understand what you spend to understand how much you need to invest in yourself to generate an appropriate income.

Let's look at an example:

JoeSoap is 30 years old and has the following expenses each month:

• Rent for flat R3 500
• Water/Lights R150
• Food R1000
• Gym membership R300
• Short term insurance R1 000
• Petrol R750
• Medical Aid R700
• Budget for car service and December holiday R500
• Disability cover R500
• Weekend social R600

The total expense per month is R9 000

90% of the people I talk to can't tell me what they spend on average per month! This is like driving without knowing how much petrol is in the car!

To spend R9 000 per month after tax, JoeSoap needs to earn R122 000 per year (R10 167 pm) before tax. If he wants to stop working now and continue spending R9 000 pm until he is 90 years old, he has to have R3 800 000 invested that earns a 2% real return (more that inflation, so if inflation is 10%, his investments have to earn 12%).

NOW JoeSoap can start putting things into perspective!

IF he wants to increase the R9 000 to R12 000 per month, he has to have R5 000 000 invested, or earn an income of R170 000 per year before tax (R14 167 pm).

IF he thinks that he can get a new job that pays R15 000 per month before tax and can work for another 20 years, with annual salary increases that is on average 5% higher than inflation, and carry on spending an inflation adjusted R9 000 pm with the balance invested, he can retire at 50 with the equivalent of R3 000 000 under investment and carry on spending the R9 000 pm (inflation adjusted) until he is 90 years old.

IF we take the same info as above but JoeSoap wants to spend R11 000 per month that increase with inflation for the rest of his life, he has to either work for another 24 years or earn R19 400 per month before tax for the 2o years, with the balance of income over expenditure invested every year.

To sum up: Doing these calculations is very easy and I can assist where needed. They are essential to know how much disability or life cover you need, how much you can spend with what you earn if you want to build up a nest egg or when you will reach a stage where you have enough investment income to change your situation from having to work to wanting to work.

Tax and your Investments.

There are some things that I just don't like doing, such as standing in a queue and paying for parking. Some things I accept as inevitable such as dying and paying taxes, I just don't want to seem over enthusiastic in pursuing them.

Therefore I pay my taxes, but only the proper amount. I can't go into the detail of tax on investments now, but there are some very basic things one can consider when investing and I will highlight them in this posting.

First, let us understand what can be taxed when it comes to investments.

Property

If you own the house you live in and you sell it, you will not be taxed on the first R1.5mil profit made. Profit is calculated by deducting the price you paid for it, together with all the permanent fixtures you added to it, from the selling price. i.e.

Purchase price R1 000 000
Build swimming pool R 50 000
Sell for R2 000 000

Profit is 2 000 000 - 1 000 000 - 50 000 = R950 000

The R950 000 is less than the R1.5 mil so no tax is payable!

BUT , If you sell a flat that you rent out, the full profit will be subject to Capital Gains Tax! (because it is not your primary residence)

AND, If you sell such a flat within 3 years of purchase, you might even pay Income Tax!!

The thing to remember here is that for assets/investments that you owned for 3 years or longer, income tax can't be charged unless it is classified as trading stock in your business. If you sell the asset/investment within 3 years after purchase, you have to prove that it is capital in nature and not income.

WHY is this important? Because the maximum amount of tax you can pay for something that is deemed to be Capital in the hands of an Individual tax payer, is 10%. The maximum tax rate for individuals on Income, is 40%.

How can I apply this tax saving? When you buy a share or unit trust or property, only sell it after 3 years if you have a choice.

Interest earned is the other place you can do some basic tax planning. Every individual younger than 65, can earn R19 000 interest per tax year without paying any tax on it. If you are older than 65, this moves up to R27 500. (figures adjusted every year)

This translates into an investment of R190 000 if you earn 10% interest on this investment, without paying tax on the interest earned! (R270 000 if you are older than 65).

How can I use this?

You have some cash to spare at the end of the year and this amount just happens to be exactly R380 000. Your spouse has nothing left because.....who knows! If you decide to keep the cash of R380 000 in your bank account and earn 10% interest on it, you will get R38 000 interest, R19 000 will be tax free and you will pay 40% (R7 600) tax on the other R19 000 if you are already in the maximum 40% tax bracket, at the end of 12 months.

Now follow closely, if you should donate half (R190 000) of the money to your spouse because you love and trust your better half so much, the spouse will earn R19 000, you will earn R19 000 and you save the R7 600!

Earn Dividends instead of interest.
On cash you earn interest, which is taxed at up to 40%
On property you earn rental, which is taxed at up to 40%
On shares you earn dividends which is taxed at up to 10%

If you do not want to invest in shares but have cash that will be taxed as per illustration above, you can slip out the following backdoor when the Receiver of Revenue walks in the front door.

There are two options:

Preference Shares: All the banks and some big companies allow you to buy their shares but unlike an ordinary share, you are only entitled to dividends declares by them and have no voting rights. I am not going to go into the details of them now but they will give you less risk on your capital than ordinary shares and dividends with a much lower tax rate than cash.

Dividend Income Funds: These are normal unit trust funds. Instead of investing in ordinary shares, they invest in preference shares. So, they do the work for you and the return on the unit trust is tax free. They charge you a fee to invest in the fund so make sure the after cost return is still better than the after tax interest you could have earned on cash.

How can I use this?

Let's say you are 40 years old. You inherited R300 000 from your long lost Uncle in Tousrivier. You want to buy a house in 3 years time so can't invest the money in shares. You already earn a R500 000 + per year salary so you are in the 40% tax bracket.

If you invest all the money in cash, you will earn R30 000 interest, pay R4 400 tax, and get R25 600, so try the following:

• R190 000 in cash, earn 10% interest, R19 000 and no tax.


• R110 000 in preference shares, earn 11.5% dividends, pay 10% tax, clear R11 385

Get R30 385 (R4 785 more)

Okay, let's stop for now and remember, paying tax is good, it keeps you out of jail, but paying too much is sad!

Understanding Financial Lingo.

Doctors, Lawyer, and Financial Advisers all babble in a language that sounds foreign sometimes. All you know is that whatever they say, it is going to cost you money!

Let's look at some of the terms used and what they mean.

Asset Class:

This is the term used to describe things we invest in. Asset classes with similar attributes are grouped together and given names like :

• Equity : where you buy a little piece of a company as in when you buy a share.


• Cash: please don't let me explain this! To most people cash is king, like Elvis.


• Property: is your house or a holiday flat or an office building or a factory building.


• Bonds: is not the same as the money you borrow from your bank to buy your house! This is money you give to usually a big company or the government to finance their business activities and they pay you interest.

If you give your money to be invested, it will end up in one of these asset classes. The asset class that you invest in will determine if you make money or if you lose money. Let me give you some of the characteristics of these asset classes:

• Equity : very unpredictable over the short term and because of this seen as higher risk. Provides you with capital growth (value of the share increases) and sometimes pay a dividend (income). Proved to be the best performing asset class over longer periods of time.


• Property : unfortunately the sub categories in property (residential, commercial and industrial) can have cycles that are not synchronised but in general they are also seen as higher risk because they can be damaged, slower to buy and sell, can not be moved to better location! You usually get rental income and increase in property value.


• Bonds : are generally regarded as lower risk assets because you receive an interest income from a reputable institution which is contractually binding. The instrument via which you buy your bond can have some volatility in price which makes it not 100% save.


• Cash: This is the safest investment (used to be before some banks started going belly up) and pay interest on a capital amount which are both guaranteed. (capital and interest)

Instruments:
When they talk about "financial instruments", reference is made to the containers through witch you can invest in the different "asset classes". Let's look at some of the instruments for the different asset classes:

Equity: shares direct, unit trust funds, hedge funds, policies, retirement annuities, pension funds, satrix, etc.

Property: buy a building, unit trusts, policies, retirement annuities, pension funds, etc.

Bonds: buy a bond direct, unit trusts, policies, retirement annuities, pension funds, etc

Cash: bank account, unit trust, foreign currency etc.

Diversify:
This is something you will always hear when financial advice is given. What is meant by diversification is simply the allocation of your money between different "asset classes", not necessarily different "instruments"! The main purpose of diversification is to spread your risk between different asset classes that act differently and at different times so that if you misjudged one asset class and it loses money, you might have other asset classes that make you money. You should not only diversify between different assets, but also between countries, currencies, sectors in the economy, investment strategies etc.

Short Term and Long Term
In finance talk you will always hear people attaching investments to certain periods of time. Usually they would say that shares are a "long term" investment and cash is a"short term" investment. This is all due to the level of unpredictability associated with the asset class. We know what we will get from our cash investment tomorrow, but we have much less confidence in our expectation of what will happen with our shares tomorrow.

So, to give the unpredictability time to become more predictable you have to give shares time to settle down and that "longer term" is at least 5 years, BUT, it could be much longer. I would suggest that if you want to go into shares from the current valuations you should give the investment the 5 years at least.

If you want to use your money within 18 months, don't even think about anything except cash.

Between 18 mts and 5 yrs you can call it medium term and Bonds might be an investment alternative.

To sum up:
If I have R50 000 to invest, the decision filter should be:

• Is this 5 jr plus money or not?


• How much do I want to invest in the different asset classes?


• Which instruments am I going to use?

Answer:

• Yes, all of it.


• Diversify between 10% cash, 10% bonds, 10% property and 70% shares.


• Cash: account at my bank or unit trust; Bonds: Unit trust fund; Property: Unit trust fund; Shares: 50/50 between satrix divi and satrix rafi.

We have lots still to cover and only 352 days to go, keep those comments cumming!

Must I invest in SATRIX?

One upon a time, in a galaxy far, far away, we could invest in Shares or an Endowment Policy, that was about it!

If you had a lot of money you invested in shares and if you had a little and the word "shares" scared you, you invested in a policy. Now the funny thing is that buying a share and buying a policy can be exactly the same thing and if you are afraid of shares, you should be more afraid of a policy. Why, because some policies are only a bunch of shares tied together and sold as a bundle called a policy. So as a matter of fact, you should always specify the type of policy you want to invest in.

Fortunately things have changed and computer systems enabled the investment product providers to offer us a huge choice of different ways to invest. Unfortunately with the increase in choice came the increase in confusion regarding what to choose!

Now one of the best ways to invest in South African shares is with a relatively new product called SATRIX.

Why do I like SATRIX investments?
Because in all investments you get risk you can manage, and risk you can't. With SATRIX you can decrease the manageable risk because of the following:

• The product "SATRIX" is regulated. There is a watchdog to ensure no funny stuff happens.
• Via SATRIX you get a little bit of a lot of shares which decreases your risk. (diversification)
• The investment can be sold easily. (liquid)
• The cost to invest is low.

You can however not get away from the fact that it is an investment in shares, which can make or lose money with no guarantees!

Now I am not going to give you all the detail about the SATRIX investment plan, you can and should go to the website: http://www.satrix.co.za/ and read it yourself. What I can mention is that the cost to buy is 0.10% of the investment made compared with up to 1.5% if you should trade small amounts of shares via a Stockbroker, and when you sell, the cost is 0.10% again. Other than that you get charges about 0.80% per year for management fees which is not more than any other equity Unit Trust.

How does it work? Very simply it is a group of shares that is listed on the South African Stock Exchange, packaged together. So when you buy the SATRIX share, you actually get all the shares in the package and not only one share.

You get different packages of SATRIX as well. The ones I would consider are the following:

SATRIX RAFI : This is a package of 30 or 40 shares that passed certain criteria which distinguishes them from the other few hundred listed shares because of their current valuation and potential. The RAFI selection process has proved to be very successful in the USA for many years.

SATRIX DIVI : This is 30 or 40 of the shares that pay the highest dividends. Now, this is cool because not only do you get the potential growth in the price of the share, but you also get the almost tax free income during the year which you can re-invest or use.

The oldest SATRIX fund is called the SATRIX 40. If you invest in this one you invest in the biggest 40 companies in South Africa. I do not believe that bigger is always better. You might get a nice fast run on them but that doesn't mean that they will provide the best returns over time.

To sum up: Instead of going to a stockbroker or insurance company to buy shares or Unit Trusts or even a equity policy, just go online, complete the SATRIX Investment Plan, print, sign and mail or fax to SATRIX and you will have one of the cheapest, best regulated and diversified equity investments in South Africa.

You need only R300 pm or R1000 lump sum to open an account!

So if I had R20 000 now to invest for at least 5 years or longer. I would invest R4000 pm for the next 5 months via debit order into the Satrix RAFI.

Feel free to use the comment button to send me questions or remarks.

Where to invest...?

Now we get to the interesting stuff, where do I invest spare cash? The answer to this question will be different for most individuals because their circumstances differ and that is why it is good to consult a professional, sooner rather than later (especially with larger investment amounts).


The problem you face when going to an investment advisor (as I mentioned previously) is that they will either charge you for advice, or show you the door because they only work with BIG money.

Now that is where everything starts going wrong!


Let’s deviate a bit and indulge me in a little bit of a moan.


If you ask anybody what you should do to get rid of your party hangover they will tell you to start by drinking a pain pill. If you ask anybody what eating health means they will tell you that you have to include fruit and vegetables in a balanced diet. And so we can carry on with the general knowledge, BUT, ask people what you must do with spare cash and their eyes will glaze over and you will get replies like, spend it, invest it, put it in your bond, keep it in cash, buy US$ etc.

What I am getting at is that there should be a standard answer that everybody should give you based on the “laws of finances”. A five year old should give the following answer:

• If you have debt, re-pay it.
• If you want to use it in the next 12 months and you have no debt, put it in your bank account and earn interest.
• If you have no debt and don’t want to use it in the next couple of years, invest it in shares.
  

Why go and pay somebody to tell you this?! I am not saying that it doesn’t get more complicated than this but these are the basic rules.

OK, let’s get back to the topic of investments. Let’s use and example one of my friends gave me the other day and break it down into a potential investment plan:

Joe Soap has no debt and R20 000 in a Money Market account. He doesn’t want to use it for the next 10 years but want it accessible if something unforeseen should happen. Let’s break it up:

• No debt so rule number one doesn’t apply.
• Keep it in the Money Market (cash)?
• Buy property?
• Buy other investments that will pay interest like Government Bonds?
• Buy Gold?
• Buy US$?
• Buy shares?
  

Not suggested

• Money Market, cash, government bonds and other interest paying investments because these instruments should be used for the short term. They are safe but taxable and inflation will erode all the returns over the longer term.
• Property require much more than R20 000, even for a deposit.
• Gold is very speculative and high risk.
• Buying a currency like US$ is once again a speculative investment and closer to gambling than investing.
  

Suggested: Shares because,

• Currently the share market is relatively cheap.
• This is a longer term investment and shares have proved itself as the best performing investment over the longer period.
• Returns will be largely tax free.
• Shares can be sold with the click of a button if cash is needed.
• Shares on average outperform inflation over the longer period, unlike cash.
  

If Joe Soap does decide to invest his R20 000 in shares, I would urge him to keep it simple and consider investing into what is known as the SATRIX range of shares on the Johannesburg Stock Exchange.

Time is running out so I will give you the details of what SATRIX is in my next posting.

Thanks for your feedback, keep it up!

What came first?

In the previous posting I mentioned two golden rules of financial management.

1. Get rid of personal debt and
2. The sooner you can start saving, the better.

The question now is if I have personal debt (not the same as debt used to finance some business activity like a bond on a rental property), do I re-pay the debt before I start investing into something else like shares, or do I allocate some money to the re-payment and some to investing, or do I invest everything?

In my opinion the answer 90% of the time should be to get rid of the debt before you start investing, BUT, we are experiencing unusual times at the moment and my current opinion falls into the 10%.

Why should one re-pay debt? Here are some reasons:

• Let's say your bond rate is the same as the current Prime Interest Rate, 15%. So, the bank charges you 15 cents(15%) per year for every rand you borrowed from them to buy your house. Now at the end of the year, you owe them R1.15. If you give them back their R1 rand at the beginning of the year, you saved the 15 cents interest.
• This 15 cent saving is guaranteed. You know that you will have 15 cents in your pocket at the end of the year if you give your bank back the R1 at the beginning.
• The 15 cents is tax free. Because you have 15 cents in your pocket at the end of the year because you paid the bank the R1, does not allow the Receiver of Revenue to tax you on it.

Now if you decide to take that same R1 and not give it to the bank as re-payment of your bond, but decide to invest it in a share, the following will apply:

• You have no idea what the amount of money is the share will give you at the end of the year. It might be 15 cents, 20 cents or even -30 cents. The point is that the return on the share is not guaranteed.
• The other disadvantage is that the return on the share is taxable.

So, if you re-pay your bond it is the same as getting a guaranteed 15% tax free return on your money.

If you invest the R1 in a share, you don't know what you will get back, if anything, and whatever you get will be taxed.

So why do I say that we currently have to consider our options between re-paying debt and investing in shares? Here are the reasons:

• You can buy the shares of big, well managed, profitable companies all over the world for on average 35% less than you bought them 12 months ago. Some of these companies will also pay you an annual dividend of up to 5% which is almost tax free.
• Interest rates in South Africa are coming down so you might only have to pay 12 cent (12%) on every R1 outstanding on your bond soon.

To sum up, If you have to decide what to do with an extra R1 in your pocket, ask yourself this question:

- Can I get an after tax, guaranteed return of more than my bond rate by doing something else with the money?

If the answer is yes, then do it, if you don't know and have some appetite for risk, then go 50/50. If you have no debt, start investing.

I will look at some investment alternatives in the next posting.

Please remember that the aim of this blog is to make you think and consider alternatives and not to give you professional advice. For advice you can contact me or your licenced financial advisor.

Let's do the numbers

In my previous posting I mentioned that parents play a very important role in establishing sound financial management consciousness in their children. Let's face it, very few young people are interested in saving money or want to know how to deal with it and if a parent sets a bad example, a real nasty habit can develop in the child.

My motto is "Keep it simple". You don't need complicated structures and stuff to do the right thing. Let's look at two examples of just doing the basics right.

The MOST important lesson we all have to learn is that private/personal debt is never good.

Why? Because debt is an expensive luxury and if you watched the world economy go down the gutter over the last 12 months, you will understand that sitting on a box of dynamite for a very long time with nothing happening doesn't make it save.

Get rid of your debt:
If you have a bond on your house of R500 000. Let's say the interest you pay on the bond is 13%. If you repay your bond over 20 years the monthly repayment is R5 858. If you add all the monthly repayments for the 20 years your house will cost you R1 405 890.

Now if you increase your re-payment with R503 per month to R6 361, your house will be paid off in 14 years and 7 months and the house would cost you R1 125 950.

YOU SAVE R279 940 by just paying R500 pm more into your bond.

Now let's say you were smart and bought a small house/flat when you were 25 years old and only up scaled when you could buy a bigger place with the profit from selling the previous house without increasing your bond, and you used your annual salary increase to repay your bond as discussed.

At 40 you have a bond free house and can start saving/investing. Don't fall into the trap of accepting a great new line of credit from your bank! (believe me, they will come running. Why? because as long as you owe them money, you lose and they win!)

The sooner you can start investing/saving, the better.

• You start investing R500pm (R6000pj) at a return of 10% and increase the annual investment with the inflation rate (say 6%) every year. So in year 1 you invest R6 000, in year two you invest R6 360 etc. In 20 years you will have R580 860.
• If you start 5 years later, you will end up with R393 172

So by starting 5 years later, you invested R33 823 less because you started 5 years later, and lost R187 688 because of that.

Something we can discuss next time is whether you should get rid of debt before you start saving or 50/50 or what.

Sent me comments or questions any time.

We have liftoff.

Today the gears are starting to turn for most people back at work. Most people do this not because they love it but because they have to. All of us would love to get to the point where the previous statement is reversed.



To get to the point where you do what you love and not because you have to do it to survive, starts with something that you can't choose, your parents. Why do I say this? there are 3 reasons:

1. They have plenty of money and you don't have to work to support yourself, ever.


2. They encourage you from a young age to do what you love and not what society demands.


3. They provide you with an education that enables you to find a good job.

The first two points are obvious. The third is the one most people have to deal with.

What we can take from what I am saying is that if you are a parent, you have a huge responsibility. Schools don't provide proper financial management education and there will always be a lot of pressure from society to keep up with Mr & Mrs Jones. You as a parent must either encourage your children to do what they love or if they love nothing in particular, make sure that they can find a proper job one day and instil in them from a young age the discipline and knowledge of sound financial management.

2009

This is going to be a year where you have to take part in the investment industry and not sit on the sideline. If you have cash, there will be plenty of sound companies to invest in. If you have debt, you have to kill it before you start investing, and never get back into debt!

I don't think lump sum investing is the way to go but be sure to follow a phasing in plan over say 6 months. In this blog I will provide you with some investment truths, according to me, and can and should be tested with other investment professionals.

I will provide a unbiased, objective opinion about stuff I read. The problem with consulting an investment professional is that you have to have lots of money to talk to the good ones or you have to pay a consulting fee which can be rather high. The major drawback is that lots of the so called advisers provide subjective advice and do not act in your best interest.