When I first viewed the clip it had around 16000 hits and I have just received it again (from another client) and it now has almost 2.1million hits. While there may be some truth to what he is saying, this is also a kind of self-fulfilling prophecy in that people listen to it, panic and then sell. Which results in more people panicking and selling and this then leads to wholesale panic and market meltdown. At least he was honest and admitted that if the market collapsed he stood to make money from it – so he clearly has a vested interest to see it fall (and will possibly go bankrupt if it does not).

As I reflect on this there are at least 2 things that come to mind.

1. There are many people currently predicting the imminent collapse. I was at a presentation recently where the presenter joked about this and made the comment that the markets had correctly predicted 9 of the last 3 recessions/crashes. Remember Fred Crookes who quite a few years back persistently predicted a major crash on the JSE – after getting it wrong so many times he finally got one right and the market did fall. I guess that if you predict something often enough it is bound to eventually happen. Bottom line is that no one knows where the market is headed – if they did they would not be talking about it they would be retired – but interviews like this make for “good viewing ratings”.

2. I also remember reading the following quote a few years ago “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” This was by a chap called William Feather and what people fail to realise is that in order for shares to trade you have to have both sellers and buyers. So when the market falls and people are selling off massively, remember that for every seller there has to be a buyer! And this is where the real money is made – that’s how well known investors like Warren Buffett have made their money – they buy when everyone else is selling.

A third thing to remember is that when you invest money, you are doing it for the long term. Guys like Alessio are traders – they have no interest in the long term – they hope to make money from short term price fluctuations (which are often a result of irrational and emotional decisions made by so-called long term investors). I think Warren Buffett sums it up well when he says “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” If you cant do that then perhaps you should not be investing your money – there are other options that you should be exploring.

The other options include things like asset allocation and target return funds where the equity exposure is limited and the fund manager makes use of the other asset classes such as bonds, cash and property as well. The aim of these funds is typically to preserve capital over all 12 month periods and to produce real returns of 3-5% over rolling 3 year periods as well. There are some really good managers in this space and many of them have in fact outperformed the ALSI over the last 3-5 years!

This article first appeared in Finweek 21st October 2011

Related posts:

1. Just how much risk are you taking?
2. The great equity debate continues
3. The future of RA’s looks bleak…

While I can see the role that ETF’s can play in an investor’s portfolio there are a few misquoted stats and bits of information doing the rounds. Let’s look at a few of these…

1.       According to Mike Brown and the slides he put up, “ETFs typically provide beta returns and low risk”. Oh no they don’t! I understand what he was trying to say but I am not sure that the bulk of the audience did. EFTs have a low tracking error and so there is a low risk of them not matching their benchmark, but they are not low risk investments. Just like unit trusts, and ETF is an investment vehicle, it depends how it is invested! An ETF that invests only in shares cannot be low risk – especially if we use volatility as the traditional measure of risk. So anyone wanting to buy into ETFs needs to understand the relevant benchmark that the fund tracks and the associated risks.

2.       According to the presentation slides, ETFs are cheap and unit trusts (largely because of their performance fees) are expensive. Yes, some unit trusts are expensive because of the performance fees…but that is exactly the point – they have performed and therefore there is a performance fee! I agree, not all performance fees are equal and some of them are not calculated against appropriate benchmarks and worse still, some do not take into account the fact that new investors will never benefit from the past performance and so should not pay performance fees on past performance (but that is a topic for another post). But to put up a slide that shows that you could pay 11.5% per annum for a unit trust is, at best, misleading.

3.       According to the slides, ETF’s outperform unit trusts. Let’s look at the Coronation Top 20 fund which “aims to outperform the FTSE/JSE Top 40 Index, is actively managed and typically holds no more than 20 large cap stocks at any point in time”. The fund has a performance fee on it and the TER (total expense ratio) is 3.28% pa, of which 2.13% pa is the performance fee. How has the fund performed? Since inception it has beaten the benchmark (effectively the SATRIX 40 Fund) by over 7% per annum. I will happily pay a performance fee for that thank you! It is true that there are a great many “average” fund managers out there and that many of them don’t beat the index. In SA, however, we have some very good managers who consistently and repeatedly beat the ALSI – partly because they are good at what they do and partly because the ALSI is so heavily skewed towards resource shares. So invest in an ETF by all means, but just because you do (and because it is cheaper) does not mean you will do better than if you had invested in a comparative unit trust fund.

4.       Lastly, ETF’s definitely have a place in a portfolio but if I was going to invest into an ETF I think I would go direct and not via a platform – you are just adding another layer of fees (which was one of the criticisms about unit trusts). I think the only time I would probably use a platform is if I wanted to invest into an RA – now that might make sense.

Related posts:

1. Credit card rewards…
2. Minimum investments
3. Lessons from Enron (and the strong rand)

The current tax limit on RA contributions is R1750 per annum (there are a few provisos to this amount) but for all intents and purposes, the average man in the street who belongs to a pension fund and who wants to supplement his retirement savings via an RA is limited to this amount (by way outdated tax limits).

But here is the problem – you cant get into a unit trust RA with this amount. You need at least R250 and in most cases at least R500. When you ask the Manco’s why they all say it has to do with bank fees and the cost of debit orders, blah, blah, blah…

Somehow the Life insurance companies manage to do it – so either their systems are more efficient or they are making an absolute killing on the products (or both).

But the bottom line is that if you dont have R500 per month to put into an RA you cant use a unit trust RA and if you want to get any tax relief and only qualify for the R1750 then you are being forced into an inferior product. Not only is the life insurance RA significantly more expensive, but it also carries significant penalties if you alter the contract at any stage.

So if you are faced with the choice of a life insurance RA or no RA then I would stay far away from any retirement annuities…

My quesiton is so where are the legislators and where is the Miniser of Finance when it matters? Seems that unlike unit trust RA’s, talk  is cheap!

Related posts:

1. Minimum investments
2. Talk about a conflict of interest…
3. Appropriate advice?

Not only are the direct insurers more expensive than the traditional companies, but they are more expensive even at full commission and they claim to cut out all of that. Would love to hear an explanation from them on this. I think it might be bordering on misleading advertising.

There is only 1 direct insurer that really is cheaper but then you would not yet have heard of them because they have not yet spent millions on advertising – I guess that is why they are cheaper at this stage.

So for my money, if you want to go direct, then go to Instant Life, else use a broker – even at full commission you are better off (by far) than Outsurance or 1lifedirect.

Related posts:

1. Lies, damned lies and direct insurance!
2. DIY by all means, but…
3. Be wary of 1life direct’s advertising campaign…

Turns out though, that if you want to invest via the website you need to “register” and once you have completed the form online, you will be issued with bank account details so that you can make the payment.

We made the recommendation to them that the document is made available and that the “register” button is changed to “invest” or “invest online”…let’s see if anything changes.

While spending some time on their website it is also interesting to see the age profile of investors in the RSA Retail Bonds…±40% of investors are under 50 and almost 22% are under 40 years old.

While there is nothing wrong with investing into the RSA Retail Bond, it is hardly a suitable investment vehicle for a 25, 30 or even 40 year  year old…but I guess that is one of the dangers of “cutting out the advice chain”

Investors may have got into the product without paying commission but a 25-40 year old investor sitting in the RSA Retail Bond is most probably in an inappropriate product…it is certainly not an emergency fund (you cant access it) and the majority of 25-40 year olds are not looking for income from an investment – it is capital growth that they need and for that, there are far more appropriate investment options (even if there are some fees to be paid to advisors).

A typical “balanced fund” unit trust has given returns of almost 15% per annum for the past 10 years. At that rate the money has doubled in value every 5 years while investors in the RSA Retail Bond will only see their funds doubling every 8 years…I know where I would rather be invested!

Related posts:

1. RSA Retail Bonds
2. RSA Retail Bonds
3. Interest (ing)…

Just read an article online about how in these tough times one of the positive outcomes is that people seem to be investing more into their retirement funds. The bad news, though, is that it is still usually too little to enable most people to retire financially secure.

Of bigger concern for me, however, is that not only are most people contributing too little, but on top of this, most people are probably not taking enough risk on their funds. This has mostly to do with the fact that most funds are completely inappropriately named or labelled.

For example, where there is individual fund choice within a pension fund, there are usually 3 or 4 funds such as the “Aggressive Fund”, the “Balanced Fund”, the “Conservative Fund” and possibly a guaranteed or money market fund. On seeing the word “Aggressive”, most investors usually panic and run for the relative safety of the Balanced or Conservative Fund (after all this is retirement money so they don’t want to risk it). Balanced Funds in this context will usually have ±50% in equities with the Conservative Funds having even less. Now we know that the best way to beat inflation (over time) is to have exposure to equities. So while they will probably not lose too much in the down cycle as a result of this choice, they will most probably also not benefit sufficiently in the up cycles.

The problem, you see, is in the names of the funds. Remember that in terms of the investment guidelines for retirement funds, you can never have more than 75% of the total fund invested in shares*…so how can that ever be an “Aggressive” fund? In the unit trust industry, funds with 75% in equities are usually referred to as Managed or Balanced Funds. So why the inconsistency in naming when it comes to pension funds?

As a result of this inconsistency, my suspicion is that not only are people not saving enough money for their retirement, but on top of this, they are also being too conservative with their fund choices and as a result of this they will have even less than they expected when they retire.

Bottom line is that if you have time on your side (at least 12-15 years before retirement) you should most probably be in the most “aggressive” portfolio that you can – this is the greatest chance you have of achieving inflation beating returns.

So remember, when it comes to retirement money, you can not, by definition, have an aggressive fund – at least 25% of the fund will be in cash, bonds and property at any stage.

*yes, I know that technically speaking there could be up to 90% in shares and property, but the reality is that this is usually not the case, with most “aggressive” funds having 75% or less in equities with the balance in bonds and cash.

Related posts:

1. The future of RA’s looks bleak…
2. Is there still a case for RA’s?
3. Is there still a case for investing offshore?

Earlier on this year, I posted a blog called “Will it ever rain again in Cape Town ?” This was during one of the driest starts to the year that we have had in Cape Town in at least the last 9 years and also during a time when it seemed that most of the Cape-fold Mountains were on fire. The just of the post was that as sure as winter follows autumn, it will rain again – even if it did not seem likely at the time. I reasoned that in the same way, the equity markets would recover – that’s what they are designed to do – and that it was not the death of equities as we know it.

Anyone who was sitting in cash and trying to time the market was in danger of missing out on its recovery. Sure enough, both “forecasts” have happened – it is raining as I write this, and markets are up (significantly) from their lows. The problem now though, is that if you ask anyone about how much rain we have had, or about how dry it still is in Cape Town) most people will answer that there was never any doubt in their minds that it would rain again or that there is no way that this was the driest start to the year – after all, look at how much it is currently raining (it was still, however, the driest start to the year that I have recorded in 9 years).

This phenomenon is well explained by behavioural finance! People tend to place over emphasis on the current and as a result tend to forget the past. So anyone who thinks that because equity markets have run hard and recovered well from their lows, that all is over and that there is no volatility risk from investing in shares, they need to remember the past.

Equities are the most volatile asset class and there will still be (significant) periods of (significant) volatility ahead. If this is going to affect your income and/or sleeping patterns then perhaps you should not be in them to the extent that you are. Equity investing requires time – 25% in 6 months is a great return but this is not a significant period of time! The way to iron out the volatility is to diversify your assets and to give your equity portion time.

So watch out, there could still be some dry spells ahead. Just because it is raining it does not mean the drought is over!

Related posts:

1. It aint over till its over
2. Anyone seen the fat lady?
3. Just how much risk are you taking?

I think there is a danger of throwing the baby out with the bath water here…equities are the most likely asset class to give you real returns over the long term…but they can be very volatile in the short term…and so the best way to think of them (in my opinion) is like the brilliant Heineken advert where the young techie “hikacks” the space probe and converts it into a bar counter with a Heineken on it…when asked “Now what?” He replies…”Now we wait…”

Same with equities…we invest and then we wait!

Related posts:

1. A great way to save?
2. It’s going to be a long tax season…
3. If it sounds too good to be true…