The watched pot…

There’s an old saying about the watched pot never boiling which simply means that if you wait anxiously for something to happen, it seems like it takes forever.
When one considers the markets over the past few years, it has behaved much like the proverbial pot and anyone desperately watching their funds, waiting for them to go up would most likely have grown despondent by now, thinking that markets will never go up again.

And then, all of a sudden, and almost while no one was watching, the ALSI is up over 6% for the month of July*. If you’ve been sitting in cash on the side lines waiting for the “pot to boil” before you climb in, you’ve missed this.
Once again this reinforces the wisdom that you cant time the markets and that ultimately it’s time in the markets that counts.

*yes, it is only back where it was about 2 years ago…but that’s not the point

 

 

 

Your greatest financial risk is not financial; it is physics!

Over the years as we have chatted to clients about financial planning we have settled down to the “big 5” risks that everyone faces and the resulting financial (and emotional) risks that they present to the person and their family. Simply put, these are (in no order of importance):

  • Dying too soon
  • Living too long
  • Disability
  • Funds for emergencies, and
  • Debt

A lot of the work that we have done with clients has been around identifying these potential risks and then implementing strategies to address them.

However, I have recently become convinced that there is a much greater risk that people face but that is hardly ever spoken about. I also think that this risk is likely to increase as the process of disintermediation increases.

Rightly or wrongly, Albert Einstein is often credited with saying that compound interest is the greatest force in the universe (or the 8th wonder of the world, or some other version thereof). And indeed, compounding is a significant force but I have become convinced that another scientist, Sir Isaac Newton, had much more to add to the debate.

Indeed, the “biggest” force that haunts people is to be found in Newton’s First Law of motion (you should have paid attention during science lessons). Newton One states that “a body will continue in its present state of rest (or motion) unless acted on by an UNBALANCED external force.” This is known as the rule of Inertia…or the tendency to do nothing or remain unchanged.

Simply put, we are all subject to Inertia and will continue to do the same things over and over unless we come into contact with an unbalanced external force. And that’s why people have personal trainers to hold them accountable to exercise and get them fit, that’s why we have seen an increase in the demand for life coaches and it is also the role of the financial planner.

Don’t get me wrong, I have no issue with people doing their own financial planning and/or investing. The problem is that they don’t! How else do you explain the father of 2 young kids who has no will 10 years after they were born, or the divorcee who has not changed beneficiaries on her life policy (or updated her will) or the employee who has not yet started saving, or the entrepreneur who has never submitted a tax return? I could go on…

The cold hard truth is that we are often our own worst enemies when it comes to things financial and it is my strong opinion that we all need an unbalanced external force in our lives to get us out of our inertia. As long as Newton’s First Law of motion holds, there will always be work for financial planners and for that I am very grateful! We have an incredible privilege as we help clients identify and manage their financial risks and then keep them accountable to address them.

 

 

 

The ultimate savings & investment vehicle!

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.

The first bit of advice I would give them is to consult a Certified Financial Planner®. It will cost them but could well prove to be the best investment they make. At the very least, they need help identifying their savings and investment goals. Are they short, medium or long term? They are “beginner” investors after all.

My 2nd piece of advice is to stay away from insurance companies- don’t ever invest via one of them. They are expensive, inflexible, opaque with respect to fees and returns and there are penalties when you change your premium/mind – and you will need to change your premium because life happens!

Once they know why they are saving/investing then there is no reason that they cant do the rest on their own…and my advice is to use unit trusts.

Why unit trusts? I think that they are the ultimate savings and investment vehicles because they are:

  • Accessible – you can invest from as little as R50 per month (and unlike many of the insurance products with low initial investment amounts, you wont pay 5-15% of premium each time you invest)!
  • Diversified – for R50 you can get exposure to all of the shares on the JSE and for R200 pm you can own the top 2000 shares in the world.
  • Cheap – in most instances there are no upfront admin fees and there are more than a few passive (tracker) funds with annual fees that are as low as 0.2% pa.
  • Flexible – you can stop, restart, increase or decrease the premium without ever incurring penalties!
  • Transparent – you can see the underlying investments and you can see all of the charges
  • Tax efficient – any time a manager buys/sells shares you will not be subject to any capital gains tax. This only comes when you sell one day.
  • Come in a variety of flavours – specialist equity to money market and you can get a tax-free account as well.
  • There is a whole layer of legislative protection – you own units in a trust fund and this is highly regulated!

I was then asked for my 2nd and 3rd choice investments…my answer was “unit trusts and unit trusts”.

Yes, I am a huge fan of unit trusts and will remain so until someone comes up with a better idea.

 

Remove all sharp objects…

I attended a presentation by one of the SA asset managers recently…it was a good job that there were no sharp knives around. It was real slit-your-wrists stuff!

Their view is that SA is pretty much stuffed and that unless there is a significant change in ANC leadership that we are on the “low road” scenario. The reasoning is as follows:

  • SA stuck is in a no growth-low inflation scenario. The only reason the Reserve bank is not cutting interest rates is due to political risk fallout.
  • The global search for yield has kept the ZAR strong (for now) – they see it considerably weaker over 3 years, especially if we get the Moodys’ downgrade on local debt (it seems inevitable at this stage).
  • SA consumers are very stressed with much higher than normal variance in the payday compared to mid-month purchasing patterns (there is a massive spike at pay-day compared to mid month and this is much higher than normal). In addition to this, people are switching away from brand names to “no-name” products.
  • SA food retailers have noted significant change in the composition of the average food basket – food inflation as measured by retailers is very different compared to what is measured by Stats SA.
  • One of the SA retailers reported that for every R100 they are lending consumers, there is an additional R1700 in unsecured credit! Unsecured credit demand has increased radically.
  • Another SA retailer has reported worst figures in 20 years.
  • There are 17million people on social grants and this number is increasing rapidly…government is running out of money to fund this.
  • SA facing poor consumer confidence (reduced spending), poor business confidence (reduced investment in SA) and poor employment numbers.
  • The revenue (tax) base is shrinking, SARS is missing money due to incompetence.
  • SARS (and treasury) have been haemorrhaging skills and there is a significant loss of expertise at both organisations.
  • Tax payer non-compliance has increased as a result (and will continue to increase) thus worsening government revenue.
  • Government is going to be desperately short of funds!
  • The risk of a return to “prescribed assets” for pension funds has increased and along with this a limit on moving funds offshore and possible cancelling of asset swap capacity for local funds!

 

It’s a good job that there were no sharp knives around…having said this though, they are still positive medium-to-long term IF the Zuma faction is outed from government.

The value of advice?

Much has been written about the value of financial advice. There are many people who believe that financial planners offer little value for the fees charged while there are others who believe that the value financial planners add is very significant.
Research by Morningstar has revealed that the value of advice (they call it “gamma”) can be as much as 3% (of the client’s portfolio) per annum. This is, among other things, a result of managing investor behaviour and greater tax efficiency for the advised client.
We have more than a few clients who prefer to manage their own funds with no on-going advice fees and who will then consult with us from time to time when they think it necessary. And while this may seem to save them an “annual advice fee”, in my experience, it has almost always cost them significantly more than the fee that they would have paid as an “advised” client. Consider the following example from our practice.
The client retired a few years back and transferred his funds to a living annuity – he met with us around the income draw, asset allocation and resulting fund selection and has been looking after it on his own since then. He has been drawing the minimum income (as a result of some consulting that he was doing) until the anniversary earlier this year when the consulting stopped and he needed to increase the annuity. Which he did – without consulting us and without any thought to the tax consequences.
He did not consider that he had a discretionary pot of money from which he could effectively draw (close to) tax-free income. The result is that he is now paying at least R100k in tax that he need not be paying. This is R100k that we would have saved him if he had been an advised client (or if he had at very least sought advice before making the change). The R100k is certainly many times the quantum of the annual fee that we would have been paying. And he is currently staring at an estate duty problem because of the choice to increase the annuity income draw and leave the discretionary assets in his estate.
Add to this the fact that he recently switched funds – “the funds had done nothing for the past few years” and so he made the change. The move was at exactly the wrong time and his asset allocation is now also out of kilter (way too much offshore exposure for a living annuity with a 5% draw). The annual fund fees that he is paying is also way too high – he had “no idea that was an issue”.
Clearly in this case, the value of advice would have been way less than the cost to his portfolio. But then, perhaps we have ourselves to blame. If all clients think we do is choose funds then why would you pay (a significant) ongoing fee for that?
We need to make sure that clients fully understand that asset allocation is but one part of the value-add from a professional financial planning service. There is so much more to the financial planning service, but they wont know that if we don’t tell them and more importantly, if we don’t demonstrate it.

 

 

Memories

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/

 

The real advantage of knowing…

Liberty Life is currently running a radio ad about their income replacement product. Income replacement is an essential part of managing your financial risk and for any self-employed person it is almost essential cover. However, not all income replacement cover is created equal and it is essential that before you buy this kind of cover that you make sure that read the fine print and find out what is and what is not covered. In other words, what exclusions and restrictions are there on the cover?
I had heard a rumour about the Liberty Income replacement product not covering depression so I set about to try and find out if this is true or not.
It is quite difficult to get the information when you don’t have a contract with a company but I did manage to find a PDF* document online that details the exclusions on their product…and here it is…no “mental health or musculoskeletal conditions for the first 2 years of eligibility”.
Not 100% sure what that means but I would make sure that I get an answer (in writing) from Liberty before I sign anything. I have written to Liberty to find out more and will update this if/when they reply.
You need to find out before you sign the application form – it is too late to find this out at claim stage. Now that’s the real advantage of knowing!

 

 

*Pdf document accessed here: https://www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwi9ooTnsZTUAhXjD8AKHSjoD3EQFgg6MAA&url=http%3A%2F%2Fwww.liberty.co.za%2FDocuments%2Fincome-protection-plan.pdf&usg=AFQjCNHS-AnnkIIH6y3NOSG5Eg1dszu5qA&sig2=5G_HjJi32FmwITAbCGKcvg