I recently watched someone using a leaf blower to clear their pavement. As I watched, it struck me what a pointless exercise it was and it crossed my mind that the leaf blower must be one of the most senseless machines yet invented. Continue reading It’s time to do the Mickey Blue (again)
Am I the only one who dislikes Tax Free Savings Accounts (TFSA) and all the hype that goes with them?
Let’s take a step back before getting all excited about TFSA’s. They were introduced (by Government) to encourage non-savers to save and unfortunately, Continue reading The great Tax Free Savings Account con!
There is this strange phenomenon in SA called Regulation 28 that is applied to retirement funds. It stipulates that retirement fund members may not have more than 75% of their funds in equities and no more than 25% of the fund invested offshore Continue reading A case for higher offshore weighting within a living annuity?
There are many with strong opinions about the merits of a share portfolio versus a unit trust portfolio. Here’s another one (strong opinion) in favour of a unit trust portfolio.
Continue reading UT or share portfolio
Today I got a call from a journalist asking a few questions about what a beginner investor should do if they want to start investing. I think that they were looking for “tips and tricks” about which funds or shares to choose. Here was my reply. Continue reading The ultimate savings & investment vehicle!
On a recent car trip, my daughter insisted on playing some of her music – 2 of the songs on the “hit list” were “Bear necessities” from the Jungle Book and “Hakuna Matata” from The Lion King. When the music finished there was a follow up question from her to me – “what’s your favourite Disney movie, dad?”
I thought about it and decided that “Disney” could now include Pixar and went with “The Incredibles” followed by “Monsters Inc”. And then I asked her. “Jungle book, followed by Lion King” was her reply. Her younger brother concurred.
As I pondered this I realised I had just witnessed a case of what behavioural economists call “anchoring” in practice. In short, anchoring can be described as the human behaviour trait that gives more importance to recent history than to things that happened long ago. This tends to skew our view of things…we all do it and we all need to be aware of it, especially when it comes to our money. For a more precise definition read the bit below by the people that first described the concept, Nobel prize winners Amos Tversky and Daniel Kahneman.
“Anchoring is a particular form of priming effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness (Tversky & Kahneman, 1974), and sometimes it occurs when people’s price perceptions are influenced by reference points. For example, the price of the first house shown to us by an estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). These effects have also been shown in consumer behavior whereby not only explicit slogans to buy more (e.g. “Buy 18 Snickers bars for your freezer”), but also purchase quantity limits (e.g. “limit of 12 per person”) or ‘expansion anchors’ (e.g. “101 uses!”) can increase purchase quantities (Wansink, Kent, & Hoch, 1998).” https://www.behavioraleconomics.com/mini-encyclopedia-of-be/anchoring-heuristic/
I have just finished reading this excellent book by Carl Richards…
The One-page Financial Plan – some notes from the book:
“The best financial plan has nothing to do with what the markets are doing, nothing to do with what your real estate agent is telling you, nothing to do with the hot stock your brother-in-law told you about. It has everything to do with what’s most important to you.” p7
• know why you are planning
• time spent + money spent = what you really value.
• it’s about making best guesses (and not obsessing about getting things exactly right) – a lot can happen between now and the future!
• It’s about giving yourself more time!
• Things you have to invest: money, time, energy and skills – all NB to consider
• Most people don’t have a clear understanding of their current financial situation. Budgeting = awareness
• budgeting & flossing: both insanely important, super simple, & for many of us, nonstarters
• save as much as you can
• spend less than you earn
• don’t lose money
• life insurance plays 1 role: it covers economic loss. It is an expense, not an investment…it’s about the risks you are ok with and the risks you’d like someone else to take care of. Economic need, not emotional loss.
• Paying off debt = investment with guaranteed return
• Speculation and intuition are not investment strategies
• Invest and then behave for a really long time
Regulation 28 has long been a frustration of many retirement fund investors with the Financial Services Board having applied a “one size fits all” approach. That means that within Regulation 28 confines, a 20-year-old investor in a retirement fund is treated the same way as a 64-year-old investor with respect to the maximum exposure that they can have to growth assets. This is insane!
In short, regulation 28 limits the exposure that an investor can have to certain of the asset classes. Equity exposure is limited to a maximum of 75% of the fund and property to 25%*. Reg 28 also limits offshore exposure to 25% of the investment.
And while it has been possible (in theory mostly) to construct an “aggressive” retirement portfolio with 75% in equities and 25% in property, the reality is that this has required frequent rebalancing in order not to fall foul of the regulation.
The resulting “default” has been for investors to make use of “balanced” or “managed” funds. Unfortunately for younger (and more adventurous) investors, who may have a 30+ year view on their retirement money or who are just wanting more growth, most balanced fund managers manage their portfolios with a 5-7 year time horizon because this is how they are measured (it makes no sense).
The result of this is that it unusual to find a balanced fund with more than 65% in equities and 5-7% in property. Over a 30 year term, this conservative approach could seriously undermine the returns that investors can achieve – further compounding the issue of most South Africans not being able to retire with sufficient funds.
Things were not looking all that attractive in the Reg 28 space…until recently, that is, when Nedgroup launched their Core Accelerated Fund.
The Core Accelerated Fund is the latest addition to their Core (passive) range of funds that is managed by Jannie Leach and his team. It is reg 28 compliant and has a static asset allocation of 75% in equities and 15% property at all times with the balance in bonds/cash. That’s 90% in growth assets at all times! The fund will also have 25% offshore exposure (as long as the legislation permits this). And the best thing about the fund is that being a passive fund, it has a very low annual fund fee of 0.35% (this is as low as 0.25% if you access it via one of the LISP platforms).
So now it is possible to have a high growth oriented retirement fund with an all-in annual fee of less than 1%**.
This fund gets a big thumbs up!
*This includes 25% offshore exposure.
** this includes the fund, admin and advice fees.
A client of mine presented a potential dilemma to me. He has a living annuity through Liberty Life but also has the bulk of his living annuity funds on a LISP platform. He was wanting to move the Liberty one to the LISP and consolidate his investments on one platform*.
Under normal circumstances there should be no penalty when transferring living annuities. However, in the fine print, Liberty had noted that there would be an exit penalty if the annuity was transferred anywhere else within the first 5 years of the investment. As such he was advised that he was going to pay a penalty of 1.2% (±R6500) to move his annuity and he balked at the prospect.
We told him to find out from Liberty what the total annual fee on his annuity is and it turns out that they are charging him a total of 2.15% pa (admin and fund fee, no advice fee included – the advisor took that maximum upfront fee).
By comparison his living annuity on the LISP has a total annual fee of 1.1% (fund and admin fee, no advice fee). Do the maths – the 1.2% penalty will be covered in the next 12 months and thereafter he will be better off because of the lower annual fee (less than half of the current annual fee and there would still be a penalty to move for the next 24 months).
The real question I have for him is why anyone would ever invest in a product where there is any kind of exit penalty? There is no need to ever pay penalties when it comes to investing – there are far better (and cheaper) products out there than those offered by the life insurance companies. Stay away from them unless it is insurance you need!
*Note: he pays us directly for advice and there are no on-going advice fees on his investments so the advice we give to him is not affected by the desire to grow assets on which we earn fees.
What if SA is where Zimbabwe was ±20-25 years ago? With the benefit of hindsight, what would the average Zimbabwean do differently? Would they have stopped investing into their pension funds and bought more foreign currency? Would they have emigrated? Would they have bonded their houses to the hilt and taken the funds offshore?
I have always promised my clients that I would not invest their funds where I am not investing myself…if it is good enough for me it is good enough for them. In the same way, I have been a massive proponent of retirement annuities (and pension funds) in SA – they have made so much tax sense (as well as estate duty sense). But what if this is all about to change? If SA goes the way of Zim then I am afraid that your pension fund in SA will be worthless. If the state re-introduces prescribed assets for pension funds, then possibly it will be better to have funds offshore. If Zuma has been paid his commission for the nuclear deal, as some are suggesting, then we are facing a bleak future and a very weak currency – then it will be better to have funds offshore.
They say you should never ask a barber if he thinks you need a haircut and unfortunately this seems to apply to fund managers and pension funds too? If you ask them if it still makes sense to invest into your pension fund in SA they are likely to answer yes – their income depends on it. But what are they doing with their own money? I’ve asked a few of them but no one is prepared to stick their necks out – I suspect that they are all moving as much money offshore as quickly as they can but no one seems to be brave enough to say this in public.
So perhaps it’s time that we had a frank discussion about the future of pension funds in SA – we might not be Zimbabwe yet but perhaps we are the proverbial frog in the pot of water and perhaps we are reaching the point where we will no longer be able to jump out? So how about it, anyone brave enough to express an opinion on this one?