Don't Clutter

I think that in all aspects of life we should avoid clutter. The trap we all fall in is that when things are going well, we buy stuff we don't need and it ends up standing in some corner gathering dust.

Now look around you and tally the things you never use. In my case it is half my wardrobe, my Jet-ski, half the stuff in my kitchen, tables, chairs, Hi-Fi etc. If I should put a monetary value on it, it must be worth R50 000. Let's say you fare better and the value of unused items in your house adds up to R10 000.

If you bought the stuff on average 5 years ago instead of keeping the money in the bank, earning interest at 6%, you have already lost R3 382. If you keep the stuff for another 10 years before throwing it away, you will lose another R10 583. This is called opportunity cost.

Now if you fall into the trap of buying expensive items like Flats, holiday stands, weekend motorbikes, boats etc, your opportunity cost might just be running into the tens of thousands!

At the end of the day what I am saying is that only buy the things you need and not the things you just want. Buy investments you understand and not just because everybody is doing it.

When times are tough and you want to sell that flat, boat, Harley etc, nobody wants to buy it!

And Remember, if it doesn't make you money, it loses you money!

It is wonderful to journey through life with a light load, emotionally and physically.

Life and Disability cover

DO NOT expect your life and disability cover to give you something back except money when you die and money when you become disabled!

This is like any other insurance, it should NOT be confused or combined with investments.

Life and Disability are very important when you are dependent on an income generated by yourself and on you being there. If you have enough passive income like interest, dividends, profit share, rental etc. that will continue paying in your absence, your need for cover diminishes considerably.

Let's look at life cover:

You need enough cover to pay off all your debts and leave your dependants with either a lump sum or an annuity income that will be sufficient to replace the loss of your income. If you have no dependants, any cover is a luxury that will enrich someone else and the premium should be invested rather than spending it on insurance.

And disability cover:

In this case you are still alive and need the money so you have to cover debts and income loss even though you have no dependants!

How Much?

Enough to cover debts and loss of income. If you have children the need for cover becomes more important because without your contribution the spouse will have to double up! Most financial planners have programs that will calculate how much you need in a heartbeat.

Investment and Cover:

Usually you should separate the two. If you buy a product that has both in one plan, you will confuse the matter and pay more and get less. Determine how much cover you need and get quotes, take the cheapest. Then see how much you have left to invest and go seek quality, regardless of price!

Serious stuff:

You should not tempt fate! You need disability until you are financially independent, then you need it no more. You need life cover whilst you have dependants relying on your income. When you become financially independent, you need it no more.

Rebalancing your portfolio

Over the last 100 years we have seen markets go up and we have seen them come down again. You can take almost any investment: property, gold, shares, cash, bonds and take any economy: USA, Europe, Japan, China, South Africa, Argentina etc. and they all fluctuate around their trend line over time.

Now there are 3 ways to handle this:

Do Nothing: If you have a very long time and you don't touch your investments, you will eventually receive the inherent return of the investment you are in, let's call it the "trend line return". If you are invested in shares, you will receive the highest return and if you are invested in cash, the lowest. The problem with this strategy is that you might have to wait an extremely long time for the trend line return due to the irrational nature of the market!

Actively trade: Here you try to time the market by selling your investment when the return is high and buying an investment when it is cheap. This method requires you to know more than the rest of the investors in the whole world and is doomed in the long run. The problem with this method is that the information regarding an investment is available to everybody at the same time and because of this already reflected in the price. Lots of people make the mistake to think that because they get it right 2, 5 or even 10 times, they are clever and not just lucky!

Rebalancing your portfolio: By this I mean deciding how much money you want to invest in the broader layers of the investment universe namely: country, currency, asset class, sector and instrument, and sticking to those allocated percentages no matter what. On a predetermined interval, you evaluate your portfolio and sell those areas where you have a higher percentage due to good performance, and buy those areas where you are under your predetermined percentage due to bad performance.

Let's take an example:

You decide to start your portfolio with the following percentage allocation:

• Equity 40%
• Property 20%
• Bonds 10%
• Gold 5%
• Private Equity 5%
• Cash 10%
• Hedge Funds 10%

You decide to invest in the following countries:

• USA 40%
• Europe 30%
• Japan 10%
• South Africa 5%
• East Asia 10%
• South America 5%

You decide to invest in the following currencies:

• US$ 40%
• Euro 40%
• Rand 5%
• Yen 5%
• Pound 10%

And so on!

Now if you decide to rebalance your portfolio on the 30 June and 31 December every year, you might find that your Equity exposure went up to 45% of your total portfolio and your Bonds went down to 5%. What you will do now is take the 5% profit you made in Equities and buy more Bonds at the lower price to get back to the Equity 40% and Bond 10% ratio.

The same should be done on the other levels as well, if exposure in the USA went down to 30% and Japan increased to 20%, rebalance!

WHY???

Because this will force you to leave emotions out of your decision making and stop thinking that this time is different! It will also ensure a smoother long term return and reduce the risk of thinking that you can beat the market or go for the one more year of spectacular growth in a specific area, just to lose at all and having to start again.

Problem: There is nobody out there that will do this type of rebalancing for you and you will have to do it yourself. Financial advisers will do the initial planning to determine how you should invest your money between all the layers but then they will allocate the money to the different products and leave it to grow or fade.

The good news is that there is a Fund Manager out there that does manage a fund based on rebalancing.

Advice versus Coffee

One of the things that makes me happy in life is a cup of good coffee in the morning. I would usually start my day by going to a coffee shop (different one every time), and order a coffee while I read the newspaper.

Financial advise is a lot like coffee, you can get it anywhere and they all taste and cost the same, except at that one special place. I would drive a long way for a good coffee and I am prepared to pay a bit more because life is short.

Now if you have to have a coffee and you have no choice as to where to go, at least know that the coffee is bad and don't over pay for it. The only way you will know that there is something better out there is if you shop around.

To illustrate my point take the following actual example:
A lady walks into our offices with an investment quote under her arm and asks us to look at it. She has R5mil to invest for the longer term. On the one page investment quote she is advised to put it all into a Matured Endowment Policy with 100% exposure to the Money Market and the adviser's commission is R100 000!

This is as BAD as coffee gets!

The moral of the story is to always get a second opinion and drink only good Coffee!

Next time I am going to write about a financial term I believe will start to pop up in the media more and more called " Rebalancing of your portfolio".