Cutting Costs in 2010

If you still have a job, car and house you made it through the recession! If you only have your job, you will be okay.

A lot of people earn only enough money to cover their expenses. They have nothing to save for the day they can no longer work, not to mention luxuries. Both these issues are problematic for the following reasons:

• If you last longer than your job, you will have nothing to live with if you didn't save during your working life.
• If you can't buy something small but very special every now and then, life becomes gray.

The only way out is to force yourself to save something every month!

I have been researching ways to save money every month without changing anything except my habits. I forced myself to do the following 3 things and these were the results:

1. Never exceed the speed limit on the road. Save 10% on petrol (R150pm)
2. Buy the "no name" brands and "advertised specials" in supermarkets. Save (R100)
3. Switch of lights in the house and overall electricity conscious. Save (R120)

This is a monthly saving of R370.

NOW this might seem like a lot of effort for very little benefit but consider this:

For every R150 you can save per month at 7.5% return (Money Market rate), you will have R26 700 in 10 years from now.

If I invest my R370 per month in an Equity Unit Trust I believe I will get at least 10% growth which will give me an investment of R75 800 in 10 years time!

The point is that by just thinking about saving I can have something I never would have had.

None of us have enough self discipline to save and then not spend it again so to make this work you have to SIGN A DEBIT ORDER!!! Never accumulate the saving in a tin on the fridge or in your savings account at the bank.

Some other things I do:

• Only drink coffee at a place where I can read the morning newspaper for free (save R6.20 per visit)
• Never park where I have to pay (save R7.50 per parking)
• Invest in a Retirement Annuity at end of the tax year (save up to 40% on the investment). If you earn R100 000 taxable income per year you can contribute R15 000 to an R/A and save up to R6 000 in Tax.
• Adjust my short term insurance values every year (save R100pm)
• Take lunch to work instead of buying takeaways (save R20 per lunch)
• I eat what I buy. You will only eat an over ripe banana once. Next time you will buy one less!

What I am going to start doing:

• Grow my own herbs and greens (save R100pm)

There are many more things you can save on without doing anything except changing your behaviour. We live in a world where we waist way too much. You can actually contribute to saving the Planet!!

2010!!

Good Luck for 2010, this will be a defining year as far as the sustainability of the economic recovery goes. One of 3 things can happen:

• Everybody can sit and wait to see what will happen resulting in the market moving sideways.
• The predictions of a double dip recession will materialise and we will see another 40% fall.
• The work done by governments in 2008/2009 to stimulate the economies will work and we will see markets grow at a moderate pace.

If you read the newspapers, experts are divided 50/50 between points 2 and 3, in other words, nobody has a clue!

2009 was easier to predict the direction of the markets. After a 40% drop the next direction would be up, the timing was uncertain. Evidence of this can be seen in the 10 shares I chose in April 2009 and discussed in my June Blog. I chose 10 shares based on their NAV valuation and reputation of the companies, the result was a 42% average return.

For 2010 I would play the game as follows:

• Interest rates would remain stable in SA.
• Only the companies with solid earnings growth will reap the benefit of higher share prices.
• Small marginal companies will suffer.
• The Rand will weaken, if not in 2010, then in 2011!

Based on the points mentioned, I would follow the following investment strategy:

• Stay in cash for any short term requirements (3-4 years worth).
• Invest 80% of your longer term money in bigger, solid companies. Unit Trusts can be used with such a mandate if you don't buy direct shares yourself. SATRIX DIVI and RAFI still offer a well diversified, low cost investment.
• Keep the remaining 20% in cash and wait for dips in the market to invest or invest this amount over a 12 month period using a monthly debit order.
• Make sure you invest half of this amount in international markets to protect yourself against the weakening of the Rand.
• If you have money that you can save on a monthly basis, get the debit order going and forget about it!

At the end of the day you have to remember:

• Investing in cash over the longer term is a dead investment.
• Never be impatient with the return on a share investment. If you can't wait for the return, don't do the investment.
• If you invest in a company that has been going for 20 years, chances are that even if the market drops by 40%, it will bounce back as before.
• Never compare your returns with that of your neighbour. Only focus on getting an after tax and cost return that outperforms Inflation.
• Spend less than you earn!
• Get rid of debt!

Some of us have to work harder for our money than others. Some are lucky and they get a couple of good breaks in life. Some inherit wealth and they have no financial concerns and others had financial peace of mind and lost it. At the end of the day none of this will matter if your mindset is one of making the best with what you have got, contributing to society where you can and taking pride in what you do. We need not eat the best food every day or live in the biggest house or drive the smartest car to experience contentment in life. The secret is in appreciating the small things like watching the sun set over the Atlantic or watching a bird building its nest in the garden.

Nothing is permanent, everything changes. If you can prepare for these changes in any manner, you will stay ahead of the game!

Reality check!

I have recently written a note on current market conditions to clients at the company I work for and decided to publish it on this blog so here goes:

It is important to understand the sensitivities of investments and I would like to highlight some current developments.

Cash and Bonds
Not much needs to be said about these asset classes except to avoid them for longer term investments but treasure them for shorter term liquidity (0-3 years).

Listed Property
The longer the consumer takes to start buying goods and services, the longer it will take for retail and commercial properties to justify the fantastic recovery in the share prices of listed property stocks. We are not experts on this specific asset class and entrust the rating thereof in the hands of fund managers, but it seems as if this asset class carries more risk than some other equity investments.

Listed Equities (Shares)
As we are writing this the JSE All Share Index stands on 26 188 points. This means that it is fair value if compared to the average over the last 10 years. We want to make the following comments about investments in South African Shares:

1) We do not believe that the market should go up another 30% over the next 12 months as it has done over the previous couple of months. If this should happen, fundamental value would no longer exist and anything could happen.
2) On a technical valuation, everything is due for a correction. We do not invest client’s money based on technical valuations but rather on sustainable fundamental valuations. The implication hereof is that longer term the best place to invest is still shares but over the short term nobody can predict the direction of the market.
3)Our investment strategy is still to evaluate the timeline of our client’s investments and invest longer term funds in equities at the current fair value.

Rand vs. Other currencies
We are still of the opinion that the Rand at R7.87/US$ is too strong and that it should be closer to R8.50. To predict the value of the Rand is for us a guessing game and we suffice in saying that it is still a good time to invest in the International market if you haven’t reached your optimal offshore exposure (+/- 30% of longer term investments).

In Closing
We would like to remind our clients that investments are all about buying value for money and then having the patience for it to unlock. We believe that any sell-off in the market should be seen as an opportunity for a longer term investor to buy shares and for clients already in the market to understand that volatility is the nature of the beast (bulls and bears).

Understanding the last 9 months

So we wake up one morning and it is October 1, 2009. We pour ourselves a cup of coffee and contemplate the Share market. Year to date your investment in shares is up 15.81%, your investment in cash is up 6.5% and inflation is at about 6.4%.

Now if you are like me you think about the future and ask yourself "what now?"

This is what flashes through my mind at that moment of asking the question:

Cash is killing me! (return wise that is). I earn 7% pre tax (4.2% after tax) and inflation is at 6.4%. That is okay for short term liquidity but what about the longer term, say 5 years from now.

Do I invest in shares at these levels? This I will only do if the price I pay for them now is still good value. A good way to determine the value of a share is to look at its Price/Earnings ratio (PE).

We have experienced what they call a "crash" in the share markets in 2008. An easy way to see how severe this "crash" was is to look at what happened to the PE ratio of the market and compare it to the long term average.

The 20 year average PE for the JSE All Share index in South Africa is 14. If the current PE ratio is below this average, we can say that the market offers good value and vice versa. In March 2009 the PE stood at 8 (market very cheap), currently it is at 13.5 and rising.

The increase from 8 to 13.5 is reflected in the 30% + rise in the share market from March. The question is, "can this continue?" The answer lies in the historic behaviour of the market.

2 Things happen after a crash. We saw this in 1961, 71, 76, 82, 88, 91, 98 and 2003.

First there is a Re-Rating of the share market. This is not a recovery based on a fundamental improvement in the shares like an increased earnings growth, but rather a reversion to mean. The 20 year PE mean is 14; it stood at 8 so it wants to go back to 14!

This reversion is lightning fast and unannounced. This time it happened at the beginning of March 2009 and is over. If you weren't in the market you lost this re-rating rally.

Secondly you get the fundamental recovery which is mainly driven by the earnings growth of companies. Investors will not continue buying a share from these levels until they are satisfied that the company will grow its earnings from current levels. We saw a 30% year on year growth for 4 years after 2003. The important thing to remember is that the PE ratio of the share does not increase substantially because the earnings growth matches the increase in the share price so the company with a 10 PE might increase its PE to 11 but the share might go up 20%.

After all this I can give you a short answer: The JSE All Share is still good value but the next 20% growth will take much longer than 6 months to materialise and will be driven by the recovery of company earnings rather than re-rating or sentiment.

Money or the Box?

I have taken some flak from readers regarding my insensitivity towards people who have no money to invest; made all the mistakes I wrote about and have no hope of earning the big bucks ever!

I have some GOOD NEWS!!!

You still have a remote chance of one of the following happening:

• Marry rich
• Win the Lotto
• Inherit from somebody you don't know

One of these can happen! But in the meantime, let me give you some good advice which we can call "Money or the Box".

This is a very simple game where I give you a choice between choosing the money or choosing the box where:

Money = Salary

Box = Lumpsum Cash

If you choose the money I will give you R10 000pm before tax for the next 25 years which will increase with inflation.

If you choose the box I will give you R1.5mil now.

NOW YOU CHOOSE!

To see which one is better, I will assume the following to make us compare apples with apples:

• You earn no other income thus your tax on the money will be R1 000pm. This leaves you with R9000pm spending money.
• Your actual expenses are R7 000pm in both instances.
• The monthly savings from the "money" as well as the R1.5mil lumpsum can be invested with a growth of 2.5% over and above the inflation rate.

Result:

If you choose the money, you will be able to survive for 36 years. So if you are 40 now, the money will be gone at age 76.

If you choose the R1.5mil cash, the money will be gone in 23 years (age 63 if you are 40 now).

Conclusion:

Your ability to generate an income is far more important than being a millionaire today.

The Good, the Bad and the Ugly!

Believe it or not, you get investing personality types! I am one of 4 brothers, raised by the same Mother and Father and we all invest differently. Now if you can admit that you have a problem, you are 50% towards solving it!

3 of the 4 investment personalities need help. The 4th one doesn't because he/she is consumed by understanding investing. Let me take you through the 4 personalities and help you solve your problem.

The Fearful person:
This is the person that cannot and will not go into the proverbial investment water! If you ask him today where his money is he will say "cash". If you ask him in 10 years he will say "cash". Then you tell him that inflation is 7% and after tax he gets 5% on cash, losing 2% of his investment value each year and he will say "but shares are too risky". This is the person that can never retire because for every Rand he earns, the tax man takes 40% and inflation the rest. This person has to work an hour to earn a $. He will never have what we call "passive income". Money being earned on investments while he is sleeping or drinking coffee.

The Cure for the fearful person: Go see 5 independent financial advisers. If they all tell you to invest some of your savings in shares and they give you the same reason, believe them! I mean really! If a lawyer tells me that I will go to jail if I steal a car, I believe him.

The Reckless person:
Now this dude is the opposite of the fearful one. This guy is bullet proof, balls to the wall, nobody can tell him anything. His mania is usually driven by greed. He will make and lose millions during his life and the end result is usually not in his favour. He is lucky, not wise and you should never get sucked into his plans.

The cure: Go see an independent financial advisor. Let him calculate how much money you need to be financially independent for the rest of your life and give him that amount to invest and manage for you. You can take the rest of the bucks and do whatever gives you a rush.

The Ignorant person:
This is somebody that doesn't care about money. For them it is all about life and living. Money has no meaning and at best it is a means to an end. If they do not stumble upon a "money spinner" passion they will not compromise their beliefs just to make some cash. These people are also very generous and will often give and not receive. They will also believe the rubbish clever sales people tell them and get burnt badly. Because money is not important to them, they need very little. The problem is that because of their disinterest in money, they miss even the most basic opportunities to invest wisely, getting money that they can give away if they like.

The cure: Just listen to somebody you trust and that knows about investments. Let that person advise you on not necessarily making money but rather just not wasting money.

The Calculated investor: This person eats, sleeps, drinks and talks investments. He will not always be right but because he understands investments, he will be conservative and bold over time, winning 51% of the time and losing 49% of the time. He will get to a point in his life where he generates more money from investments (passive income) than from working. He understands two things very well and they are, patience and respect for money.

His advantage: He knows that investing is a science. No single investment can always be the right one and no two people should invest in the same manner.

Life is a balancing game, so too investments.

New investment options.

There are 2 things I can tell you that you might not know about when it comes to investment products and that might be to your benefit.

The First one is a product from Discovery Invest and you might have heard the ads on radio. It is all about them giving you up to 26% more than the amount you invest and guaranteeing a 6% growth on that portion.

The cool thing is that if you lost money in the crash last year, you can get it back by investing with them. So these are the basic facts:

• Invest say R1 000 000 in any of the unit trust funds they have on their list.


• Get R260 000 from them invested at 6%. (26% of amount invested)

What do you have to do to deserve this?

• You have to take out a life policy from them. The higher the monthly premium, the bigger the sweetener up to the 26%.

Bottom Line: If you need life cover, consider this opportunity, if not, not the best investment but also not bad. I will provide more details if requested.

The Second product is called the Investec Money Market iSelect fund. If you want to leave your money in cash, this fund will give you on average a 0.25% higher yield than the normal Investec Money Market.

Fund Name and Yield
Cadiz Money Market 9.09
Gryphon Money Market 8.88

Investec B (iSelect)* 8.79
Allan Gray 8.57
Investec Money Market R* 8.49
Metlife 8.43
Old Mutual 8.32
Standard 8.22
Nedbank 8.21
Coronation 8.13
Prudential 8.11
Symmetry Money Market 8.10
RMB 8.09
Absa 7.96
PSG 7.96
Sanlam 7.61
Glacier Money Market 7.11

The higher yield is due to the way the iSelect fund is priced. If you pay tax on interest at a rate of 40%, you can also benefit by buying this fund in a sinking fund wrapper and paying only 30% tax on interest.