DESTINY PERSONAL
IN ASSOCIATION WITH
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PERSONAL
B
rought to you by Old Mutual Wealth in partnership with DESTINY, this report aims to help you take a fresh look at your finances so that you can create the wealth you need to live your dreams. There was a time when investing was about putting your money into a fund that matched your risk profile and achieved better returns than its peers. However, in recent years this notion has been challenged by financial planners who understand that your relationship with money depends very much on your personal experiences, hopes and lifestyle aspirations. Lasting financial well-being can best be achieved if you place your range of
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lifestyle needs at the very centre of the financial planning process and give a lot of thought to questions such as: “What matters most?”, “What do I want from life – and when?” and “How much is enough to fulfil this vision?” At Old Mutual we believe in the value of partnerships. One of our key objectives is to earn respect through the quality of our research and advice, and trust through our deep commitment to being a responsible financial partner. • Visit: www.howmuchisenough.co.za to find out more.
LESEGO MOKAU Brand & Advertising Manager: Old Mutual
SHEENA ADAMS Deputy Editor
Photographer: Sarah de Pina. Make-up: Niqui da Silva
HOW MUCH IS ENOUGH?
O
ne thing has stuck with me throughout the editing of this report: “What does your money mean to you?” It’s a question Jason Bernic, Financial Planning Coach at Old Mutual Wealth, poses in explaining the kind of detail you need to go into when drawing up a long-term investment plan. It might not be an obvious one to ask yourself, but it’s an important one. The way you use your money depends on what it means to you. Bernic joins experts like JSE executive Zeona Jacobs and accomplished businesswoman Johanna Mukoki in this collection of articles – brought to you in association with Old Mutual Wealth – offering advice, tips and information on building, retaining and increasing wealth. We hope it really gets you thinking about how best to direct your money.
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HOW MUCH IS ENOUGH TO SEND YOUR KIDS TO A TOP SCHOOL & STILL INVEST IN A GAME FARM? How much is enough? An age-old question that needs a new answer. Old Mutual Wealth has it and it’s called Integrated Wealth Planning. It’s a wealth map that puts you and your goals at its core, helping you plan how much is enough for you – for now, for your life and for your legacy. Contact your Financial Adviser about your Old Mutual Wealth Integrated Wealth Plan.
Call 0860 WEALTH (932584) or go to www.howmuchisenough.co.za
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page 70 | MARCH 2015
PERSONAL
ON THE
MONEY Draw up ideas for your wealth plan with this solid outline of what bespoke investment principles look like Compiled by Sheena Adams
IT’S ALL CONNECTED: INTEGRATED WEALTH PLANNING Many a financial planner would say the problem with most clients is that they don’t know what they want. Maybe they know they’d like to retire in their 50s, rather than their 60s, but have they considered exactly what that retirement looks like? Where are they living and what are they spending on? Sharon Moller, a Financial Planning Coach at Old Mutual Wealth, says wealth plans require a lot of introspection and a deep engagement process. “Clients need to identify what they want their lives to look like. We do lots of coaching engagements to help clients make important decisions like that,” she says. A “discovery interview” is the first step towards uncovering who the client is. A period of goalsetting follows. The data-gathering is precise. Do you see yourself in your current house in 10 years’ time? Who’s with you? How much income do you need to generate as a compromise for spending more time with your family? Moller says once the “current reality” of the client’s drawn up, the planner will construct an investment plan that ensures the client’s money lasts until a certain age.
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MORE THAN SKIN-DEEP “If you ask someone a generic question about their life goals, they’ll probably tell you something like: ‘I want to retire successfully, have a nice car, as well as family and friends, and stay healthy.’ “If you care about that person’s aspirations, rather ask them: ‘What does your money mean to you?’ These open-ended questions lead to entire conversations. “Many young people don’t think very far forward, while older ones avoid contemplating the future, as it can be scary. So we try to take people from where they are to where they want to be. “Everyone has goals, realised or not, but they have to learn
how to expand them. They also need to monetise them – which is where we come in. “If we understand your desired lifestyle and goals, then – based on your assets, liabilities and earnings – we can work out what your money needs to do in order to achieve those goals.” – Jason Bernic, Financial Planning Coach: Old Mutual Wealth
“Many young people don’t think very far forward, while older ones avoid contemplating the future, as it can be scary.” – Jason Bernic
Old Mutual Wealth doesn’t pay commissions to advisors, but follows a feefor-service approach. Costs include planner, administration and fund management fees. Planner fees need to be agreed between the planner and the client for the first round of financial advice and any work done in setting up the plan. This fee can be rand- or asset-based. Administration fees are charged at 0,3% of invested assets, with R114 minimum per month and R500 maximum (excluding VAT). This is per client, per investment vehicle or product. Fund management fees form the last component.
KEY INVESTMENTS Chris Potgieter, Head of Private Client Securities at Old Mutual Wealth believes the intense competition in the share market has actually opened it up to entrylevel investors. A managed share portfolio is now within reach of most professionals. “We construct local and global portfolios without any middle man. Your portfolio manager can discuss Apple, Google and ExxonMobil equally against Richemont,
Sasol and Naspers. You have one point into the global investment universe and it’s not an off-the-shelf solution,” he says. “We have a client who wants a different level of transparency and engagement with their investments. “We have R1,5 trillion of unit trusts in SA in collective investments of assets. There’s nearly R1 trillion of direct investments on the share market by individuals, high networth investors and people who trade the market actively. It’s a market that’s been exclusive until recently and what opened it up was the liberation of information on the Internet,” adds Potgieter. Anil Thakersee, Chief Investment Officer at Private Client Securities, says the most attractive shares are those in “high-quality businesses”. “These have a proven track record of delivering earnings on a consistent basis and the outlook is to grow those earnings consistently too. It’s also important that the company’s been growing at a faster rate than the market,” he explains. “Discovery, Aspen, Naspers and Mr Price are examples of such companies. In every market, you have companies with a product or service matching a sizeable local market who are growing and who have the disposable income to buy that product or service. These companies are able to do it profitably. They’re the ones in which we want to invest for our clients. We also want our clients to hold onto those investments long enough for gross sales figures to result in outsized
investment returns, compared with the index,” says Potgieter. “But you need to understand that if you want to buy such a company, you have to pay a premium to the market,” cautions Thakersee. Other points to consider when seeking which company shares to invest in are: • Look at businesses which are in a dominant position in industries where it’s difficult for rival organisations to take their market share. • These companies should be leaders in products or innovation. • Their earnings should be geographically diversified and not dependent on certain products. • They should have a proven track record of consistent growth. Typical unit trust portfolios have 40 stocks, says Thakersee. “Some are 0,2% or 0,5% of the portfolio. We don’t do that. We try to identify 18-22 companies; our portfolio at the moment is 19 stocks. “We believe in high-conviction investing. What we don’t do is target the benchmark. “Discovery, for instance, is 0,5% of the all-share index. A typical unit trust manager will say he wants 1% in Discovery because that’s double the index rate. “We, on the other hand, have 6% in Discovery because we’ve taken the time to understand its business model and we’ve been convinced by its track record.”
Written by Geordi McIntosh, Head of Old Mutual Wealth Fiduciary Services
DEATH AND TAXES At its core, estate planning is about answering the proverbial question: “If I get hit by a bus, are all my affairs in order?” At a minimum, do you have a valid will which directs the way you’d like to distribute your money and who would you like to manage that process? We look at your fiduciary needs within your entire estate plan and take you on a journey that will ultimately result in a valid, appropriate will. The estate planning
process will identify any potential pitfalls. So, if you’re worried about the proverbial bus today, what’s the technical situation? For example, what are the tax consequences of you dying? Would there be capital gains tax or income tax? What will the estate duty be, since there are taxes on death? We also look at expenses (including executors’ fees) and at liquidity issues: is there enough cash to pay these expenses and fees, as well as your other liabilities? If you’re young, you tend not to have many assets, so you may consider buying life insurance in order
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to create instant assets which would then help your beneficiaries. If you’re at the stage where you’ve made your money, how would you like to ensure it’s passed on to the next generation, or to your beneficiaries? Also, how should they receive them?
A LIVING WORK IN PROGRESS You need to understand that a will isn’t all about death – it’s actually a live, ongoing conversation. As you change and evolve in your life, your wealth needs change too. So do the needs of your beneficiaries. For
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THE COST
PERSONAL
Written by Izak Odendaal, Investment Analyst at Old Mutual Wealth
THE INVESTMENT HORIZON Over the past 100 years, South African shares have been among the best in terms of long-term value. However, based on historical data, a more expensive market typically yields lower returns. We expect returns from the South African market over the coming five years to be lower than they’ve been over the past five, but still positive, since the market’s still delivering real (post-inflation) returns. One of the big things to watch out for this year is how interest rates move in SA. Our view is that they’ll likely stay flat. Meanwhile, the JSE’s performance has been driven largely by companies that generate the bulk of their earnings from outside SA. Naspers, for example, is effectively a Chinese entity with its stake in Tencent. MTN, too, is actually a Nigerian and Middle Eastern cellphone company, while SABMiller is a global brewer. Those global shares have dragged the market up because both local and global investors want to trade in them. The JSE’s
become more of a global index. Another trend we’ve seen over the past year is a big divergence in the performance of the traditional “big three”: the industrial, resources and financial sectors. The financials have done extremely well over the past year, partly because expectations for interest rate increases have come down considerably since January. Industrials have been in the middle and include cellphone companies, retailers and consumer goods organisations such as Richemont and SABMiller. Resource shares were down about 14% last year because commodity prices fell quite dramatically. So the obvious question is: what can you expect for the rest of this year? We don’t expect resource shares to pick up unless commodity prices increase. However, this is an area to watch carefully because, from a valuation point of view, it’s obviously more attractive than other sectors. The local consumer area is also worth watching. While the market’s been somewhat pessimistic regarding the prospects for South Africans, the recent sizeable petrol price cuts are likely to result in inflation rates falling – bringing welcome relief to consumers.
example, you might have a child who isn’t very good at managing money, so we need to build a proper framework for him or her to inherit assets and retain them. Trusts, for us, are primarily wealthbuilding vehicles: for example, using one for the shares of your business and letting its value grow. The law exempts you from any duties below R3,5 million and below R7 million if you have a spouse, so anything under that might not make sense for a trust. If you’ve got significant wealth in a trust, it falls outside your estate. You therefore need to minimise your estate duty portion.
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For a child who’s incapable of managing their own money, or who’s a minor under the law, one option is a will trust, into which money is deposited and managed by trustees until he or she reaches a certain age.
WHY A WILL IS ESSENTIAL If you die without having a valid will, it’s left to the law of intestate succession to direct where your assets are distributed. So, effectively, someone else gets to choose what happens to your assets. You might believe it’s not worth making a will because you don’t have much money, but
do you really want a stranger to decide what will happen to whatever you do have? Probably not. It’s also an administrative nightmare winding up an estate and settling a person’s affairs without a will. Estate planning helps people talk about death and can unearth deep family issues. Imagine two dependant siblings, one of whom says to their father: “Dad, you paid for my brother/sister’s MBA, so I should get the first R150 000 because you spent that amount on him/her.” It’s better to deal with these issues now to avoid grievances and complications after you’ve gone.
page 74 | MARCH 2015
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PERSONAL
THINK YOURSELF
RICH What’s the difference between you and Warren Buffett? Well, apart from the obvious, the fact that he thinks like a billionaire Written by Lisa Witepski
K
erry Fynn is the CEO of AlphaWealth, a company which specialises in wealth planning services. His work has brought him into contact with seriously wealthy individuals – and allowed him to experience, first-hand, what sets them apart from those who spend their time fretting over bills. So what’s this secret ingredient? “A willingness to defer gratification; to sacrifice today’s pleasure for tomorrow,” says Fynn. He points to investment genius Buffett, who once observed that if he were to buy a $20 000 car on credit, this reasonable price would balloon to over $1 million because of compound interest. Hence his preference for paying cash, even if it means settling for something a little less exciting. Fynn says that although he’s encountered some flashy individuals, most people who attain enormous wealth tend to be very circumspect. It’s not about stinginess, he adds: it’s simply that they understand the importance of prudence in wealth accumulation. Then again, they’re not entirely ruled by caution. “The seriously
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A wealthy person will always be wealthy because of their mindset and the decisions they make. In this way, wealth becomes a legacy. wealthy are willing to take calculated risks,” says Fynn – unlike most investors, who prefer playing it safe. “The wealthy are willing to spend time doing research and when they’re convinced they’ve found a worthy investment, they waste no time acting. That research allows them to feel sufficiently comfortable about making the investment,” he adds. This is a strategy Buffett upholds: he’s pointed out that you stand to make far more money by investing in the three most attractive options than you will by hedging your bets (and potentially diluting your returns) by investing in the top 20. The very thought of taking such a plunge might make you balk, because it goes against our nature to be this bold about a financial risk. However, says Fynn, going against the grain is another hallmark of the wealthy. He quotes Baron de Rothschild, who maintained that the best time to buy shares is when everyone else is selling theirs. Again, Buffett’s philosophy upholds this wisdom: stocks are the only things noone wants to buy when they’re on sale, he says – but the gains are there to be made when the market recoups. Wealth coach Susan Mercer has also had ample opportunity to observe the thought patterns, behaviours and beliefs of the über-wealthy. She believes there’s a difference between being wealthy and simply being rich. “Think of soccerplayers, movie and pop stars, people who win lotteries or game shows, or who earn big salaries. They wear their money, drive their money, live in their money and spend their money,” she says. The result: enormous expenses
and the accumulation of debt. Mercer blames this on the incessant craving for material things; a drive fuelled by the need for instant gratification. “These individuals feed on consumer wants,” she notes. The tragedy is that with this mentality, the money only lasts until the next craving hits. In contrast, a wealthy person will always be wealthy because of their mindset and the decisions they make. In this way, wealth becomes a legacy – and legacies can last several generations, sustaining multiple trusts, charities and organisations. “Wealth is when you stay out of debt and are mindful about your money. This doesn’t mean you shouldn’t enjoy the finer things in life. You don’t need to go to work to purchase what you want, or get into deeper debt to buy that car or that house, or go on holiday, but you also spend time educating yourself financially, building your investments and businesses that provide enough cash flow to cover your monthly expenses.” Mercer adds that one measure of wealth is the number of months or years you can survive without having to work or adjust your standard of living. “It’s the point when the passive income you receive from your assets exceeds your expenses.” Surely this is a level only the likes of Bill Gates can reach? Not necessarily, says Mercer. Like Fynn, she’s noticed certain traits common to all wealthy people, primarily a drive to become wealthy. “Essentially, this becomes their purpose,” she says. “They thirst for knowledge and understanding. They understand how compound interest can affect them both negatively (in terms of debt) and positively (through investment returns).” The wealthy are also intensely interested in what money can do for them, says Mercer – so they respect it. Maintaining their wealth is as important to them as increasing it. “Wealth isn’t something that comes out of nowhere and is handed to people. Wealthy people have strong minds and values,” she adds.
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WEALTHY
SOUTH
AFRICAN
WOMEN
PERSONAL
Local women who’ve made their fortunes share their strategies and views on making and keeping money
your gains and suggests putting aside extra earnings for your children’s education.
YOLISA PHAHLE, CEO: M-Net
She believes in taking calculated risks. “We do all our arithmetic before we invest. However, buying property is basically common sense: there’s only so much land available, so it’s inevitable that prices will go up. When it comes to money, you have to be careful. Use some, save some and invest some,” she says.
For Phahle, an awareness of the importance of saving came early. “My father always saved a little on a monthly basis and explained the power of compound interest to me when I was very young,” she recalls. Nonetheless, it was only many years later – after her first child was born – that she started to invest, albeit “very small” amounts. “Now, though, I’ve saved a substantial amount in British sterling to give my son for his 18th
“When you come from a family where there was no spare money, the idea that you could lose everything is very scary.” birthday,” she says. Phahle describes herself as “fairly risk-averse”. “When you come from a family where there was no spare money, the idea that you could lose everything is very scary,” she says. That may explain her preference for property: she always wanted to own her own house, so when she first starting earning well (while touring with British group Soul II Soul), she used it as a deposit for her first flat – a savvy move, as property prices in London have “gone through the roof ” since then. Her advice to women interested in building their portfolios? “Take the time to read the money and business pages; listen to business radio programmes; discuss options with friends and seek the advice of a qualified, independent financial advisor. Be prepared to set aside your savings for the long-term.” She also warns against squandering
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MARGARET HIRSCH, COO: Hirsch’s Property’s also the favoured vehicle of Hirsch, whose very first investment was in a building that later become one of mega-appliance store Hirsch’s outlets. “When my husband and I started our business, we had just R900; R300 was for our rent, another R300 for electricity and the remaining third for things like invoice books,” she recalls. She then realised that although she was working “like crazy”, her money was disappearing on rent – essentially leaving her with nothing to show for it. The turning point came when an old butcher’s shop was put up for sale. Since Hirsch was giving microwave cooking lessons at the time, which had required her to temporarily move all other appliances out of the business showroom, she was keen to expand her space and the couple bought the shop. Although they had to purchase it on credit, that R200 000 investment now returns R62 000 in rent every month. The Hirsches have maintained that philosophy, owning all their premises, rather than renting them. “We buy land while it’s cheap and build our own stores, which is cheaper than purchasing an existing building. We also make use of an access bond, when necessary,” she says.
JOHANNA MUKOKI, CEO: Travel With Flair Mukoki’s training as an accountant has influenced her approach to investing. “I’ve always been a saver, even as a youngster. As an entrepreneur, you can’t be sure where your next cheque’s coming from. I’m one of the few businesswomen who don’t have a sports car parked in their garage because I’m keenly aware that whatever I make must sustain me into my old age.” Although she has a specialised understanding of money and markets, Mukoki also believes in consulting an experienced broker. She describes herself as a low-risk investor. “I work hard for my money and I have young kids I need to educate, so I’m not prepared to put my earnings at risk,” she declares. She’s adamant, though, that money needs to be invested. “Don’t waste your money – you only have one pair of feet, so there’s a limit to how many shoes you can wear. Also, moveables like cars aren’t assets, so if your money’s burning a hole in your pocket, buy a house.”
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PERSONAL
STARTING ON
A CLEAN
SLATE If you want to invest in a savvy way, the first step is being debtfree. Here’s how to get there
T
here’s a quote that goes: “If life serves you lemons, make lemonade.” So what does this have to do with creating wealth for yourself ? Replace the word “lemon” with “debt” and “lemonade” with “snowballs” and you’ve just discovered one of the greatest wealth creation strategies around. In my 20s, being completely financially illiterate, I believed the hype of “You can have it all now” and “Buy now, pay later” and walked into modern-day slavery with my eyes wide shut, accumulating loads of consumer debt. As I started earning money, I was offered a plethora of store cards, a credit card and an
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Written by Ann Wilson
overdraft. I thought I needed it: after all, I now had a job and needed to look the part. My store cards were buying a power wardrobe, credit cards
In my 20s, being completely financially illiterate, I believed the hype of “You can have it all now” and “Buy now, pay later.” were used for holidays and accessories, and I even got a bank loan to buy a white water kayak which I took on just one
wild holiday, scaring myself half to death as I plunged down roaring rivers, before vowing never to use it again. It didn’t take long before I was working for everyone except myself. Anxiety became my norm as I realised that if I lost my job or wasn’t able to earn, I wouldn’t be able to last more than a few weeks. All the dreams and adventures I had planned were put in a bottom drawer and I wondered whether this was what people had meant when they told me: “Wait until you get into the real world.” I knew there had to be another way to exist and I resolved to find it. I also read a great quote: “If you find yourself in a hole, stop digging.” I decided to take that advice.
A STEEP CLIMB I realised that if I was ever going to get out of the debt hole I’d created, I’d have to put down the shovels of credit and money I didn’t have. I also knew I had to do things differently from everyone else if I wanted to live the life I’d always dreamed of. But just having made that key decision wasn’t enough: I had to work out how to actually do it. Thus began my research. I read many books on the subject and discovered that getting rid of debt is the second most common new year’s resolution (after losing weight) and, like shedding kilos, is one of those goals many people fail to achieve. A number of personal finance books suggested taking the same approach: • Arrange your debts from those with the highest to the lowest interest rates. • Designate a certain amount of money to pay toward debts each month. • Pay the minimum amount on all debts, except the one with the highest interest rate. • Throw every other rand and cent at that debt. Once the debt’s been settled, don’t alter the monthly amount you’ve set aside to pay creditors. Throw all you can at the debt with the next-highest interest rate, etc. This makes perfect sense. By doing this, you pay the least interest over the long term. The trouble is, the debt with the highest interest rate is usually the biggest debt (like a home loan), so focusing on it first is like tackling Everest when you’ve just learnt to walk. You tackle it with determination and commitment, but because it’s such a giant, you feel as if you’re getting nowhere, eventually becoming so worn down that you give up and go and buy yourself something (on credit) to make yourself feel better. The other problem is that, inevitably, one or another of life’s unexpected events crops up (an accident, an illness, a breakage, an unexpected repair fee, etc) – but, because every spare rand you’ve had has been thrown into paying off debts, you have no safety net of savings.
As a result, you have to use credit to deal with the emergency – wiping out all your good work and setting you and your motivation back to square one. This happened to me repeatedly: start and fail. Start and fail. Then I discovered the debt snowball method. This is similar to the traditional approach, except that instead of attacking high-interest rate debts first, you start with the debt which can be paid off fastest. This often means low-balance debts first. Why is this so much more successful? Because you’ll get the psychological lift of blitzing debts off in rapid succession.
Set up a debt-erasure system of positive reinforcement which yields quick wins and provides the psychological support needed to keep going. Logic dictates that the traditional method is the best one, but debt isn’t logical – so using only logic to break free of it doesn’t deal with the emotional side. If we were robots, it would be fine, but we’re human beings and for us, money is far more about emotions than about figures. That’s why we have to approach financial matters in ways that make us feel successful. Many of us know what we should do, but find it difficult to actually do it. We know all about the “shoulds”, but let’s be honest: telling ourselves what we ought to do just doesn’t work. If we were logical, we wouldn’t accumulate consumer debt in the first place. It’s silly to tell somebody who’s deeply in debt that they must follow a repayment plan which minimises interest payments. The important thing is to set up a system of positive reinforcement,
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a recipe which yields quick wins and provides the psychological support needed to keep going. Success breeds enthusiasm and reinforces our motivation, which is why the second approach makes all the difference. So let’s make snowballs: • Commit to claiming back your life, your dreams and the ultimate gift, freedom of choice. • Create a cash crisis fund of R5 000R10 000 to use in the event of a real emergency, so that you don’t have to bring out the plastic again. (A pair of designer shoes isn’t an emergency.) • Arrange your debts from the lowest to the highest balances. • Identify the minimum monthly payment you need to make towards each debt. • Pay the minimum payment on all debts, except the one with the lowest balance. • Commit to paying a lump sum at the lowest debt, in addition to the minimum repayments on all the others. This is your debt destroyer fuel (DDF). • Focus on erasing one debt at a time, starting with the smallest one. • When that debt’s been settled, congratulate yourself and focus on the next-lowest debt, repeating the process. • Add the minimum repayment you were making towards the debt you’ve just settled to the minimum amount you need to pay towards settling the nextlowest debt. In no time, the second debt will have been erased too – and you’ll be feeling fantastic. • Continue adding the repayments from your erased debts to your DDF (like a snowball getting bigger as it rolls down a hill) until all your consumer debts have been well and truly blitzed. Every bit of consumer debt you wipe out adds to your net worth, increasing your financial standing significantly. Celebrate your new wealth creation skills, embrace the challenge and claim back your life! • Ann Wilson is the best-selling author of The Wealth Chef and an international wealth mentor.
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ASSET CLASSES TO RELY ON You’ve set aside a sum and you’re ready to invest – but which asset class will suit you best? Written by Lisa Witepski
page 82 | MARCH 2015
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ith an array of asset classes on offer, each with their advantages and disadvantages, it’s difficult to select just one. And, indeed, the experts say you shouldn’t – remember the old warning about putting all your eggs in one basket? That said, there’s no doubt that certain asset classes have greater appeal than others. For Irene McEnderry, Regional Head of Alexander Forbes Financial Planning, stocks are a clear winner. “Provided you adhere to tried and trusted rules and follow the advice of a professional planner, the stock market is the most effective asset class for enhancing your wealth over the long term,” she says. The reason is that stocks provide both capital growth and an income stream, thanks to the payment of dividends. McEnderry believes the return on equity investments is
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“unbeatable” over long periods and points out that stocks are an effective way of obtaining part-ownership of a listed business. Moreover, if managed by an experienced stockbroker, there’s little risk involved. You can reduce this risk further by creating a diversified portfolio. However, according to Luyanda Joxo, Head of Institutional Business at Argon Asset Management, this is one of the key problems when it comes to buying shares: obtaining such a portfolio requires a significant capital outlay. Investing smaller amounts works out to be costly, too. “The less you invest in a share, the higher the costs involved,” he explains. This is because brokers usually calculate their costs according to a sliding scale. Hence the allure of unit trusts: for just R100 a month, says Joxo, you can invest in one of your choice and, in doing so, access a diversified portfolio of shares. The more attractive costing stems from the collective nature of
THE JSE DEMYSTIFIED
According to Zeona Jacobs, Director of Marketing and Corporate Affairs at the Johannesburg Stock Exchange (JSE), any investment strategy must start with exploring your aims . Whether you’re hoping to secure your retirement or make extra mon ey on the side, this will provide a time line for your investment and clarify your appetite for risk. Next, find an experienced broker who’ll be able to tailor your portfolio according to these parameters. Visit www.jse.co.za for a list of authorised stockbrokers, as whoever you select must be registered with the Financial Services Board and a member of the JSE . “And be aware of the costs,” cautions Jacobs. “While investment fees may seem small or reasonable (just a few percent upfront and annually), they can have a significant impact on the long-term performance of your investment.” By law, your investment service provider is required to provide a full breakdown of all investment fees – and you can ask to review them on an ongoing basis.
CONSIDERING PROPERTY? Joxo says that property provides a good inflation hedge – a must-have in a diversified portfolio. However, there’s a caveat. “If you’re investing in a property portfolio, you need to understand the cycle of property returns, which are determined by economic fundamentals of demand and supply, as well as the level and direction of interest rates.” McEnderry’s view is that while property’s an evergreen favourite (especially among those new to investing), it’s not necessarily the best investment class. True, it retains value and may well provide an additional revenue stream, if rented out, but several things could go wrong: for example, what if the location you invested in proves to be unpopular, or if it’s a buyer’s market when you want to sell? Worse, what if the tenants you were counting on to provide a secondary income stream prove to be more trouble than they’re worth?
unit trusts: a number of investors are pooled together, so costs are shared proportionately. Unit trusts also have other advantages over stocks, says McEnderry: whereas it can be difficult to find a willing buyer for stocks when the market’s in free fall, a fund is always obligated to buy back your unit trusts, making this a fairly liquid asset class. What’s more, you can switch between funds if you wish and make monthly contributions. If you have an issue with spending discipline, this is the asset class for you. However, there are drawbacks here too. McEnderry says funds are generally sluggish in responding to either good or bad market developments and that fees (including the costs of initiating and managing the fund) can detract from your overall long-term return. In addition, being able to switch between funds could inculcate a mentality focused on chasing last year’s top performer, or a habit of timing the market – both costly exercises
that decrease your ultimate return. Another challenge for those who battle to delay gratification is that units can be converted easily to cash. What about exchange tracker funds (ETFs)? At first glance, this relatively new asset class appears to offer the best shares and unit trusts, allowing you to purchase funds in a single investment product. This means you can participate in direct buying on the JSE at a lower cost; plus, there’s an obligated buyer if you want to discard your investment at any time. As with unit trusts, you benefit from price averaging and there are a wide range of ETFs available, so you’re bound to find something that sparks your interest. Yet
The less you invest in a share, the higher the costs involved, because brokers usually calculate their costs according to a sliding scale. McEnderry hesitates to recommend these above other asset classes, as there’s no active involvement from an asset manager: in other words, no-one will warn you if a share’s underperforming or alert you if something more attractive has come onto the market. “I’d guard against investing all my funds in a passive strategy,” she says. Add to that the expense of transaction fees and it’s easy to see why she recommends property unit trusts as a worthy alternative: a medium-risk investment with the possibility of a higher return. Offering the same advantages as other collective investments, this asset class requires a limited outlay of capital, with no liability or debt incurred. “Because property’s stable, property unit trusts carry less risk than shares – but you don’t have the hassle of dealing with maintenance as you would with a physical property,” McEnderry points out. Since a collective investment scheme that invests in property is required to have its participatory interest (underlying investments) listed on the JSE, liquidity’s
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assured. And the returns? Attractive, indeed: according to McEnderry, the listed property index has risen by 31% on average over the past five years. She adds, though, that past performance is no indication of future performance, so caution is essential.
ONLINE INVESTMENT ACCOUNTS Many banks now offer the ability to purchase funds through their websites – a great convenience offering flexibility (you can usually buy ETFs during trading hours) – and liquidity. They’re also easy: provided your Financial Intelligence Centre Act details are in order, your account will be set up within a day or two. What’s more, dividends are paid directly into your trading account. However, warn McEnderry and Joxo, if you’re not familiar with the world of investments, you could make bad decisions. It may be better to rely on the input of an experienced broker.
HOW DOES COMPOUNDING WORK? “Since the tax impact only kicks in when you sell your property investment (which is usually after a long time), you’ll benefit from a pre-tax growth on the property price every year, as well as growth on the previous year’s growth,” explains Joxo. “As a general rule, investments with a pre-tax compounding effect are better than those that compound post-tax growth.”
GOING OFFSHORE McEnderry considers offshore investment to be “essential”. “An offshore portfolio can’t be influenced by the political or economic stability of a single country; it also allows you to diversify your risk across currencies, so you needn’t worry every time the rand takes a dip,” she says. Again, there are choices: you can either invest through a local offshore unit trust which feeds into a global fund or buy hard currency. Which option will suit you best?
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With the former, you can look forward to currency hedging that enhances your assets. Although your money’s directed offshore, your investment’s made locally, so there may be a degree of familiarity – and with that comes comfort. Also, since you can make a monthly contribution, entry levels are low. However, there are certain drawbacks: for instance, there’s no political hedging and when you cash in the investment, your payment will be in rands. Moreover, you might pay double fees (to your local service provider, as well as your foreign fund manager), which means the costs could be high. As for direct investment in currency: it’s expensive, but you’re hedged against political risk and you have a choice of currencies to choose from (remember that your investment can be paid in any country of your choice). It’s a good idea to seek specialist advice, though, as tax and estate planning requirements apply. According to Andrew Taylor, Managing Partner at Henley Estates and co-author with Christian H Kalin of the International Real Estate Handbook (Ideos Verlag), there’s another exciting option when looking offshore: property. One of the reasons this option is so attractive is that many countries, such as Portugal, grant residence permits (or even immediate citizenship, as is the case in Cypress) to propertyowners. Add to that the potential of high returns: in Portugal, your return may be 4-5%.
LUXE INVESTMENTS Prefer physical investments to asset classes? These purchases will not only add beauty and pleasure to your life, but are sure to appreciate in value over the years. • You can seldom go wrong by investing in the work of rising artists, one of whom is Johannesburg-based, Ugandan-born Benon Lutaaya. Recently, a mixed-media portrait of his was auctioned by Stephan Welz & Co for R102 312. Visit: www.stephanwelzandco.co.za • Classic styles of bags and other leather goods from enduring luxury brands like Burberry are also a good bet. Its Embossed Canterbury bag retails for R18 500. Tel: 011 325 5923. • A wine that ages well is another good investment. The Kanonkop Black Label Pinotage 2013 is a particularly valuable buy and is available through the Wade Bales Wine Society for R1 350 per bottle (minimum six bottles per order). Tel: 021 794 2151 or email: info@ thewinesociety.co.za
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HORIZON WATCH
J
Global equities are a good bet for 2015 and look set to offer the best value in global asset classes
ohn Orford, Senior Portfolio Manager for Old Mutual Investment Group’s MacroSolutions boutique, says that if interest rates remain relatively untouched over the next year and the rand and bond yields remain stable, interest rate-sensitive sectors and stocks will continue to perform fairly well. “Locally, nominal bonds should continue to outperform cash and inflationlinked bonds, with the recent sharp fall in the oil price contributing positively to a further fall in inflation,” he says.
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“Fiscal tightening in the budget next year and weak growth outcomes mean interest rates are unlikely to rise significantly for some time in SA. In this context, nominal government bond yields should continue to perform reasonably well, but risks to this performance include a sharp move upwards in US bond yields, should the Fed initiate earlier and more aggressive than expected monetary tightening, as well as the possibility that ratings agencies downgrade SA’s sovereign debt to below investment grade.”
With the world likely to continue to be characterised by a continued search for yield and high-quality growth, a supportive backdrop is provided for global equities, which also offer the best relative value within global asset classes. Orford says SA equities are increasingly tightly correlated with global equities. These two factors, along with a global environment supportive of equities, suggest that SA equities can continue performing well, despite the weakness in the local economy.
LEAVING A PROUD LEGACY No wealth journey is complete without an active plan to save for an easy retirement and build a lasting legacy for future generations
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Written by Atlehang Ramathesele
ealth psychologist Ilze Alberts explains that building a legacy isn’t only about being able to service your interests: it’s also about creating a sustainable inheritance for your family that has the potential to grow. It’s important to ensure your dependants understand that the legacy is to be expanded, not squandered. “You must have a vision and purpose for your wealth. Once you’ve established what you’d like your money to do, it will be easier to communicate its importance to your children and how it links to their future. Equip your dependants with an appreciation for what the wealth can do for others,
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not just themselves,” says Alberts. She says the easiest way to foster an appreciation for wealth in your children is to start early. “When you give them pocket money, encourage them to put 10% of it away. This principle will teach them how to save and develop a mentality for looking after money from a young age,” she says. Lead by example, showing them that you appreciate your own money too. Henry van Deventer, Wealth Development Manager at Old Mutual Wealth, explains that sound financial planning, introspection and patience are the cornerstones for creating wealth and saving for a smooth retirement. He advises starting as soon as possible. People put off saving for retirement for a variety of reasons, primarily their inability to look that far into the future. In other cases, people try to put a plan into place, but have unrealistic expectations of their investment growth or consider their current assets to be suitable as a sole investment.
HOW DO YOU DECIDE? You first need a clear idea of what you want to get out of retirement. As you’ll no longer be working, it’s important to know what you’d like to be doing
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with your time. “Baby boomers changed the world over the past 40-50 years by defining their ability to make a difference. Because they’re such ‘doers’, just sitting on a verandah during their retirement would drive them crazy. It’s critical to identify what would make you feel fulfilled once you’re no longer working,” says Van Deventer. Once you’ve done that, you can take the financial steps towards achieving it. He likens retirement to a very long December holiday, when you often end up spending money unnecessarily or eventually grow bored. For this reason, it’s crucial to work towards having the most meaningful life you can in your golden years.
might want to buy, as well as the education and inheritance you’d like to give your children), invest your money in a way that gives you the best possible chance of effectively achieving those goals. Focus on getting the highest return you can at a level of risk you can afford. When building an investment strategy, there’s a simple formula for getting the
Don’t put all your money in one asset class if you want to manage your returns and risks.
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HOW DO YOU GO ABOUT IT? According to Van Deventer, there are three critical building blocks in creating wealth and planning for retirement: • Set goals for exactly what you want your money to do so that you can work towards saving a feasible amount. • Have a strategy in place for achieving those goals. • Put that strategy into practice and apply it consistently. To help you with these building blocks, ask yourself these four critical questions: • How much do you spend? • How much can you save? • When do you want to retire? • How much growth will you get from your investment? The best way to answer those questions is through a financial advisor. Van Deventer recommends finding a qualified professional with whom you can share your full vision of what you want your money to do. He or she will help you strategise, invest accordingly and manage your money. Don’t imagine you have to earn a certain amount or wait for a specific timeframe to do this: start as soon as possible.
INVESTMENT TIPS Once you understand how much growth you need for your money to last as long as possible, having taken into account the expenses you’ll incur (eg, the home you
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most growth at the least cost and the least tax: investment growth - costs - tax = actual growth. • Use investment vehicles where you pay little or no tax, such as a pension or provident fund or a retirement annuity. These aren’t taxed on the growth they generate (ie, the interest, dividends and capital gains). • Don’t simply go for the cheapest investment you find. Rather focus on the level of growth you need from it and find a way to achieve it at the lowest cost. • Don’t put all your money in one asset class if you want to manage your returns and risks. The broad asset classes in SA are shares, property, cash (money market) and bonds. Spread your money across these. This will keep your money growing, even if one asset class no longer facilitates that. Van Deventer also cautions against being overly conservative in your investment. “If I were to receive a compound return of 12% a year, my money would roughly double after six years. So if I started off with R1 million, I’d have R4 million in 12 years. However, if I got a return of just 6%, my R1 million would only increase to R2 million in 12 years because I was too conservative and didn’t understand the growth I needed from my investment strategy,” he says.
HOT TIP No matter how little you start with, it’s important to begin saving for retirement immediately. If you save R500 per month from the age of 23 at a growth rate of 6% after inflation, in today’s terms, you’d have just under R1 million at retirement (R995 000). This would provide you with a monthly retirement income of roughly R3 300.
WHY IT’S BEST TO START SOONER
Van Deventer offers the following example: if you saved R2 000 a month for 30 years (from ages 25-65) and it grew at 6% above inflation (a reasonable assumption for a balanced unit trust fund), in today’s terms, your money would yield R3,98 million. By contrast, if you only started saving R2 000 a month from ages 32-65 (ie, for 23 years), your money would yield only R2,24 million. Simply by starting seven years earlier, you’d have almost R1,5 million (60%) more to retire on.
MAKE THE MOST
OF YOUR
MONEY
It’s not only celebrities and CEOs who have enviable bank balances: some ordinary people also maximise their cash. Here’s how to get your books in order and create lasting wealth Written by Gillian Klawansky
The prospect may be less than thrilling, but reviewing your spending and saving habits can help you afford the lifestyle you dream of. By reducing monthly spending and interrogating the costs of essential expenses, you could use the money you save to make wise investments, potentially accumulating a significant nest egg. REDUCE MONTHLY EXPENSES Living frugally needn’t mean wearing the same jeans for 20 years or never taking a holiday again. It does, however, mean not spending more than you can afford. According to Yumna Ebrahim, Consulting Economist at independent economic consultancy Econometrix and part-time economics lecturer, many South African households live beyond their means. “According to SA Reserve Bank data, the household debt-to-income ratio stood
at 73,5% in the second quarter of 2014. A large part of household monthly disposable income is therefore spent on servicing debt,” she says. She also warns of the likelihood of tax increases and interest rate hikes in 2015, requiring even more monthly repayments on car and home loans. “Accumulating and investing savings can serve you in good stead and shield you in tough times,” she says. Henry van Deventer, Wealth Development Manager at Old Mutual, says you should work towards
CUTTING LIVING COSTS
•
• • •
Ebrahim suggests the following ways to reduce your living expenses: Don’t spend more on entertainment than on electricity and water. Try to save at least 8-10% of your salary each month. Limit clothing purchases to a fixed amount each month. Pay off your home loan as quickly as possible by making higher monthly repayments and using any windfalls you get for
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this purpose. You’ll be surprised how much you’ll save in interest. • Avoid unnecessary debts, such as store cards. Resist the temptation to buy that handbag on credit: wait until you have the cash to pay for it. • On a daily level, start making personal calls during off-peak times to get a cheaper rate, avoid buying expensive snacks at cinemas and limit restaurant visits to once a month.
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“Unit trusts and endowments are the best investment instruments to kick-start your saving journey, as they’re affordable and give you access to different asset classes.”
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Once you’ve reduced monthly expenses, invest your savings to grow your wealth. “When starting out, you need to understand the difference between the different asset classes available, from equities (shares), bonds and cash to property and other alternatives. In this way, you’ll know what kind of return each asset class yields for your portfolio,” explains Mmangaliso Nxumalo, Head of Wealth Management at Inkunzi Investments, who offers investment advice and management for private clients. “Consider the historical returns, flexibility and objectives when selecting which investment you’ll make. “Unit trusts and endowments are the best investment instruments to kick-start your saving journey, as they’re affordable (with as little as R150 required per month) and still provide you with access to the different asset classes, especially the share market.” Also consider the tax implications of each option, as there may be hidden costs involved – especially with endowments.
Nxumalo offers the following guidelines when making investment decisions: • Understand the power of compounding. This is the simple, but spectacularly rewarding phenomenon of interest on interest. The earlier you start saving and taking advantage of it, the better. • Emotions are your greatest assets – and liabilities. Understanding and navigating fluctuations in emotions is key to avoiding fear- and greeddriven market trends, but can also help you make a really timely investment decision. Simply put, buy when everyone else is running in fear and sell when everyone else is convinced they’ve found the next big deal. • Diversify: By spreading your wealth over multiple non-correlated assets/ sectors and then diversifying within them, you limit the risk of any one investment or sector devastating your portfolio with large, unexpected losses.
PRINCIPLES OF SAVING
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you can’t do your present job, but others could require you to retrain for a similar occupation. This difference affects the premium you pay, but the higher-quality cover may be worth the additional cost. • Reduce the amount of your life cover as time passes and your investments grow – the amount of insurance required depends on your level of investments and income needs, which could change. MEDICAL AID • Be realistic: if you’re young and healthy, you might not need the top-of-therange option that includes nice, but unnecessary extras like private hospital wards, etc. • Consider the payout history of the scheme. • Remember that a penalty could be applied to your premium if you weren’t on a medical aid scheme before the age of 35. • Medical aid cover must be reviewed annually, as schemes are allowed to change cover for the members once a year.
PROTECTING YOUR WEALTH Nxumalo suggests the following asset protection strategies: • Adjust your liability insurance. Ensure your personal risk liability cover is for an amount at least equal to your wealth portfolio. • Review your trust. A family trust can be used to split income between family members, reduce probate and estate duties, and protect assets from creditors. • Consider keeping your assets separate. Depending on the laws and tax implications, it’s recommended that you share your accumulated wealth with your spouse or children through separating assets. Their portion is protected from tax or liability claims. • Review your will to shield your assets. Ensure that what you’ve built is still transferable to your heirs. Remember, in SA, certain estate duties apply to various amounts.
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SMART SAVING
PAY LESS FOR LIFE INSURANCE AND MEDICAL AID We often drastically reduce our savings by paying high rates for life insurance and medical aid. According to Debbie Netto Jonker, a certified financial planner and founder of investment planning company Netto Invest, studies show that most South Africans are under-insured. It’s essential to have medical aid and life cover, as your death or an incapacitating illness could lead to complete ruin for your family. However, shop around for competitive quality cover rates. Jonker suggests the following: LIFE INSURANCE • Understand the long-term premium patterns of the cover you’re considering. Cheap now may be expensive later. • Consider the cover you may already have on your group scheme at work. Many people don’t know that they have disability and life cover built into their retirement fund scheme. • Understand the quality of the cover: some disability policies will pay out if
eliminating or reducing non-essential expenses when drawing up your monthly budget. “Cut back on luxury items – things which wouldn’t affect your lifestyle if you didn’t have them,” he suggests. He adds that your budget is a living document: keep adjusting it to take into account unforeseen expenses and micro-payments, such as school tuckshop money and parking costs. He also advises watching how much money you spend on smartphone apps and iTunes and recommends cutting satellite TV costs by opting for one of the bundles, rather than the full bouquet. Setting financial objectives is essential, he adds. “It’s much easier to stick to a budget if you have goals you know will benefit you in the long run, like a house extension, a child’s university fees or a long-dreamed-of holiday abroad.”