The Financial Coach™ - Managing people & their emotions around money » Investment Planning

Do the Mickey Blue Eyes…

Gregg — Tue, 13 Jul 2010 12:16:01 +0000

I enjoy using lines from movies when talking to clients about investing and financial planning. For example there is the classic line by Jack Nicolson’s character from “A few good men” when he is on the witness stand and being asked about the truth of an investigation to which he replies…”You want the truth? You cant handle the truth”. Sadly we get to use this when telling clients the truth about being able to retire or about their budgetting and the reasons that they are always in debt.

But one of my favourite lines that we often get to use is from the movie “Mickey Blue Eyes” which stars Hugh Grant as the boyfriend whose prospective father-in-law is a gangster boss. Hugh Grant’s character is very proper and speaks with a real hot potato in his mouth. The father wants to introduce him to his gangster friends but cant have him speak with that accent and so he tries to teach him to speak like a mobster…about the only thing he gets right is the line “forget about it” which sounds more like “fur ged abowd did”…and so it is with investments – clients need to learn to do the Mickey Blue Eyes and “forget about it”.

We’ve recently had a few calls from clients about their investment values – this is largely a function of quarterly or half-yearly statements just having gone out combined with the current volatility that is being experienced. Research shows that the more often you look at your investments, the less likely you are to stick to your long term plan/goals as it becomes too easy to focus on the short term volatility.

Unfortunately legislation requires that companies report frequently (how that happened is the subject of another post) and as a result clients are getting statements too often (in my opinion). Combine this with the ability to access the values online and the absolute glut of information by so-called experts it becomes too easy for investors to be distracted from their plans and to make decisions based on the short-term “noise”.

I am not advocating a reckless negligence of your finances but I recommending that if you are an investor (that implies that you are in it for the long haul) and you have an investment plan/strategy in place then you need to learn to do the “Micky Blue Eyes” with your investments and “fur ged abowd did”. Give them time and they will come right!

Minimum investments

Gregg — Tue, 25 May 2010 09:52:32 +0000

I was recenlty approached by someone who was looking to save a bit of money for his newly born nephew…he wanted to put away R100 pm for the next 21 years or so. Not a problem I assured him – a unit trust is the way to go…

However, it appears that most unit trust companies are no longer interested in the smaller amounts and now insist on a minimum debit order of at least R500 per month. There are still 1 or 2 companies that will take R100 or even R50 per month but for the most part, they are not interested in less than R500pm.

Strangely though, you can invest in Satrix (or any other ETF) for R300 pm and this raises some very interesting questions. For example:

Why have so many of the unit trust companies all decided that R500 is their minimum investment?
What are investors with less than this supposed to do? (Please stay away from insurance products such as endowments.)
Why dont mancos have 1 fund (e.g. a balanced fund) that will accept lower minimum investment amounts?
ETFs such as SATRIX are a supposed “threat” to the unit trust industry, so why have the unit trust companies put their minimum investment higher than that of SATRIX?

For interest, the lowest debit order amount that any fund will accept is the Stanlib Equity fund at R50pm and the minimum debit order amounts for a few of the “prominent” companies are as follows:

R1000 – Foord
R500 – Allan Gray, Cadiz (most funds),Coronation, Investec, Nedgroup, Prudential, OM (most funds), Stanlib (most funds).
R300 – SATRIX, DBX ETFs, RMB.
R250 PSG Alphen, some OM funds and Cadiz (1 fund).
R200 – ABSA, Sanlam (most funds)
R150 – Metropolitan
R100 – ABSA (3 funds)
R50 – Stanlib Equity Fund

Fundisa (again)

Gregg — Wed, 19 May 2010 07:12:52 +0000

I have been a huge fan of Fundisa, having written about it often and having encouraged many of my clients to invest in it…however, after initially being a huge fan of the product, I have done some more work on it and as I see it, the big hurdle that Fundisa has is the underlying fund and its potential returns over a 15 year period…so much so, that I am questioning whether or not I can continue to support it.

Here is my thinking…

Following some basic maths, I calculated that the projected return using Fundisa would look something like this (assuming R200 from me + R50 from govt and a 10% per annum return – this also assumes no escalation on the contribution because the bonus is capped on the first R200).

Year	Fundisa
1	3 141
2	6 612
3	10 445
4	14 681
5	19 359
6	24 528
7	30 238
8	36 545
9	43 513
10	51 211
11	59 715
12	69 109
13	79 488
14	90 952
15	103 618
16	117 609
17	133 066
18	150 141
19	169 004
20	189 842

So after 10 years there should be ±R51000 in the account and by 15 years, ±R103600…

However, if I use a simple balanced fund and I put away R200pm, no escalation and I can get a return of 14% pa (which is the historical average return for this sector over 10 years) the results look something like this:

Year	Bal Fund	Fundisa
1	2 560	3 141
2	5 503	6 612
3	8 885	10 445
4	12 772	14 681
5	17 239	19 359
6	22 374	24 528
7	28 275	30 238
8	35 058	36 545
9	42 854	43 513
10	51 814	51 211
11	62 112	59 715
12	73 948	69 109
13	87 552	79 488
14	103 187	90 952
15	121 157	103 618
16	141 811	117 609
17	165 550	133 066
18	192 833	150 141
19	224 192	169 004
20	260 233	189 842

So for the first 9 years or so, Fundisa is a better prospect, however after that, it gets left behind. This is without any escalation on the debit order – which you would normally do and also assumes I use a balanced fund not an equity fund which would be totally appropriate over a 15 year period…

So we have a problem…Given that most people will start saving (via Fundisa) when their kids are very young and will therefore be saving for much more than 15 years, Fundisa is not as good as it appears and anyone using it would be worse off over anything more than a 10 year period…

To my mind, Fundisa needs to do the following to make it a really attractive option:

1. Fundisa needs to have an alternate (more aggressive) fund option such as a balanced or equity fund.

2. Fundisa needs to allow for bonuses on an escalation – this could be capped at 10% per annum.

Even if I escalate my contribution on Fundisa without the bonus increasing, I will still be significantly worse off than escalating the contribution on the balanced fund (without any bonus)…

I have written to ASISA re these concerns and will post their reply if we get one…Fundisa is a great concept, but in my opinion, it was not clearly thought through…

For now, I would hold off on new investments into Fundisa.

A total rant!

Gregg — Tue, 11 May 2010 13:48:17 +0000

I need to get this off my chest (again)…been fighting with 3 of the bigger insurance companies re the level of disclosure on their products with respect to fees and more specifically the performance on their portfolios…

Suffice to say it is a futile exercise – it appears that even in this highly regulated environment that they can get away with complete nonsense when it comes to answering questions put to them .

There is such a huge discrepancy between the published returns on their portfolios and the actual returns experienced by investors that one can only deduce that this must be the costs of the products – and it is not a pretty deduction.

Anyone who puts money into any investment product with any insurance company needs their head read! You are being very foolish indeed – there is a better way with lower costs and no contractual obligation and no subsequent penalties for breaking that contract. Invest in unit trusts and/or exchange traded funds – low/no fees, complete transparency and no penalties – EVER!

RSA Retail Bonds part 2

Gregg — Tue, 04 May 2010 09:33:47 +0000

Following on from the first post on RSA Retail Bonds, I received a reply from the communications manager at National Treasury who referred me to 2 more people and I finally received a 10 page summary on the bonds. The first section is titled “How to invest” and answers the questions we had but is unfortunately not available on the website (yet)!

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!

RSA Retail Bonds

Gregg — Mon, 03 May 2010 12:48:55 +0000

Much was made about the RSA Retail Bond when it was launched and about how it would provide a safe and cheap investment with a reasonable returns to the “man-in-the-street”.

Well, I have been trying to buy some of these for a “man-in-the-street” using the RSA Retail Bond website – what a nightmare. There is an application form online but no details where to submit it or how to pay the funds into an account.

So I sent an email to the address on the site – 4 days later and still no reply. So I tried calling the telephone number (which is the number investors are supposed to use if they want values) and it just rings and rings and rings until it goes dead…

I know that you can also buy these at Pick n Pay or via the Post Office but if that is the only way to do it then why have forms on the website? And if no-one is going to reply to emails or answer the phone, why have an email address or telephone number on the site? And if you are not going to reply, how do you expect investors to get information or communicate with you?

This is my first experience of using this investment vehicle for a client and so far, I am not impressed.

I have written to the communications manager at National Treasury – let’s see if we get a reply.

Appropriate advice?

Gregg — Tue, 13 Apr 2010 13:50:54 +0000

Consider the following – what would you advise the client?

Client A took out an insurance based RA in 2003 (23 year term). She started a debit order of R450 pm (escalating at 10% pa).
The current fund value is R63500
The company claims a return of 11.8% pa on the funds but the maths shows that she has had about 6% per annum.
She now wants to move the RA to a unit trust RA (where there is no contractual obligation and no initial fees). This will be done via a Section 14 transfer and the company can (legally) penalise her 30% of her fund value if she moves.
Her R63500 will then reduce to R47000.
Should she go or should she stay? What is appropriate advice in the situation?

I have not been a fan of moving this kind of policy but a quick look at the maths reveals quite a lot and has got me questioning things:

If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
If she moves, incurs the penalty and invests the R47000 (no fees) but then gets a 10% return for the next 15 years she could have ±R802000.
That’s R200000 more inspite of a 30% penalty!

How could anyone not make a case that it is completely appropriate for the client to incur the penalty and move the funds elsewhere? I am pretty sure that as long as this is well documented and motivated, the FAIS Ombudsman would find no fault with this.

At issue for me are 2 things:

How can the insurance companies continue to claim performances on their portfolios which bear little or no resemblence to the reality on investor’s funds?
How can the industry still actively promote the continued selling of these awful contractual savings products, especially when there are substantially better products available. It is my contention that in years to come there will be a flood of complaints at the FAIS Ombudsman from people who have been sold these contractual RA’s instead of the cheaper and better unit trust alternate. There can be only one reason that they are still sold and that is commission!

Dilbert on Finance

Gregg — Thu, 08 Apr 2010 12:01:13 +0000

The Dilbert cartoonist, Scott Adams, earned a MBA from Berkeley, worked at a bank (got held up twice at gunpoint), and is worth millions. So we presume he knows a thing or two about money. In an interview with the Akron Beacon Journal, Adams says he read about a dozen personal finance books and began working on one himself. However, he found it all boiled down to these nine points and he “couldn’t figure out how to fluff it up.”

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

If we adapt these to South Africa they might read something like this:

1. Make a will (you are going to die one day and the consequences of not having one if you have beneficiaries is too great to contemplate).

2. Pay off your debt including your credit cards and home loan.

3. Get life insurance if there is financial risk at your death (i.e. you have a family to support or debts that need to be paid including estate duty).

4. Fund your pension fund to the maximum (that the company allows).

5. Fund your Retirement Annuity to the maximum (if you dont have a pension fund).

6. Buy a house if you want to live in a house and can afford it. I guess the same logic would apply to buying a car - if you can afford it.

7. Put six months expenses in a money market account (once you have paid off your debt).

8. Take whatever money is left over and invest 70% in an equity based unit trust or exchange traded fund (etf) and 30% in a bond fund or 100% into a balanced unit trust fund and never touch it until retirement. As South Africans, probably at least 20-30% of this should be offshore (i.e. out of SA).

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

Weeds are green too…

Gregg — Wed, 13 Jan 2010 08:55:00 +0000

2009, what a year! Markets have done what they always do – surprised us in the short term. We have seen the JSE ALSI run from just over 17500 in March to just under 28000 at the end of December. That’s more than 54% up since March when everyone thought we were facing the worst financial crisis since the Great Depression. (And offshore market recoveries have been even more spectacular.)

During this time much has been written about the markets phenomenal gains and whether or not these gains are sustainable and one of the “new” expressions that has emerged has been the term “green shoots”, with particular reference to the “green shoots of growth” that commentators and analysts are starting to see…

I dont understand how this all works and dont understand where all the growth is going to come from if consumers are cash strapped and not spending money…

And I cant help but think that with all this talk of “green shoots” has anyone stopped to think that weeds are green too?

Anyone seen the fat lady?

Gregg — Wed, 14 Oct 2009 14:43:44 +0000

So it looks like the “fuss” is all over and the equity market is set to run even further…I guess it is at times like these that you need to make sure you are “in for the ride” and not sitting on the sidelines watching it all go by. But it is also important that investors do a little “stock take” (pun intended) and understand/remember the following…afterall, has anyone seen the fat lady sing yet?

Investing takes time – equity markets can be extremely volatile – remember the past year? They can and do move rapidly in the short term (up and down) and so, if you don’t have time, you cant afford to invest into equities solely (diversify).
You cant time the markets – if you moved to cash a while back (after the market fell) and are still sitting there – sorry for you! You have missed the best part of the rally. You are either in or out – you cant be both and you cant time it right either!
Learn to ignore the noise around you – have a plan (know why you are doing what you are doing) and stick to it. Don’t be swayed by the noise.
Cash is not necessarily a “safe” or “low risk” option – it hardly ever beats inflation over time. And as an investor, inflation is your biggest enemy.
There are probably still some significant risks in the financial system – share prices have run hard in anticipation of earnings…there are plenty of people trying hard to talk the market up but if there are earnings disappointments then expect to see some more down days…
Inflation risk is still on the upside – big time – just imagine what the increase in electricity price increases is going to do to inflation (we are not alone in this – the UK is facing similar problems). Tradtionally high inflation is not good for shares…but it could still be a while before we see any siginificant increases in inflation.

Bottom line is this – have a plan and stick to it! If necessary find a good financial planner/coach who will guide you through this and coach you to stay the course.

The Financial Coach™