Financial Discipline

If you should receive all the money you would ever earn at birth, how would you spend it?

So let us say that your budget is R20 000 per month for 90 years. That will give you a lump sum at birth of R21 600 000. Now anybody receiving this amount of money at birth would probably die on the spot. But let us see what it really means.

Point number 1: With an inflation rate of 6% per annum, R21 600 000 today will buy you only R114 000 worth of goods in 90 years’ time! So you will have to earn a return on this amount of at least 6% to preserve the buying power of the money. This translates into an investment OTHER than a bank account because interest after tax will give you LESS than inflation.

Point number 2: There will be times where you will have to spend way more than R20 000 in a month to support your lifestyle for example when you buy a car or a house. The implication is that you will have to carry some of the monthly allowance over to an investment to prepare for those occasions. You will also have to determine how much you have to save every month to provide for a specific car or house BEFORE you buy it.

Point number 3: You will soon realize that as you grow older, your financial needs increases due to education, health and comfort reasons. When you are young the doctor can wait. You can sleep in a tent and only need to eat something to satisfy your hunger. In other words, you do not need the fancy stuff. This will give you the opportunity to make use of the power of compounding where if you leave the money in your investment, you will earn interest on the interest! This is where most people will fall into the trap of BUYING more than they need for whatever crazy reason!

Lastly, you do not know how old you are going to get so you will have to evaluate your financial plan continuously to ensure that you do not dip into your reserves to such an extent that you will run out of capital before you die.

THE SAME RULES APPLY for all of us earning our income as we go on and not in one single lump sum!

In summary:

·        Inflation will be your biggest enemy.

·        Provide for the big ticket items and make sure you can afford them.

·        Don’t waste money just because you have it. The lean years will come.

·        Formulate a financial plan early on and evaluate it regularly.

Markets for first 6 months of 2013

If you have been following the investment markets over the last 6 months you would have noticed 5 very distinct things being:

1.      The South African share market has been very volatile. It has gained 7% at its highest point and lost almost 4% at its lowest point giving it an 11% spread from peak to trough.

2.      The Rand has depreciated 21% against the US$, moving from R8.50 to touch R10.30 at one point.

3.      The US market has outperformed the SA market by more than 16% in US$ terms. Developed markets in general has outperformed emerging markets year to date.

4.      Listed Property and Bonds have been struggling.

5.      Gold, Platinum, Silver and most other metals have been taking a beating.

Looking at the under performing South African market one can name at least two culprits and they are the slowing Chinese economy and the lack of political talent. South Africa is very dependent on countries like China buying our mineral wealth and when there is a slowdown in the demand for our commodities, the price will fall. This will give rise to our imports exceeding our exports which will increase our current account deficit, which will be exacerbated by the weakening Rand due to foreigners taking their money out of South Africa to invest in the rising bond yields in the USA.

Another problem that faces the Rand is the inability of our government to manage the wage disputes and general well being of our economy which gives rise to an increase in the budget deficit, the downgrading of South Africa’s credit rating and ultimately the loss of confidence by international investors.

Looking at the rest of the world we can see a very confused investor public. Whenever there is good news about the growth in the US economy, the market goes down instead of up. This in mainly due to the fear of investors that the US central bank will start closing the tap on free cash. The signs of growth in the US is good news and that is why we have seen the share market outperforming the emerging markets like South Africa. It is about time for the shares in the US to gain some traction if you consider the poor performance for the last decade up to 2010. The US market has outperformed the Emerging Economies by 22% in $ terms year to date!

I am not too worried about the short term volatility in the markets and have been avoiding exposure to Gold, Listed property and Bonds for a while now due to the clear indications that they are either over valued or on the wrong side of the interest rate cycle. I have been telling my clients to increase their exposure to offshore shares because of the under performance of that sector and the strength of the rand over the last couple of years.

I am worried about the situation in South Africa and do not believe that the situation will be resolved over the short/medium term. Investing in South Africa will remain a higher risk investment than some of the developed economies and has recently increased that investment risk. There are two things one should do to mitigate this increased risk and they are:

1.      Ensure a well-diversified international portfolio. Focus on the USA

2.      Be very specific when selecting South African shares to invest in.

Investment mistakes we make, over and over.....!

A very wise man once told me in passing that you should sensor what you listen to and what you read. He said that when you are in your car, be very critical about the content on the radio and rather use the time to reflect in silence than to get worked up over an agitated caller's personal opinion.

There are 3 things I can think of right now that can be called the bully in the playpen. These 3 things will detract from your long term financial wellbeing as surely as filling your mind with crap will manifest in your daily life.

Instant gratification
Warren Buffett once said that he hates spending money because he knows that with every dollar he spends, he could have made $10 by investing it. Now if you do not know who Warren Buffett is, go Google him! People love to shop and some more than others. Miraculously there is always something you need urgently because it will do something extraordinary. Like, if you buy a new HD plasma TV you also need to buy a new HD DVD player and a sub-woofer to complete the experience.

Now that is all very "live in the moment" but just remember that one day when you are almost blind and probably deaf, that R1000 you spent when you were 30 years old, would have grown to over R230 000 when you turn 70 if you invested it in an investment yielding 15% return per annum.

Procrastinating
Such an ugly word but it does even worse with your potential investment returns! We all get caught by this one. I sold my house in November 2012 and "parked the cash" in an interest bearing account yielding 5.2%. I was busy with life, and waited for the Rand to strengthen to R8,20 to the $ because I want to invest in the USA stock market.

Well, here I am, still waiting. The R/$ is at R9,58 and the Dow Jones in Rand terms has gone up 20%. So I have made 2.5% return on my cash and my intention of investing would have given me 20%. We have to ACT when it comes to investing!

Investing on rumors and promises
This is a crap shoot, a roll of the dice way of investing. If you make money you are lucky and luck always runs out. Look at Sharemax, Kings etc. If you see your buddy making money on a share or some property investment, congratulate him/her and invest your money into something you know or into something with a proven history of performance and stability.

So don't just buy stuff, invest now and don't listen to hot gossip!

Investing 2013

What a fantastic surprise we got in 2012! The JSE gave us 27% including dividends and the S&P close to it. I was hoping for 12% return on shares. The amazing thing I take away from 2012 is how wrong we all are in our expectations.

January 2012 people stormed into my office, begging me to sell all their shares and to buy Gold. The big thing back then was that the EU was going to collapse and that Gold was going to hit $2 500 at the end of 2012!

Gold returned 6%, Inflation was about 5.8%!!! Gold shares like AngloGold returned -25%!!!

So if you sold your JSE share portfolio in Jan 2012 for R1mil and bought AngloGold shares, your LOSS would have been R520 000!!! This is something that will take you a very long time to recover from, if ever.

It is because of these emotionally driven disaster choices that people suffer financially, and the worst thing is that they then blame Shares for their predicament and make the mistake of keeping their longer term funds in Cash because their investment confidence got shattered!

I am convinced that the BIGGEST mistake we can make is to tamper with a well diversified equity portfolio. If you invest in 2 or 3 of our most successful (based on 7-10 years past performance) EQUITY Fund managers like Coronation, Foord or Nedgroup, you need not worry because with ALL the ups and downs, you will receive a good return after 7-10 years!

The Second Biggest mistake we make is to not build a relationship with a qualified licensed IFA (Independent Financial Advisor). I can give you 2 reasons why you should do it:

1. If you are still young and accumulating investments for future retirement, the IFA can work out a plan that will give you precise information on how much you have to save, for how long and in what.This plan can be monitored every year to see how you are doing.
2. At some stage in your life you will have to start drawing money from your investments (retirement). At that stage the IFA will know you well enough, and you will trust him/her enough to split your portfolio between the short term cash and the longer term equity exposure.

Regarding investments for 2013 I list the assets in order of preference:

1. Developed countries Equity.
2. Emerging Market Equity including SA (The Rand might be rather strong so no currency profit).
3. Bonds are expensive and when interest rates turn up they will suffer, so avoid.
4. Listed Property is expensive, as it has been for the last decade and keeps surprising on the upside but I will avoid it.
5. Cash only for short term expenses, it is not an investment.

Good Luck.

The day I lost all my money

I was deep in the Himalayas in Northern Nepal on the 10th day of a 15 day hike. The altitude was just over 4000 meters and the clouds were rolling in so I decided to stop at a small refuge in the mountains. The rooms were very basic and unsecured so I decided to break my 25 year backpacking rule of diversification.

Usually I would split my travel money into 3 sections: The first batch consisting of my daily allowance will go into my shirt pocket with my credit card and passport. The second batch consisting of my hard currency ($, Euro etc) and 50% of my local currency would go into my wallet/money-belt and the last batch would be the other half of my local currency which I would hide in my backpack.

I was keen to do an acclimatisation hike up the mountain to a small monastery before sunset and in my haste decided to put all my money into my wallet and take it with me. I forgot all about it and that evening I joined the 6 or so other guests round the little Yak dung stove in the dimly lit dining room to escape the bitter cold.

When I woke the following morning I did what I always do, I re-packed my backpack to make sure that I had everything. My final check was to sort out my money diversification strategy. After going through all my pockets I realized that my wallet was missing. At first I thought nothing of it and unpacked everything in order to locate it. As I checked every pocket I started to get that cold, clammy uneasy feeling.

I calmly walked down to the place where we sat the previous night and looked under all the tables and chairs. I then went back to my room and, being in full denial, re-checked everything. At that moment the gravity of my situation started to dawn on me. I had 5 days of tough hiking to get off the mountain and back to civilization. Without money to pay for food and shelter I was completely dependent on the charity of other people for my survival.

In a full panic I rushed back down to the lounge in the hope of a miracle, and I encountered one. The Sherpa guide of one of the other guests saw my frantic search and asked if I was looking for my money belt. I actually became dizzy with relieve when I realized that I was going to be okay.

Now you can ask me, what is the moral of the story? And my answer is DIVERSIFICATION!!

If you go through life and start building up a portfolio of assets through diligent and responsible investing, the most unnecessary and gutted feeling you will ever encounter will be the permanent loss of all your savings due to betting everything on one single asset.

And remember! The "safest" place might not be that safe!

Avoid Probate on Offshore Investments

While we are waiting for Greece to exit the EU, we might as well discuss something important regarding your death. Did you know that, if you've got investments Offshore (as a South African), the executor of your estate will have to request an authorized person in the country your investment is registered in, to release the investment to the estate. This is called Probate.

This can take months, if not years to happen and the fees will be sky high. Now imagine the nightmare if you have got 10 different investments in 10 different countries! Property in the UK, shares in the USA, Unit Trusts in Guernsey etc. The easy solution is to invest in products where you can nominate a beneficiary or where you can nominate a joint owner. In such a case probate will be avoided.

One product that can actually do all the probate avoidance tricks as well as consolidate a portfolio consisting of a number of different assets like bank account, shares, unit trusts etc, is the new Old Mutual International Investment Portfolio. This product not only allows the sophisticated investor with the means to invest in a range of assets under one admin roof, but also allows for tax free returns (no Capital Gains Tax, no tax on Dividends or Interest, nothing).

The only drawback is that the minimum investment is $150 000.


As a South African, investing in a country outside the political grasp of the SA government, investing in a market offering products and services not offered in SA, investing in countries where the assets are cheap compared to similar assets in SA, one has no choice but to do it, if not for your own wealth diversification, then for your children and grandchildren's.

Clarity on previous post about Greece

I mentioned the trading range on the Top 40 and the return day traders (speculators) make as 15%. This is the "geared" return due to instruments they use being options,warrants etc. If for example I buy the index using a warrant (TopDWC) which is 9 times geared at the current moment, I will receive a return of 30% if the Top 40 moves from 29 500 points to 30 500 points (3.39% x 9). Usually you don't get the full participation and you average up or down and I halved the return to illustrate the point.

Still very risky when the range is broken!