There are many risks to consider when investing, one of them is the Political risk of the country you invest in. South African investors saw the risk of investing in South Africa as VERY high in 1994 and some of them built bunkers and stocked up on canned food and bottled water.
Well, those who predicted SA to crash and burn were SO WRONG!
R10 000 invested in South African shares for the last 10years gave you back R33 000. The same amount invested in Foreign shares returned only R10 900! But Political Risk is very real and one only needs to look at a country like Zimbabwe to realise how devastating it can be. The Arab Spring also highlighted the risk of investing in a specific country or region.
What has this got to do with investing in a Retirement Annuity then!?
Consider the following. A Retirement Annuity (R/A), like other Pension instruments, are governed by the laws of the country which are drafted by the government in power. The benefit of investing in a R/A is that you can deduct some of your contributions from your taxable income and in the 2012 Budget the Minister declared that no tax on Dividends or Capital Gains will be paid in R/A's while at the same time INCREASED those two taxes for investments in shares outside of a R/A and other Pension instruments!
In short what he did was to make it very favourable for you as a SA citizen to increase your savings towards an R/A, and decrease your savings towards "discretionary" instruments.
The downside of the R/A investment is that when you retire out of the R/A from age 55 onwards, you may only withdraw 1/3 of the capital and with the remaining 2/3 you have to buy another Pension (regulated by the Government off course).
So if you believe in Political risk, you will start thinking about what will happen to your R/A investment if the Government decides in 15 years to CHANGE the legislation and force the manager of your funds in the R/A to buy Government Bonds at some ridiculous valuation? Or, changes the tax law and tax you at a rate of 50% on all the withdrawals you make from your Pension?
Remember, money will flow from the rich to the poor. In a country where only the "rich" have R/A's, what will a government do to maintain the popular vote?
At the end we might have another decade of fabulous returns in South Africa. Just make sure you can decide how you want to access and invest your savings when things change. I would still make use of the great benefits an R/A offers, but carry on investing in discretionary funds as well!
Monday, March 5, 2012
Thursday, February 16, 2012
Retirement: The race between death and bankruptcy
For a lot of people this can be a reality! What can you do to avoid it? Well, at least know your enemy, INFLATION and CASH investments.
Ponder this:
A car costing R10 000 in 1999 costs R150 000 today and will cost R360 000 in 2030. At a rate of 6% inflation the cost of something today will double in 12 years.
Now if you want to fight inflation with cash investments, you are bringing a knife to a gunfight. Consider the following:
You are retired and earn 5.5% interest on your cash investment of R10 000. You spend R10000 per year on groceries and the inflation rate is 6%. After one year you withdraw your investment in cash which is worth R10 550 (10 000 + 5.5%) and hurry to the Mall to buy your annual groceries. You buy exactly what you buy every year and at the till the cashier tells you that you have to pay R10 600 (10 000 + 6% inflation). You are R50 short!
So what do you do? You eat less or cheaper food! You have to put something back because the bank will not lend you money and nobody else gives a dam. Just imagine the effect if inflation is 8% and SARS deduct some tax on your interest earned!
What can you do?
Your only friend in this fight is inflation beating returns. Your investments have to generate more than inflation eats away. Your best weapons are assets like equities and listed property and the power of compounding (earning returns on returns).
Once you retire and stop generating an income, it is very difficult to take the risk of investing large amounts of your savings in risky equity investments. The catch is that you have to take that risk because cash returns will not beat inflation and you might run out of money before you die!
The best solution is to START SAVING EARLY into quality shares where even if the shares fall for a couple of years, you can just wait for it to bounce back and provide you with a return over TIME which will beat inflation like it has been doing for the past 100 years!
You have to take the calculated risk of investing in a diverse number of quality shares while you work via Unit Trusts, Retirement Annuities or any other means, to help you build up a reserve for those later years when you have to put most of your money into cash.
If you are still in your income producing years (between 20 and 70), you have to invest in shares and other inflation beating investments. Between 20 and 50, go 100% SHARES etc and forget about it! Let your Fund Manager handle it.
You eat an Elephant one mouth full at a time, living costs after retirement (voluntary or forced), is one Mother of an Elephant. Start eating now.
And to really drive it home, consider earning 30% less on your Pension or Salary like the Greeks! If you lived on credit and cash reserves, depending on future Salary increases or a nice Pension, stop dreaming!
If you are going to be responsible and save some money every month, at least give your investments a chance and choose equities and not cash.
Ponder this:
A car costing R10 000 in 1999 costs R150 000 today and will cost R360 000 in 2030. At a rate of 6% inflation the cost of something today will double in 12 years.
Now if you want to fight inflation with cash investments, you are bringing a knife to a gunfight. Consider the following:
You are retired and earn 5.5% interest on your cash investment of R10 000. You spend R10000 per year on groceries and the inflation rate is 6%. After one year you withdraw your investment in cash which is worth R10 550 (10 000 + 5.5%) and hurry to the Mall to buy your annual groceries. You buy exactly what you buy every year and at the till the cashier tells you that you have to pay R10 600 (10 000 + 6% inflation). You are R50 short!
So what do you do? You eat less or cheaper food! You have to put something back because the bank will not lend you money and nobody else gives a dam. Just imagine the effect if inflation is 8% and SARS deduct some tax on your interest earned!
What can you do?
Your only friend in this fight is inflation beating returns. Your investments have to generate more than inflation eats away. Your best weapons are assets like equities and listed property and the power of compounding (earning returns on returns).
Once you retire and stop generating an income, it is very difficult to take the risk of investing large amounts of your savings in risky equity investments. The catch is that you have to take that risk because cash returns will not beat inflation and you might run out of money before you die!
The best solution is to START SAVING EARLY into quality shares where even if the shares fall for a couple of years, you can just wait for it to bounce back and provide you with a return over TIME which will beat inflation like it has been doing for the past 100 years!
You have to take the calculated risk of investing in a diverse number of quality shares while you work via Unit Trusts, Retirement Annuities or any other means, to help you build up a reserve for those later years when you have to put most of your money into cash.
If you are still in your income producing years (between 20 and 70), you have to invest in shares and other inflation beating investments. Between 20 and 50, go 100% SHARES etc and forget about it! Let your Fund Manager handle it.
You eat an Elephant one mouth full at a time, living costs after retirement (voluntary or forced), is one Mother of an Elephant. Start eating now.
And to really drive it home, consider earning 30% less on your Pension or Salary like the Greeks! If you lived on credit and cash reserves, depending on future Salary increases or a nice Pension, stop dreaming!
If you are going to be responsible and save some money every month, at least give your investments a chance and choose equities and not cash.
Tuesday, January 10, 2012
Investing in 2012
Okay, the 2011 results are in. The winner was a South African investing in the USA using the Rand. Why? because the Rand depreciated against the US$ by 18% and the Dow Jones grew 8.4% in $ terms. So, if you listened to everybody when they said you must take your Rands when it was trading at R6.80 to the US$ and invest it in Multi-National companies trading on single digit PE's in the US, you would have made close to 26% in Rand terms. Compare that to the 2.6% you got on the South African JSE.
Results
The way to invest in 2012:
To end: Never stop investing. Trust your fund manager to select solid companies. Don't be greedy. Don't be fearful. Be patient, don't buy and sell too often. Never become emotional about your investment. Never retire, keep on earning something!
Good luck for 2012!
Results
- SA Equities 2.6%
- SA Bonds 8.8%
- SA listed property 9%
- SA Cash 5.8%
- Dow Jones 8.4% in $
- MSCI World -5% in $
- MSCI Emerging markets -18% in $
- China -18% in $
- Europe -17% in $
The way to invest in 2012:
- Equities: phase money into the market over 6 month period if you have a lump sum or via a monthly debit order if you have a monthly surplus for the longer term.
- Cash: Interest rates will remain low but don't commit short term cash for volatile equity investments.
- Listed Property: Had a good run but I don't see value.
- Bonds: Rising interest rates will impact bonds negatively so do not over commit.
- Rand: We saw the Rand go from R6.70 to R8.90. Where it will go from here I don't know but it should stay at around R8 for the time being.
- International: Always important to diversify over the world. If you are a SA citizen, invest some money in the US and Europe. If you are a US citizen, invest some money in SA and other Emerging Markets.
To end: Never stop investing. Trust your fund manager to select solid companies. Don't be greedy. Don't be fearful. Be patient, don't buy and sell too often. Never become emotional about your investment. Never retire, keep on earning something!
Good luck for 2012!
Thursday, October 20, 2011
The cost of Comfort+ living
I was running along the beach the other day, minding my own business when I was distracted by the "for sale" signs along the road. The houses on offer where huge and mostly ugly but they did have a fantastic view of Table Bay and the mountain.
My mind was taken to the current economic uncertainties in the world and the words I read that morning in a research article that stated "Don't focus on the things you can't change. Rather focus on the things you can".
Now, I have always been fussy about where I lived, but never about what I drove. During my early years as a Financial Planner at Citadel, I noticed that most people spent a huge amount of money on their cars and I came to realise how fortunate I was to not have such a weakness, because it was pretty difficult to accommodate their passion and still get them to retire before they turned 80!
I understand that everybody has something they splurge on, unfortunately cars and houses are two of the biggest ticket items. So, if you can be disciplined enough NOT to spend that extra couple of thousand on the top of the range product and adhere to the "focus on something you can change" principle, it will help a tremendous amount.
I call this the "Comfort +" effect.
Let's take an example. Your child finishes school and studies something for 4 years. The child is now 22 and starts working. The child earns enough to rent a small shared flat and to finance a small car. At age 30 the child saved enough money to buy a car without financial assistance and here the child is faced with the first choice. Buy a new car for R80 000 or a second hand one for R60 000? The child chooses the R60 000 option, thus saving R20 000. Time goes by and at age 35 the child faces the same choice. The child also has a choice to buy a flat for R1mil or one for R800 000. Once again the child chooses wisely and saves R20 000 on the car and R200 000 on the house.
The option of new or used car repeats itself every 5 years and at age 60 the child contemplates retirement at age 65. What was the financial impact of the wise choices made during the last 40 years? The answer is R3 000 000 if the cumulative saving of R340 000 grew at 8.5%. If we take inflation at 6%, the real saving was R580 000. This is R580 000 saved because the Comfort + effect was eliminated.
At this stage of my jog I am tired and sweating and the cool sea breeze isn't as comforting as before. I flop down onto a sofa and take a long drink from my water bottle, both of which would have been equally as nice in one of those big, ugly houses for sale on the beach, but not more so!
What I am trying to say is, spend money on what makes you happy in life, but remember that the bigger, faster, brighter, sweeter, smarter, louder product will not necessarily make your life more comfortable, but will definitely cost you more than it offers!
My mind was taken to the current economic uncertainties in the world and the words I read that morning in a research article that stated "Don't focus on the things you can't change. Rather focus on the things you can".
Now, I have always been fussy about where I lived, but never about what I drove. During my early years as a Financial Planner at Citadel, I noticed that most people spent a huge amount of money on their cars and I came to realise how fortunate I was to not have such a weakness, because it was pretty difficult to accommodate their passion and still get them to retire before they turned 80!
I understand that everybody has something they splurge on, unfortunately cars and houses are two of the biggest ticket items. So, if you can be disciplined enough NOT to spend that extra couple of thousand on the top of the range product and adhere to the "focus on something you can change" principle, it will help a tremendous amount.
I call this the "Comfort +" effect.
Let's take an example. Your child finishes school and studies something for 4 years. The child is now 22 and starts working. The child earns enough to rent a small shared flat and to finance a small car. At age 30 the child saved enough money to buy a car without financial assistance and here the child is faced with the first choice. Buy a new car for R80 000 or a second hand one for R60 000? The child chooses the R60 000 option, thus saving R20 000. Time goes by and at age 35 the child faces the same choice. The child also has a choice to buy a flat for R1mil or one for R800 000. Once again the child chooses wisely and saves R20 000 on the car and R200 000 on the house.
The option of new or used car repeats itself every 5 years and at age 60 the child contemplates retirement at age 65. What was the financial impact of the wise choices made during the last 40 years? The answer is R3 000 000 if the cumulative saving of R340 000 grew at 8.5%. If we take inflation at 6%, the real saving was R580 000. This is R580 000 saved because the Comfort + effect was eliminated.
At this stage of my jog I am tired and sweating and the cool sea breeze isn't as comforting as before. I flop down onto a sofa and take a long drink from my water bottle, both of which would have been equally as nice in one of those big, ugly houses for sale on the beach, but not more so!
What I am trying to say is, spend money on what makes you happy in life, but remember that the bigger, faster, brighter, sweeter, smarter, louder product will not necessarily make your life more comfortable, but will definitely cost you more than it offers!
Wednesday, October 12, 2011
I feel better now.......
September was a bad month. The ride up and down the market was fun for a trader but unsettling for an investor. I do feel better than I felt at the end of August about the EU. The reason I can provide is the fact that I sense the market was waiting for someone to accept responsibility for the mess they have created. The difference between 2008 and 2011 is the fact that in 2008 a smelly skeleton was discovered as a complete surprise, where as in 2011 everybody knows about the skeleton but want somebody to actually open the cupboard and claim it!
Make no mistake, when the final medicine gets dished out, or the actual double dip recession is formally announced, the market will crack the whip with a knee-jerk 10% drop. But, I believe the bottom of this negative spiral is very close and investors are buying value on the dips.
For longer term investors, do not sell good shares, start buying good shares on dips if you have cash or trust your Unit Trust Fund Manager to do it for you.
Always remember, never use short term funds for equity investments, or hold long term money in cash!
Make no mistake, when the final medicine gets dished out, or the actual double dip recession is formally announced, the market will crack the whip with a knee-jerk 10% drop. But, I believe the bottom of this negative spiral is very close and investors are buying value on the dips.
For longer term investors, do not sell good shares, start buying good shares on dips if you have cash or trust your Unit Trust Fund Manager to do it for you.
Always remember, never use short term funds for equity investments, or hold long term money in cash!
Tuesday, August 30, 2011
The EU, Hurricane or Tropical Storm?
From the last week of July 2011, right after the USA debt ceiling fiasco, the JSE and Dow Jones lost 12% for the month to date. In investment terms it is called a "correction" on the markets. The exact same thing happened in the beginning of April 2010 so this is not new or alarming. We also predicted a lot of volatility in the markets after the recovery in 2009.
Something that should actually frighten you is a repeat of the 2008 crash, where the JSE dropped 46% and the Dow 54%. In financial terms that was a Hurricane, what we saw this month was only a strong wind with lots of rain.
The EU (European Union) on the other hand is turning out to be either a Tropical Storm at best, or a potential Hurricane. The USA has problems but I get this feeling that they will manage to fix the problems over time. The EU on the other hand has me spooked. The sad thing is that even though our beloved country (SA) is in a good position, we will be dragged down with the Tsunami of negative sentiment if Europe should go into a recession.
What should we do as a South African investor?
I think we should consider the following:
Something that should actually frighten you is a repeat of the 2008 crash, where the JSE dropped 46% and the Dow 54%. In financial terms that was a Hurricane, what we saw this month was only a strong wind with lots of rain.
The EU (European Union) on the other hand is turning out to be either a Tropical Storm at best, or a potential Hurricane. The USA has problems but I get this feeling that they will manage to fix the problems over time. The EU on the other hand has me spooked. The sad thing is that even though our beloved country (SA) is in a good position, we will be dragged down with the Tsunami of negative sentiment if Europe should go into a recession.
What should we do as a South African investor?
I think we should consider the following:
- After the August 2011 correction, only 6 of the top 40 shares are on the consensus selling list of Stockbrokers.
- The current Dividend Yield of the top 40 SA shares is 3.19% (note that a 4% DY is equal to a 6.15% interest rate after 35% tax).
- The Forward PE of the top 40 shares is 12 times (below the 15 year average).
- The loss incurred on an investment in 4 Balanced Unit Trust Funds was only 1.65% over the last 2 months.
- It is very apparent that investors are fearful if we look at the flight to Gold and the willingness of investor to buy US 10 year bonds at 2.2%.
- When others fear you should be bold, that is what Warren Buffett tells us.
- If the EU does go into a recession, the market can drop another 10% in a day!
- If you are exposed to small companies or in a geared investment, you might experience a permanent loss of capital.
- Even without a recession, the world GDP growth might be very slow and equity returns much lower than in the previous decade.
- If you are invested in shares, make sure you can wait for10 years before you have to sell.
- If you are thinking of investing in shares, make sure you can wait 10 years before you need to sell.
- If you have a lump sum to invest in shares, consider phasing in the investment over 12 months. Take note however that although we are at the same level on the JSE as we were in April 2010, phasing in or lump sum investments at the beginning of 2010 would not have made a difference.
- Always remember to diversify, especially into international companies.
- Cash must only be held for the short term (3-4 years). If you wait for the crash or for the pullback after a run, you will never invest!
- I believe that the outcome of the problems in the EU is very unclear and therefore you have to invest with caution. You have to select companies that are well established, with lots of cash and whose income streams are well diversified. They have to pay you a good DIVIDEND!
- It seems as if governments have no more solutions for the problems but somehow, they always end up finding one. The thing that hurts your investment the most is the negative sentiment created by uncertainties. Never act on sentiment, always act on fundamentals.
Wednesday, August 10, 2011
USA is not a responsible parent!
Do you want to tell me that the politicians in the US could not have handled their problems in a more responsible manner!? Was it necessary to parade their power hungry ambitions in public, demonstrating to the whole world how stupid they are when given their 15 minutes of fame in front of the camera and the world stage?
And after receiving the reprimand from a dysfunctional rating agency (S&P) in the form of a downgrade to AA+, after the same agency was unable to see the debt crisis of 2008, Obama stands up and says that the US will always be AAA!
So now the ignorant world investor is losing his/her money due to the market reaction. US is 16% down and SA 14%. I believe that the US policy makers created this new round of panic selling.
For those who have extra cash to invest, this is a mega sale in Blue Chip companies. Look at this:
In a newsletter written at the end of May 2011 I said that an equity investor needs to understand that volatility will play a big part in his/her investment. I also wrote that trying to time the market will end in tears and that no matter what happens with the price of a good quality company, you will receive the dividend and the company will continue making profits and eventually you will make a good return on investment.
Please, do not invest in Equities if you haven't got the guts to hold on during the bad periods, and do not invest in cash if you have a longer term time horizon!!
So, unfortunately as an SA investor all the profits for the last 20 months have been erased from your portfolio. Fortunately you will still receive your dividends because most of the companies have strong Balance Sheets and loads of Cash!
And after receiving the reprimand from a dysfunctional rating agency (S&P) in the form of a downgrade to AA+, after the same agency was unable to see the debt crisis of 2008, Obama stands up and says that the US will always be AAA!
So now the ignorant world investor is losing his/her money due to the market reaction. US is 16% down and SA 14%. I believe that the US policy makers created this new round of panic selling.
For those who have extra cash to invest, this is a mega sale in Blue Chip companies. Look at this:
- BHP Billiton: trading at same price as in July 2007
- Anglo American: trading at same price as in April 2006
- FirstRand: trading at same price as in December 2005
- Standard Bank: trading at same price as in December 2006
- Old Mutual: Trading at same price as in July 2002
In a newsletter written at the end of May 2011 I said that an equity investor needs to understand that volatility will play a big part in his/her investment. I also wrote that trying to time the market will end in tears and that no matter what happens with the price of a good quality company, you will receive the dividend and the company will continue making profits and eventually you will make a good return on investment.
Please, do not invest in Equities if you haven't got the guts to hold on during the bad periods, and do not invest in cash if you have a longer term time horizon!!
So, unfortunately as an SA investor all the profits for the last 20 months have been erased from your portfolio. Fortunately you will still receive your dividends because most of the companies have strong Balance Sheets and loads of Cash!
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