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

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On the face of it, exchange control legislation has all but fallen away with the announcement by National Treasury that individual investors can take R4million offshore each year. But it seems that someone at Treasury forgot to tell SARS that it is ok for people to take money offshore.

In my experience, it is just about impossible to get a tax clearance from SARS at the moment. The number of hoops that need to be jumped through seem to change quite regularly, they lose the application form, they have different “standard” processing times and then tend to decline the certificate on minor technicalities (it seems that at this stage SARS require a prospective investor to have the amount they intend investing actually sitting in their bank account).

So while exchange controls might officially have been relaxed by National Treasury it seems that another government department is making it almost impossible to get official permission to take the money offshore. The result of this is that people will eventually give up on the the “right thing” and will find other ways to take money offshore again. But is that not the reason we needed a whole big amnesty a while back?

Surely someone at Treasury needs to speak to someone at SARS and find out why they are being so difficult with the tax clearance process? The result of SARS’ approach will be increased non-compliance in the future (especially if we see the rand weaken again suddenly).

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I cant understand the motivation behind treasury and the FSB’s latest (very zealous) implementation of the regulation 28 rules that apply to retirement funds.

These rules have a whole host of unintended consequences, not least of which, will probably be that RA’s are no longer used as savings vehicles and especially by younger people.

First a brief bit of background:

The Prudential Investment Guidelines (PIGS) are part of Regulation 28 that has been applied to pension funds and how the assets can be invested. Without getting into too much detail, the past rules stipulated that in terms of PIGS, funds could have a maximum equity exposure of 75%, property and equity was limited to 90% with the balance of the funds being invested in the other asset classes (bonds and cash). Typically “pension” funds have tended to sit with around 65% in equities, 10% in property and the balance of the assets in bonds and cash. On top of this, funds were allowed to have up to 25% of their assets invested offshore.

Now most companies tended to allow individual investors to do as they please so long as the fund as whole complied with the regulations. In practise this meant that because some investors were more conservative and had most of their money in bonds and cash, others could be more aggressive with some investors (typically the younger ones) having 100% in equities. The same applied to the offshore exposure. This seemed to work fine for just about everyone. Or so it seemed…

However, recently, the national treasury and the FSB saw fit to amend Regulation 28 (I still cant figure out why) and the worst part of the amendment seems to be that they want each individual member to comply with the legislation with some talk of them even forcing members to comply. This could mean that the companies would be forced to switch some individual members funds until they comply (that could be a legal nightmare). Talk about big brother watching you!

Going forward, 2 of the unintended consequences that I can already see are as follows:

1. Anyone who has an existing RA will have to make sure that it complies with the regulations before they can add to it (this will even apply if they want to increase an existing debit order). Practically this will have the following effect: I have an existing RA where the equity exposure has grown to 78% and the offshore exposure is sitting at 30% of the fund. I am happy with this but I will now not be allowed to add to this RA fund unless I reduce the equity exposure to 75% and the offshore exposure to 25%. Now there will certainly be times when this might be appropriate but there are also times when investors will not want to reduce equities or their offshore exposure (for example when the market is weak and the rand is strong – it would be a classic case of buying high and selling low – and this enforced on us by the regulators!). The practical solution will be to leave the existing RA as it is and start a new RA at a different company. This exercise could be repeated each time investors want to add to their RA’s and it is not inconceivable that they could end up with 10-15 different RA’s at 10-15 different companies over the years – this is an admin nightmare for everyone.
2. A second unintended consequence will be that younger investors who up until now have been able to invest 100% in equities will now shun RA’s in favour of discretionary funds where they can determine their own asset allocations. Sure there are no tax deductions and they will probably end up accessing the funds before they retire but that’s what you get when you try to force an inappropriate situation onto people. Why should a 30 year old investor with 35 years to go until retirement not have 100% in equities if she wants to?

I cant see why the new regulations have been introduced and more specifically why they seem hell-bent on enforcing them at individual investor level – it is certainly not about protecting investors from themselves – under the new rules, it is now possible to have 75% of your fund in equities and the remaining 25% in property – that is certainly not lower risk than the previous guidelines and will certainly mean more volatility for anyone who opts for this route. So what are the real intentions behind this all?

In our practice, we are very close to advising investors to stay away from RA’s until they are ready to retire – at retirement age they could transfer their discretionary assets into an RA. Under current legislation this would have multiple tax benefits for them.

Is anyone at treasury or the FSB listening to investors?

This article appeared in Finweek on 14th October 2011

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http://www.sanlam.co.za/wps/wcm/connect/2408bd0047ebbffebca8beb4ae0d5b11/SIM%2BGlobal%2BMarket%2BReview%2BAug%2B2011.pdf?MOD=AJPERES

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It is a great way for people to generate income – at 7.25% for 2 years it is still the best rate out there, but as a long term savings product it is pretty poor. Even at 8.25% the 5 year rate is way below what you could reasonably expect from a balanced fund and the All Share index generated about 11.5% pa for the past 5 years.

I have long been a fan of the RSA Retail Bond and still am for people looking for income but as a savings option I think that it is pretty poor – you can do significantly better over the long term – even after fees and commissions – if you are prepared to put up with a bit of volatility risk.

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The basic argument goes around the fact that in a retirement fund an investor may not have more than 75% of his/her funds invested in equities and by default most investors tend to opt for “balanced” funds. Although balanced funds can have 75% equity exposure, most, in reality, do not and they tend to err on the lower equity side.

As a result of the lower equity exposure, a balanced fund will under-perform an equity fund over long periods of time.  In fact, Mouton’s article suggests that as a result of the more “conservative” asset allocation, an investor in a retirement fund could have less than 1/3 of the money that an investor in an equity unit trust fund could have. Scary stuff indeed and certainly it sounds like a compelling reason not to use retirement annuities – especially if you are young. Or is it?

Let’s take a different look at the case and let’s assume that the chosen equity fund (outside of the RA) gives a total return of “x” over the period. Now if we use the same equity fund within the RA we could invest 75% of the contribution into this fund – the balance of the money would have to go into the other asset classes and for the purposes of this example let’s refer to that as “cash”. Over the investment term, the RA would then give the following: 0.75x + “cash”. Clearly this is less than the equity fund.

But this is where the financial planner in me comes out…

One of the primary reasons for using an RA is because of the tax saving involved. For every rand you contribute, you receive a “rebate” equivalent to your marginal tax rate. Simply put, if your marginal tax rate is 30% you will only effectively pay 70cents in every rand of the RA premium – the 30cents is the tax saving. Now if you are disciplined you can invest this amount and if we use the same equity fund used above, then over time your return will be 0.3x (or your marginal rate * x).

So your total “RA” return now becomes: 0.75x + “cash” + 0.3x.

This is equal to 1.05x + “cash” (this could be as high as 1.15x + “cash”).

Even without the “cash” portion, 1.05x > x (apologies for the maths but you should have paid attention in class!). And then it is also possible to invest the “cash” portion into a property fund – which would be significantly better than “cash” over the long term.

Now this is where the detractors of RA’s will jump up and say “yes but there will be tax on the income taken from the RA whereas there will only be capital gains tax payable on income taken from the equity fund”. You are correct and this could well be less than the income tax payable on the RA income.  However, at death, there will be estate duty payable on the equity fund whereas the money in the RA will fall outside of your estate (there will also be no executor’s fees on it).

I am sure that there many responses possible to this article, not least of which would be to make sure that the voluntary money was invested via a trust but that has another whole set of implications. The point of this article was to show, mathematically, that there is still a case for RA’s.

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11. Advice is not free – be prepared to pay for it – especially good advice. Professional advisors are highly qualified individuals so be prepared to pay for their consultation just like you would for any other professional. If you want “free” advice then expect that it will be tainted by the need/desire to sell you something at a later stage (and most probably motivated by ulterior motives).

12. Don’t be rushed – this is a favourite sales technique so be aware of it. There are times when there is a genuine need to “rush” but generally these do not include the area of product purchase. Examples where there might be a degree of urgency include changing beneficiaries on investments, updating a will and meeting the tax deadline for Retirement Annuities. Rather than be rushed into making a decision, take your time to consider the implications it will have on you and your family. Talk it over with your spouse, sleep on it and then make a rational decision in the morning. Never sign a document you have not read or don’t understand.

13. Life insurance is not an investment. This is an area where we have long been misled. In the overwhelming majority of cases it is better to separate your investment and insurance. You will never benefit from a life insurance policy – it pays when you die! So why would you want it to have a (cash) value? Most of the insurance companies now recognize this and have begun to separate investment and risk in their products. Watch out for the “new” products that offer bonuses in the future…the stats show that the average lifespan of an insurance policy is less than 7 years – so why would you want to pay towards something you probably won’t have with the same company in the future?

In conclusion, ask questions, think carefully, act rationally and insist on conducting your financial affairs in a professional manner.

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2. Fools and their money…
3. Fools and their money (2)…

7. Don’t be greedy! Emotions drive irrational behavior – 2 of them are fear and greed. Don’t give in to either. If it sounds too good to be true it (probably) is! When considering the returns offered, measure them against inflation (aim for real returns – those which are in excess of inflation). Inflation is currntly (oficially) low and in a low inflationary environment, 20% per annum returns are not probable so be realistic in your expectations. Expect equities to beat inflation by 7-9% per annum oevr time and expect yoru pension fund to beat inflation by 5-7% over time. So if inflation is 6% you could expect returns of 11-13% pa from your pension fund. Also, don’t be fearful if your equity investment “loses” value in the short term – go back to your plan and goals and be reminded of the reasons that you made your decisions to invest and then stick to them.

8. Sign a service agreement with your advisor – Financial Planning is a process, not an event! You need to review your plan on an ongoing basis so set the parameters for the relationship upfront. Who is responsible for what, how are fees being calculated and paid?  This is step 1 of the 6 Step Financial Planning Process (as endorsed by the Financial Planning Institute.) The agreement should lay the foundation for the relationship and should include the frequency of review/reporting and what is to be expected from each party in the relationship. It should also include a clause for exiting the agreement.

9. Never make a cheque (for your investments) out to an advisor or pay money for an investment into his/her account. Go back to rule 1 and think again. There are very few reasons that you should need to make cheques payable to advisors/deposit funds into their accounts – and if you ever do need to there are many checks and balances that need to be in place before this happens. If you are investing then make the cheque payable to the relevent company or better still, pay the money directly into their account.

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• 4. Get an education about financial matters – no one will look after your money like you will so make it your business to find out about your business. There is no need to be ignorant – read the financial papers and financial magazines – you can even consider doing a course that will teach you the basics about money (as a starting place get on the web and search for “financial education”).
• 5. Ask questions – lots of them. There are no silly questions when it comes to your money – if you don’t understand then ask until you do…remember you have the money and they want it so make sure you know what you are getting and all the implications associated with it. If you are not sure what it is that you are signing, dont sign it…keep asking until you do understand and then if you are satisfied with the answers, sign!
• 6. Get it in writing – if you don’t do this then you have no comebacks later. This goes for the quotes, the recommendations, the costs (upfront, ongoing, exit), the term, the guarantee (if there is one). Also insist that your financial advisor makes his/her recommendations to you in writing. These should be on a company letterhead and you should insist on getting a signed copy. It is also a good practise to take notes at your meetings with your financial advisor…this way you will remember what it was that you discussed and who was responsible for the next actions.

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3. Fools and their money (3)…

RA’s have received a lot of press (not all of it good) and as a result there is probably a great deal of confusion about whether or not they are good investments. So let’s look at a few of the “issues:

• RA’s are effectively “private” pension funds and as such they are most appropriate for people who have taxable income and who don’t belong to a pension fund. They are also great for commission earners.
• Subject to tax limits, contributions to RA’s are tax deductible – this means that for every rand that you invest, the government is effectively subsidising your contribution and effectively “loaning” you money to invest until you retire.
• Yes, RA’s are subject to restrictions and are taxed when you retire but the tax rate at retirement (i.e. after 65) is significantly lower than pre-retirement (for most people that is).
  

In my opinion, RA’s are great investments. However, not all RA’s are equal. Don’t ever invest money into an RA through an insurance company – you are contractually committing yourself to a long-term relationship where there will be penalties when you want to leave it. Contractually binding someone to a 30 year product is an archaic way of doing business.

Here is how the “insurance” RA works. You agree to pay a given premium, escalating at some number (inflation) for a given term. The insurance company then works out all the future “profit” from this contract and accounts for it today. As a result, if at any stage in the future, you want to adjust the premium down or reduce/remove the annual premium escalation, you mess with their profits and as a result, they penalise you for it. And very often, this penalty bears little or no resemblance to the actual “loss” of profit. For policies issued prior to 2009, the penalty is usually 30%, while for policies issued after Jan 2009, legislation has reduced the maximum penalty to 15%. Very often people have to reduce/stop their premiums through no fault of their own e.g.  loss of employment, forced to join the company pension fund. In such circumstances, it is fundamentally and morally wrong to penalise the investor. But that’s the fault of the way the product is structured.

So if you should never ever use an RA through an insurance company, which RA should you use? Unit trust RA’s are a much better option – there is no contractual obligation! You pay a premium as and when you want/need to and the costs are taken off as and when you pay. You can change your mind as often as you want/need to and will never ever incur a penalty for doing so.

So why are more people sold unit trust based RA’s? The very simple answer is because of the commission structure on insurance company RA’s. Consider the following example: a 30 year old takes out an RA for R1000pm.

• Through the insurance RA they need to “commit” to a term and so they agree to pay until they turn 55 (that’s the minimum age) and agree to a 10% annual premium escalation. The commission on offer to the salesperson would be R1304.40 upfront (paid in advance) and R25pm (escalating with the increased premium).
• The same RA though a unit trust company would pay the salesperson a maximum commission of R30 per month each time the premium is paid (this will also escalate as the premium escalates).
• So while there may be little difference in the total commission paid over the term of the RA, there is an incentive to earn upfront commission on the insurance based RA…and if you have a sales target then it is pretty obvious which one you are going to favour.

To summarise then, RA’s have an important role to play in helping investors to save for retirement. There are significant tax incentives when RA’s are used correctly. A contractual based RA (such as the insurance company RA) is an archaic way of doing business – stick to RA’s where there are never any penalties for changing your mind about the premium.

*for those that remember “Squad cars” on Friday evenings on Springbok radio way back before TV in South Africa.

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