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MONEY JULY 2021
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SAVING & INVESTING
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CONTENTS FEATURES 4 easy ways to cut your expenses
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The real reasons why South Africans aren’t saving Here’s a plan to manage your debt
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Diversification: how to enjoy your free lunch
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REGULARS Rands and Sense with Gerard Visser
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Fact File: Household savings rates in different countries
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Money Basics with Martin Hesse: 5 Ways to invest R1000 a month
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Money Quiz 18 Planning Perspectives with Palesa Tlholoe
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Important contacts and links
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FROM THE EDITOR
A bargain ain’t a bargain unless it’s something you need. – SIDNEY CARROLL
American film and television screenwriter
CONTACT US PUBLISHER Vasantha Angamuthu vasantha@africannewsagency.com MONEY EDITOR Martin Hesse martin.hesse@inl.co.za DESIGN Mallory Munien mallory.munien@inl.co.za PRODUCTION Renata Ford renata.ford@inl.co.za BUSINESS DEVELOPMENT Keshni Odayan keshni.odayan@inl.co.za SALES Charl Reineke charl@africannewsagency.com ENQUIRIES info@anapublishing.com
INVESTMENT guru Warren Buffett says you should spend what is left after saving instead of saving what’s left after spending. But this is easier said than done. If you’re struggling to make ends meet each month, it is almost impossible to follow this advice, because everyone needs to spend on essentials such as food and accommodation, and these essentials alone may be gobbling up all your income. However, if you’re struggling to make ends meet because most of your income is going into servicing debt, then you probably can afford to save. This is because much of what you are paying off on your debts is interest. Put another way, it's the ”fee” the bank or credit provider is charging you for borrowing the money, and all it’s doing is making the bank richer and you poorer. So if you reduce your debt, you reduce how much the bank is profiting from you, releasing some much-needed free cash. July is Savings Month, an annual initiative of the South African Savings Institute (SASI). Many of the large financial institutions take the opportunity to encourage South Africans to save more (we’re pretty hopeless at this compared to some other countries – see page 13). Why don’t you use the opportunity to try to cut down on non-essential expenses (there are a few ideas on pages 3 & 4) and use what you can save to reduce your debt and to begin putting away something each month, even if it’s only a few hundred rands? For details on what SASI is doing to promote saving, go to https://waystosave.co.za/
Martin Hesse
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EASY WAYS TO CUT YOUR EXPENSES If you are keen to save, or need the extra money to start reducing your debt, here are four everyday things you can consider cutting back on, which could possibly save you a couple of thousand rands a month.
1. YOUR CELLPHONE How much are you paying each month on your cellphone? If you are on a contract and have a top-of-the-range phone, it is likely to be over R1000 a month. You may not be able to do it immediately, because you are tied into your contract, but when your current contract expires you should consider a cheaper contract, with perhaps a less fancy phone, or even keeping your current phone for another two years or so and going payas-you-go. You could save R500 - R600 a month.
2. EATING OUT We all want to support our local restaurants in these dark times, but perhaps you were eating out too freely before the pandemic? A dinner for two can easily cost R600, whereas you can make a meal for two at home for R100. That is a saving of R500 every time you don’t eat out. Cut your eat-outs by two a month and you save R1 000 – and you get a chance to hone your cooking skills. Another idea: pack a lunch for work instead of going out to lunch with your colleagues – for three days a week, at least.
3. CLOTHING What is your clothing bill each month? Are you running up high balances on clothing store cards? This is one area where you can cut down drastically. You don’t need a new outfit for each special occasion, and you certainly don’t need to buy only highend designer labels. Get comfortable in clothes that you can wear time and again, and comfortable with the fact that you don’t have to impress your friends with designer labels. If they are friends worth having, they like you for being you, not for the labels you dazzle them with.
4. GIFTS It’s a virtue to be generous. However, you need to scale your generosity to your budget. Gifts to loved ones and friends don’t have to be lavishly expensive. And it should not be a competition to see who can give the most expensive item, either: gifts from the heart are well-chosen but not necessarily expensive. An idea: why don’t you and your partner settle on an upper limit for gifts to each other over the festive season or on your birthdays? Decide, for example, that gifts do not exceed R500. Then you both know where you stand.
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THE REAL REASONS WHY SOUTH AFRICANS AREN’T SAVING SISANDILE CIKIDO delves into why the savings rate is so low in the country, despite the fact that it appears that most South Africans actually want to save. She suggests the solution lies in better, simpler savings products and boosted financial education.
OVER the years, banks and financial experts have made ongoing calls for South Africans to save for the proverbial “rainy day”. Then, in March 2020, that rainy day arrived, as Covid-19 delivered a torrent of financial challenges that left anyone without accessible savings and investments struggling. A recent study conducted by a leading data analytics firm, Kantar, revealed some very interesting insights into the real reasons behind why so few South Africans are saving. And unfortunately, the hard lessons Covid-19 delivered about the importance of saving still don’t appear to have been taken to heart by many South Africans. Arguably one of the most interesting findings of the research was that, contrary to widely held perceptions, most South Africans want to save, and they understand the importance of doing so. However, the large majority find it difficult to do so because they find most formal savings offerings overly complex and intimidating, and they simply don’t understand how the typical savings account can help them grow their money.
RISKY APPROACH In addition, the research also revealed that the younger generation is increasingly turning to new ways of growing their money, such as share and forex trading and cryptocurrency, as they generally have a greater appetite for risk than tried and tested savings vehicles. This is an indication that younger investors look for more aggressive growth as they want to build wealth and fast, which isn’t necessarily a bad thing. With time on their side this allows investments to go through various stages of growth, and, in bad seasons, they have the time to wait out the storm. However, it is imperative for young investors to investigate all investment platforms and do their research on any asset class or investment type. This is to preserve losing the very wealth they are trying to build. The research findings further highlighted that many people are reticent to put their money into a formal savings product because they see banks as less of a partner in building financial security, and more of a gatekeeper, forcing
them to ask permission and jump through hoops to then get their money back when they need to. This misperception isn’t helped by the fact that many people believe that formal savings products simply aren’t meant for them, but are rather targeted at wealthy individuals who have high levels of financial literacy. DIFFERENT VEHICLES FOR DIFFERENT GOALS This also highlights another significant hindrance to the development of a much-needed savings culture in South Africa, which is that few individuals recognise, or understand, that the various savings products available through formal channels are designed to help savers meet very specific goals. So, for example, someone who needs to save money that they may need quickly for an emergency would choose a very different savings account to the person who has five years in which to save towards a long-term goal. And the savings goals inform the design of the savings solution, which means some prioritise access over interest levels, while
7 others like fixed deposits, focus more on delivering maximum growth over time. The failure by many people to understand these differences in design has led to a widespread misperception that when they put their money into a savings account, they effectively lose control over it. This is obviously not the case. In fact, the opposite is true, and most formal savings solutions offer savers total control in the form of a choice of what objective they want to prioritise in their savings plan. FEAR OF FEES Another significant challenge to building a savings culture is the lingering perception that formal savings offerings are expensive. Despite most bank savings accounts charging low, or no fees, many potential savers still believe that high account charges will eat away at what little savings growth they achieve. High minimum deposit requirements are also seen as a significant barrier to entry by many. So, while banks have come a long way in terms of simplifying their savings offerings, it’s clear that there is still much work to be done. Obviously, there’s no one-size-fits-all savings offering that will provide a solution to all these challenges. But understanding what is holding South Africans back from saving the way they should, and then acknowledging that a more consumer-oriented approach is needed for the design and marketing of savings products, are two important steps in the right direction.
Sisandile Cikido is the head of retail investments at Nedbank.
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THE WAY FORWARD Clearly, what is needed is a combination of innovative, simple and people-centric savings product design, full transparency around costs and rates of return, a greater investment in consumer education, and a commitment by banks to put a more human face to savings. And from a consumer perspective, acknowledgement of the importance and value of saving, even if it is just a small amount to start with, will go a very long way towards building the long-overdue savings culture.
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HERE’S A PLAN TO MANAGE YOUR DEBT You cannot begin to save for the future if you do not have control of your finances, and the first thing to do is to control and, if possible, reduce your debt. FOR most people, some debts are unavoidable. However, you and other South Africans now face a unique challenge: consumerist culture and the relentless selling of instant gratification. Combine that with easy access to credit, and it becomes the perfect storm of losing control over your finances. That is why debt management is an essential strategy to bring and keep your financial situation under control. Implementing an effective, ongoing debt management plan can ensure that you: ● Become empowered to manage your financial situation proactively.
● Avoid losing control of your debt. ● Find a way out of indebtedness. ● Stay on track to reach your financial goals. Carla Oberholzer, debt adviser at debt counselling firm DebtSafe, says: “Having authority over your finances can turn your money into a powerful ally. But, if debt is left unchecked, it will become your ruthless enemy.” Oberholzer says an effective debt management plan consists of the following five steps: Step 1: Revise your financial situation The first step is to get an idea of
your current financial situation. Answer these three questions to get your first debt management step in check: ● What is your monthly income after deductions? ● What does your payment history on your bank statements reflect? ● What does your credit record portray? (Did you know that you can pull your record for free, every year, at any registered credit bureau?) Step 2: Compare your current income to your debt The second step is to calculate your current debt-to-income ratio. Here’s
9 how in a nutshell: ● Add up all your monthly debt repayments. ● Divide the figure by your monthly income before any deductions (gross salary amount). ● Multiply by 100 to get a percentage, which will give you your debt-to-income ratio. Oberholzer says anything above 40% is an alert sign. “The higher the percentage, the closer you are to over-indebtedness.” Step 3: Prioritise what debt to pay off sooner Prioritising debt doesn’t mean not paying certain debts; you should still meet all your monthly debt obligations. It means that you identify the most damaging debt to your finances and use your budget to find ways to pay these debts off sooner. Debts that increase your financial worth should be grouped into “good debt”, and debts with no long-term value can be grouped into “bad debt”.
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Step 4: Set up a personal budget Now that the groundwork of setting up a budget has already been
completed, you should continue to keep at it. Here is a basic budget outline that you can start off with: ● Take your money amount that comes in (your net income – salary after deductions such as tax, retirement fund contributions and UIF). Include any extra income, such as monthly commission or rental income. ● Subtract your money that goes out. There will be your essential day-to-day living expenses on things such as accommodation, food, electricity and water, clothes, and telephone. Then there will be your credit service agreement on your debts, such as your credit card, personal loans, car finance, store cards and mortgage bond. Thirdly, there will be your monthly contributions to medical aid, insurance policies and any investment policies. Finally, there will be your non-essential expenses such as what you spend on eating out, DStv, entertainment, luxuries and holidays. ● Subtracting what goes out from what comes in equals the money you have left over. If the final amount reflects a surplus, you can use additional
money to pay off your current debt. But, if your amount reflects a minus, you are spending more than you are earning and may have excessive debt, which you will have to tackle proactively. Step 5: Use your budget to manage your debt Answer these four questions to make sure you continue to budget properly and manage your debt: 1. What are your financial goals? 2. What debt amounts are damaging to your financial situation, and how are you going to address them/pay them off effectively? 3. What expensive habits or lifestyle choices do you need to get rid of? 4. Do you have an emergency fund? If not, how can you make room in your budget to start building one? Effective debt management is the key to taking control of your financial situation and it is a life skill you will be glad to have mastered. Take a confident step to get your plan going and keep at it to turn your money into a powerful ally. | Supplied by DebtSafe
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DIVERSIFICATION: HOW TO ENJOY YOUR FREE LUNCH Diversification has been called “the only free lunch in investing”. So how does it work and how does it benefit you? By MARTIN HESSE “SPREAD your bets.” “Don’t put all your eggs in one basket.” The benefits of diversification have long been known to mankind, as these well-used phrases confirm. Yet how often do we hear of people losing their entire life’s savings through a single failed investment? While on the face of it the concept is simple enough, to structure a well-diversified portfolio requires some effort and thought. There are different ways of diversifying your investments, depending on your investment goals and time horizon. Higher-risk investments, such as shares and property, are necessary in a long-term portfolio for
achieving above-inflation growth. However, the risks associated with these asset classes need to be carefully managed, and diversification is key to managing risk. Lack of diversification leads to concentration risk, the investment industry term for having all your eggs in one basket. In an article for Forbes magazine, “How diversification works, and why you need it”, Rob Berger and Benjamin Curry explain that diversification is not designed to maximise returns in the short term. “At any given time, investors who concentrate capital in a
limited number of investments may outperform a diversified investor. “Over time, however, a diversified portfolio generally outperforms the more focused one,” they say. HOW TO DIVERSIFY YOUR INVESTMENTS The secret to diversification is noncorrelation. If two assets are correlated, they move up and down in tandem; if they are noncorrelated, the one will move up while the other moves down – in other words, the same market conditions will affect the assets in different ways. You can find a degree of
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1. Diversification within an asset class This applies particularly to shares, also known as equities. For example, defensive shares (companies that provide essential products or services, such as food), tend to weather market shocks better than companies trading in luxury goods. Some sectors are highly cyclical: mining shares can reap handsome returns during a commodity boom, but may lose value at the bottom of the commodity cycle. 2. Diversification across asset classes A multi-asset portfolio that invests in shares, bonds, cash and listed property provides this sort of diversification. Equities and bonds, in particular, tend to be uncorrelated in their performance. 3. Diversification across investment styles Funds in the same category may
have different investment styles based on differing investment philosophies. Value managers, for example, choose shares that offer good value for their price. Other styles are growth (fastgrowing young companies), momentum (shares that are following the upward movement of the market), and quality (“bluechip” companies). 4. Diversification across geographies Having a certain portion of your portfolio offshore means you are investing in a range of companies and sectors you wouldn’t have access to otherwise. You also hedge against currency volatility. Don’t fall into the trap of thinking that because you have many assets in your portfolio, it’s diversified. “It’s important to consider the correlation between the investments in your portfolio,” Berger and Curry say. “Even if you own many different investments, if they all trend up or down together, your portfolio isn’t appropriately diversified. For instance, high-yield bonds often have a positive correlation with stocks. Therefore, a portfolio made up entirely of highyield bonds and stocks is not well diversified.”
DIVERSIFICATION ACROSS FUNDS Lebo Thubisi, head of manager research at Alexander Forbes, specialises in applying diversification across unit trust funds. He says: “This means spreading risk effectively so that no single asset class, investment style or asset manager will ever dominate the fortunes of our portfolios. We look to find out which styles of fund management ‘work’ – those that are more likely to outperform over time, are more predictable, and complement each other.” Thubisi says that to prevent under or over-diversification, you need to monitor your portfolio constantly, rebalancing where necessary. “We monitor a portfolio by continually checking to see if it’s performing in line with our expectation from a risk and return perspective, given current market conditions. “If the risk is out of line, we have systems that monitor it. Therefore, we take corrective action by either reducing exposure to an asset class, strategy or asset manager if we believe that the risks are too high (above the limit we set), or add to a strategy if we believe that the payoff profile is in our favour.”
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noncorrelation within and across asset classes, as well as across unit trust funds with different investment styles. Another form of diversification, which is beneficial to South African investors for a number of reasons, is across geographies.
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Rands & Sense
Financial planning basics to help you save
Gerard Visser
THE Covid-19 pandemic has put significant strain on the finances and financial plans of everyone. The weakening South African economy and highest unemployment rate in 12 years are placing even more stress on us. As a result, debt balances have increased for many people, who are relying on credit to keep going. Beware of what you cut back on Financial advisers have noticed an increase in queries from clients about reducing their retirement fund contributions, insurance premiums and cover amounts as they try to find ways to cut costs. In some cases, clients have cancelled policies entirely. Decreasing cover amounts and contributions or cancelling policies entirely will most certainly create a shortfall in your financial planning. It will be vital to review investments and policies once your financial situation improves. The importance of an emergency fund Now more than ever, advisers see clients realising how important emergency funds and voluntary investments are. These investments are there to help with cash flow and unexpected expenses in times of crisis. When setting up an emergency fund, you need to try to save any disposable income remaining from your monthly budget and build up an emergency fund of three to six times your monthly salary. Review policies regularly Review your policies and insurance cover to ensure that: ● the cost for the cover you have is within what the market offers; and ● you are not overpaying on costs on policies.
You might have cover both in your personal capacity and through your employer – for example, disability income protectors and life cover. If you have policies with similar benefits, this is a good time to review them and ensure you are not overinsured. The importance of budgeting If you did not receive a salary increase, your salary has been cut or your expenses have increased, your budget will need to be stricter, with less allocated to entertainment. Unfortunately, some of us might be getting behind or creating shortfalls in personal financial planning. It is important to have the right mindset to ensure that the change is temporary. Once stability returns, you should review your financial needs and try to make up the shortfalls. If you are struggling to cover all your expenses, completely relook at your current situation. Start your budget from scratch, including essential needs only. If you are really struggling to make your debt or loan payments, contact the respective institutions and try to agree on a payment plan. Saving from a young age is beneficial While it might be difficult for young investors looking at starting their financial planning to take their first step in the midst of the effects of the pandemic, it is definitely better to start sooner rather than later. Many employers often offer financial well-being programmes and financial advice, where employees can get information. Visser is a Certified Financial Planner at Alexander Forbes
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FACT FILE
HOW DOES SA’S HOUSEHOLD SAVING RATE COMPARE WITH THAT OF OTHER COUNTRIES? HOUSEHOLD savings is defined as the household’s net disposable income (“net” means after deductions such as tax) plus an adjustment for pension savings less household consumption expenditure. The household saving rate represents how much a household is able to save,
including what is going into retirement funds, as a percentage of disposable income. It thus shows how much households are adding to their wealth. By this definition, South Africans are getting poorer, with a negative rate for 2016, 2018 and 2019. They are among the
three worst countries in the table below (the others being Portugal and Greece). Interestingly, of the four countries that reported their rates for 2020, all saw a rise in saving during the pandemic, with Germany increasing its rate from 10.87% to 16.23%.
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HOUSEHOLD SAVING RATES PER COUNTRY 2016-2020 2016
2017
2018
2019
Australia
5.20
4.29
3.89
10.26
France
8.18
8.37
8.65
9.11
Germany
10.20
10.59
10.93
10.87
Greece
-13.08
-13.42
-13.98
-11.55
Italy
3.00
2.56
2.53
2.49
Japan
3.27
2.62
4.29
Mexico
13.98
13.02
10.25
14.69
Netherlands
10.25
8.79
9.12
10.01
Norway
6.89
6.55
5.90
7.61
Poland
1.72
0.43
-0.73
1.43
Portugal
-1.31
-2.24
-2.47
-2.07
Russia
9.51
8.71
7.35
South Africa
-0.91
0.20
-0.10
-0.25
Spain
2.97
1.64
1.43
2.01
Sweden
13.33
12.19
13.37
16.08
Switzerland
17.39
16.45
16.00
16.17
United Kingdom
2.19
-0.04
0.34
0.74
United States
6.99
7.19
7.96
2020
16.23 10.32
15.52 4.15
17.61
Source: OECD
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MONEY BASICS
with MARTIN HESSE
FIVE WAYS TO SAVE R1000 A MONTH LET’S say you’ve given your budget the once-over and found a spare R1000 that you can afford to put away month after month for at least five years. As with any investment, you want the best returns at as low a risk as possible, and preferably a savings or investment vehicle that is flexible enough to allow you to deposit extra or, in an emergency, withdraw your money at short notice. You may be immediately attracted to the obvious safe banking options, such as a debit order from your current account
into a separate savings or notice account. But these generally offer very low rates of return. Looking further afield, you should find ways to earn a better return without necessarily taking on more risk. At the very least, you want to beat inflation, which eats into your savings. Currently, inflation is running at about 5%, so if your returns are below that, you are actually losing money year by year. 1. REDUCE DEBT This is the first place you can score: what you pay in interest on debt
is normally a lot higher than what you receive in interest on savings. First eradicate any debt on your credit card account and your retail accounts, because they usually charge the highest interest Once short-term debt is taken care of, you can channel R1000 a month into your mortgage bond. By putting more than the required minimum into your home loan account, you are, in effect, saving at the rate of interest of the loan, without paying tax on the interest saved, which is almost certainly more than you’d be guaranteed
2. BANK DEPOSITS Most of us have a bank account for everyday transactions, so opening a separate savings account into which to transfer R1000 a month is certainly a convenient option – except that most banks’ savings options fall far short of offering decent inflation-beating returns. Notice deposits are relatively flexible in terms of depositing money but you must give a defined period of notice (for example, 32 days) to withdraw money. This limits your accessibility, which is bearable only if the interest rates are worthwhile. Fixed deposits are designed for lump-sum savings, but some banks offer more flexible arrangements that allow you to make multiple deposits over a fixed period. Interest rates are better than for notice deposits. 3. UNIT TRUST FUNDS Unit trust funds are extremely flexible, allowing you to withdraw money or put in extra when you want to. Your choice is extremely wide – currently there are about 1 500 funds in South Africa available to individual investors, excluding offshore funds marketed here.
Most will let you invest R1 000 as a minimum per month, although many have lower minimums, and a handful have higher ones. Funds are categorised according to the assets they invest in. Three popular types are low-risk money market funds, medium-risk balanced funds, and high-risk equity funds. 1. Money market funds offer yields in line with prevailing interest rates, but they are usually better than most bank deposit rates, although yields fluctuate daily. They are lowrisk, so there is very little chance of losing money. 2. Multi-asset balanced funds distribute their assets across listed shares, property, bonds and cash, and cannot hold more than 75% of their assets in shares. Because of the diversification of investments, they are not as volatile and are lower risk than pure equity funds. 3. South African equity funds invest at least 75% of their portfolios in shares on the JSE. In the past they have provided the most attractive returns for longterm investors, but, because of the volatility of share markets, there is a relatively high chance of capital loss over the short term. Investing monthly, rather than a lump sum, tends to smooth out your returns (when the unit price drops,
4. EXCHANGE TRADED FUNDS Exchange traded funds (ETFs) are similar to unit trusts in that they invest in the financial markets and are as easy to access. Most ETFs passively track an index, such as the FTSE/JSE Top 40, by holding the shares in the index in the same proportions. As such, they perform in line with how the index performs, which is often better than many actively managed funds. ETFs have become popular because the investment fees are lower than those of active unit trust funds. 5. TAX-FREE INVESTMENTS Both banks and asset managers offer this type of investment, which may be a savings account or unit trustbased, but with the added benefit of not attracting any of the taxes normally associated with investments: tax on interest, on dividends and on capital gains. See Palesa Thloeloe’s column on page 19 for more details about taxfree investments.
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anywhere else. You also substantially reduce the term of your bond.
15 your monthly R1 000 buys you more units). In the case of the markets taking a dip just before your five years are up, you could probably afford to keep your investment for a while longer to ride out the storm.
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FIVE THINGS INVESTORS SHOULD NOT CARE ABOUT Investment expert DEBRA SLABBER says you should leave investing to the experts. Rather than spending time scrutinising your investments and chasing performance, you will be better off putting them out of your mind and leaving them well alone. IN A world of information overload, social media, the increasing size of the investable universe, cryptocurrencies and Robinhood trading – to name a few – it can be easy to get distracted from what is important. With so much market noise, it has become more important than ever to identify the things investors should NOT care about. We outline our top five: 1. HOW RICH ‘THE KANDASAMYS’ ARE Lottery ticket stocks will always have buyers. Why? Our brains are wired in such a way that expecting to make money feels even better than the act of making money itself. It’s the anticipation that puts your brain on high alert. This is also why gamblers are rarely satisfied with a single win. Your brain always needs another shot of dopamine to get that high again. The temptation to speculate increases when we watch others around us getting rich. Unfortunately, the stories of individuals starting a “tech company” and selling it for billions are the exception, not the rule. Going from zero to
zillionaire isn’t the order of the day and the reality is that, for most of us, we need to build our wealth over time, through diligently saving and investing our hard-earned money. There will always be people with more success, prestige, money and accolades than you. The important thing when it comes to money and investments is to play your own game and to be good at your own game. 2. THE AMOUNT OF TIME YOU SPEND ON YOUR INVESTMENTS How many hours does it take to master a skill? According to Malcolm Gladwell, in his bestselling book Outliers, “10 000 hours is the magic number of greatness”. Unless you are planning on becoming an expert, there is no need to spend hours of time and effort on your investments. Rather focus on improving the skill set that is generating your income. In many areas of life, trying and/or working harder leads to better results. That’s not necessarily the case when it comes to investing. Once you have made peace with the fact
that your investment is going to take 20-30 years to build, it is actually very boring in-between. Let it be boring: that is when the good stuff is happening. 3. HOW SMART YOU ARE When it comes to investing, the biggest assets to use to your advantage are your behaviour and temperament. Warren Buffett once said: “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” A study published in November 2016 in the Proceedings of the National Academy of Sciences showed that a high level of innate intelligence is not an indicator of financial success. The study found that personality plays a much bigger part than IQ. 4. TIMING THE MARKET PERFECTLY The biggest problem with timing the market is that we have no idea when stocks will bottom or when they will climb. Maybe
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stocks will bottom today? Maybe it will climb next week… or in a year. Who knows? Will you invest at the absolute bottom? Not unless you’re ridiculously lucky. But the point remains that the bigger the losses, the higher the expected returns thereafter and, unfortunately, the biggest up days are normally very close to the largest down days. As the saying goes, a river cuts through a rock not because of its power, but its persistence. Time in the market remains superior to timing the market.
comes to investing. As investors, we naturally want the best performing portfolio and believe this is what will make the difference in our journey to wealth creation. Yes, performance is important, particularly when monthly contributions are small, but what is more important than performance is a consistent contribution and the time you allow your money to grow. As boring and uninspiring as that may sound, there is something fabulous about it too. Regardless of how much you invest, if you just have the 5. THE SHORT-TERM patience to let your investment PERFORMANCE OF YOUR compound and the discipline to INVESTMENTS continue saving through good, American economist Robert Shiller bad and boring times and not get said that one year is the time it distracted, you will be amazed takes for the Earth to go around by the power of compounding the Sun and that it has no other over time. It is in fact, the eighth significance. Especially when it wonder of the modern world.
You don’t have to outsmart the market if you can simply outperform it. Cut through the confusion and noise and focus on what actually matters – a simple, consistent, diversified approach over the long term. While noise and speculation can act as an emotional rollercoaster, your goals are unlikely to have materially changed and, therefore, your plan shouldn’t either. So, if you catch yourself getting down about the state of the equity market, trying to predict what’s next, or getting bored with your investments, always remember why you are investing in the first place. Debra Slabber, a chartered financial analyst, is a portfolio specialist at Morningstar Investment Management South Africa.
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Money Quiz Test yourself on your financial knowledge
1. Which of these is good debt? a) Car finance b) Personal loan c) Student loan d) Credit agreement on a washing machine 2. What percentage of an equity fund must be invested in equities, according to the Asisa classification system? a) 50% b) 60% c) 70% d) 80%
6. Which government body is responsible for the imposition and collection of taxes? a) The SA Reserve Bank b) The Department of Trade and Industry c) The SA Revenue Service d) The Financial Sector Conduct Authority 7. Who is the commissioner of SARS? a) Muvhango Lukhaimane b) Tito Mboweni c) Judge Bernard Ngoepe d) Edward Kieswetter
3. What type of fund invests predominantly in cash instruments? a) Money market fund b) Multi-asset flexible fund c) Multi-asset income fund d) Interest-bearing variableterm fund
8. Roughly what percentage of total tax revenue for the state does value-added tax (VAT) constitute ? a) 40% b) 35% c) 30% d) 25%
4. What is the name of the US investment firm headed by investment guru Warren Buffett? a) Goldman Sachs b) Investec c) Berkshire Hathaway d) BlackRock
9. Which country has a worse household saving rate than South Africa? a) Greece b) Mexico c) Netherlands d) Sweden
5. Which of these companies is not listed on the JSE? a) Standard Bank b) Alphabet c) Steinhoff d) Shoprite
ANSWERS: 1c, 2d, 3a, 4c, 5b, 6c, 7d, 8b, 9a, 10d.
10. In which city does the World Bank have its headquarters? a) New York b) Geneva c) London d) Washington DC
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Planning Perspectives
Taxes you pay on investments
Palesa Tlholoe
WITH July being National Savings Month as well the start of the tax season in South Africa, this is a perfect opportunity to immerse yourself in the intricacies of how these two worlds affect each other. First, let's unpack some of the regular savings and investment products and their tax implications for South Africans who are already keen investors or savers: 1. Bank savings account. Any interest earned will be included in your income tax if the interest component is above certain limits. For individuals under the age of 65, you don’t pay tax on any interest of up to R23 800. For individuals over 65, R34500 is your tax-free portion. 2. Shares, unit trust investments and exchange traded funds. In addition to the tax on interest, explained above, most funds will also attract capital gains tax (CGT) on disposal. Switching of unit trust funds is generally considered a disposal. For individuals, there is a R40 000 exemption, and thereafter 40% of the gain is included in their taxable income and taxed at their marginal rate. Dividend withholding tax of 20% is applicable to dividends paid on shares. 3. Endowment policies. All taxes mentioned above are applicable, but taxed within the fund. The investment value is paid to the investor tax free and there’s no need to declare anything to SARS on your tax returns. 4. Property. Rental income received from a property is considered income in the taxpayer’s hands – normal income tax rules apply. The point is that, unless your money is sitting under the mattress (in which case it won’t grow at all), growth on your investments or savings is ordinarily taxed. However only growth is taxed, not your capital. What about tax-free investments? With the restrictions
that come with tax-free savings or investment products (A maximum of R36 000 in contributions per year and a R500 000 lifetime contribution limit), one needs to carefully consider how to implement a savings plan to take full advantage of compounding. Imagine a scenario where you invest R3 000 per month or R36 000 per year for about 14 years, reaching your lifetime limit of R500 000. You then stop but leave every single cent invested in order to grow within the fund for at least 10 years. Assume you invested in a growth fund, such as an equity or balanced fund, which, for example, gives you an average of 10% per year net of all fees. You should have R1 060 856 by year 14 when you stop investing, which is double your initial investment. Leaving this in the fund for another 10 years can deliver R2 751 587 by year 24. This is more than five times your total contribution of R500 000. Tax-free savings can be a great way to supplement your tax-free lump sum at retirement. Lump-sum withdrawals from retirement funds (pension, provident and retirement annuity funds) are taxed at retirement according to the lump-sum retirement tax table. You can take up to R500 000 tax-free. A tax-free investment, according to the scenario above, can be useful to supplement your retirement lump sum without worrying about tax. In closing, whether you decide to use the traditional investment options or a tax-free investment, there are tax exemptions, and a good financial planner can assist in structuring your savings and investment plans so you can benefit from most of these, especially if you’re in the higher tax brackets. Palesa Tlholoe, CFP, is co-founder and a wealth manager at Imvelo Wealth
INFORMATION
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click on the links to visit the website
Here are sources that can help you with financial education, give you more information on savings and investments, and afford you recourse if you have a consumer complaint or a complaint against a financial services provider
FINANCIAL EDUCATION Financial Sector Conduct Authority MyMoney Learning Series https://www.fscamymoney.co.za South African Savings Institute #WaysToSave https://waystosave.co.za/ BANKING Ombudsman for Banking Services ShareCall: 0860 800 900 or phone: 011 712 1800 Email: info@obssa.co.za www.obssa.co.za CONSUMER ISSUES National Consumer Commission Toll-free: 0860 003 600 or phone: 012 428 7000 Email: complaints@thencc.org.za www.thencc.gov.za Consumer Goods and Services Ombud ShareCall: 0860 000 272 Email: info@cgso.org.za www.cgso.org.za
FINANCIAL ADVICE Ombud for Financial Services Providers phone: 012 470 9080 or 012 762 5000 Email: info@faisombud.co.za www.faisombud.co.za INVESTMENTS Financial Sector Conduct Authority ShareCall 0800 110 443 or 0800 202 087 info@fsca.co.za www.fsca.co.za LIFE INSURANCE Ombudsman for Long-term Insurance ShareCall 0860 103 236 or phone: 021 657 5000 Email: info@ombud.co.za www.ombud.co.za MEDICAL SCHEMES Council for Medical Schemes MaxiCall: 0861 123 267 Email: complaints@medicalschemes.com or information@medicalschemes.com www.medicalschemes.com
Credit Ombud MaxiCall: 0861 662 837 or phone: 011 781 6431 Email: ombud@creditombud.org.za www.creditombud.org.za
RETIREMENT FUNDS Pension Funds Adjudicator ShareCall: 0860 662 837 or phone: 012 346 1738 Email: enquiries@pfa.org.za www.pfa.org.za
National Credit Regulator ShareCall: 0860 627 627 or phone: 011 554 2600 Email: complaints@ncr.org.za or (debt counselling) dccomplaints@ncr.org.za www.ncr.org.za
SHORT-TERM INSURANCE Ombudsman for Short-term Insurance ShareCall 0860 726 890 or phone: 011 726 8900 Email: info@osti.co.za www.osti.co.za
TAX Tax Ombud ShareCall: 0800 662 837 or phone: 012 431 9105 Email: complaints@taxombud.gov.za www.taxombud.gov.za PROFESSIONAL ORGANISATIONS Fiduciary Institute of Southern Africa (FISA) phone: 082 449 2569 Email: secretariat@fisa.net.za www.fisa.net.za Financial Planning Institute of South Africa (FPI) Phone: 011 470 6000 Email: info@fpi.co.za www.fpi.co.za South African Institute of Tax Professionals (SAIT) Phone: 012 941 0400 Email: info@thesait.org.za www.thesait.org.za FINANCIAL DATA ◆For ◆ the latest financial market indicators, go to https://www.iol.co.za/businessreport/market-indicators ◆For ◆ the latest quarterly unit trust performance, go to https://www.iol.co.za/ personal-finance/collective-investments ◆To ◆ look up performance of a particular unit trust fund go to https://www.iol.co.za/ personal-finance/fund-look-up
