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)
One of the really difficult parts of dealing with people and their money is having to give them bad news about the performance of the funds in which they are invested. They usually react badly and look for all sorts of people to blame (most often this the advisor). Behavioral Finance psychologists tell us that this has something to do with the fact that the pain of loss is about twice as great as the joy experienced from a gain.
The nature of financial advice is such that there will be times when we have to “break the bad news”. Currently this is the case for just about anyone who invested money offshore in the past 10 years…the World Index (in Rand terms) is flat or negative over almost all periods in the last 10 years. And right now, finding anyone who was desperate to get funds out of SA in 2000/2001 is almost like trying to find someone who voted for the National Party during apartheid. What short memories we have and how fickle we are as people. So what lessons could/shoud we learn from this?
Perhaps a good analogy would be to look at the fate of the employees of Enron. It was (and possibly still is) fairly common practise for Americans to invest their pension fund money into the shares of the company for which they work. i.e. Enron employees invested their pension in Enron shares. This makes some sense as there certainly is a vested interest on the part of staff to ensure the success of the company. But there are certain things over which ordinary staff have no control and while things are going fine there is no need for concern. The problem arises when things go wrong…and when they do, ordinary investors are faced with a fundamental “error” when it comes to investing: they failed to diversify!
And so it is with SA – the market has done really well over the past 10 or so years (the ALSI is up around 15% per annum compared to the Global Market index which is marginally negative over the same time). Right now it appears that we should all be investing all of our money into the “company” share in much the same way as Enron employees did. What we fail to remember is that as an investment option, SA represents less than 1% of the total global investment universe. So why would you put 100% of your assets into 1% of the market? The point about diversification is to spread your investment risk and by definition this means that they dont all go up or down at the same time. This has certainly been the case for SA investors who have sent money offshore.
Right now the rand is strong (and getting stronger each day). There are many reasons for this as well as much speculation but one of the most obvious has to do with our interest rates. You can borrow money elsewhere (at almost 0%) and then “invest” it in SA at 6% or more…it is a “no-brainer” as they say. So right now, the rand is strong because people are making money with it. When that no longer applies, we could see ourselves lose favour very quickly and as a result, see the currency weaken very quickly too.
At the same time our share market seems to be fairly resiliant…and the money continues to flow in…fundamentals and politics dont matter… until they matter.
If there is a lesson to be learnt from all of this it is this: right now is an excellent time to be investing outside of SA. Dont wait until it is “too late” and you wished you had done it.
For those wanting to invest offshore (via unit trusts) there are essentially 2 ways:
- Asset swap funds – where the money does not physically leave SA and is always paid out in SA but is effectively exposed to offshore markets. You can do this via a debit order for a few hundred rand each month, or
- Tax clearance and exchange control. The process is a bit tedious and SARS seems to move the goal posts from time to time. But once you have your tax clearance you are free to invest anywhere in the world and this money can even be paid out offshore as well.
- “Up to” 6.25% (turns out you need to invest R1million to get this rate – R10000 gets you 5.75% – the small print says that the rate will be tiered according to the balance.
- You cant access the funds for the first 14 days.
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!
One of the things that I just cant get my head around is the price of residential property. If the experts are to be believed, then the average house price in SA is somewhere around R550000. In order to buy this property, you would need to put down a deposit of at least R110000 (20%) and would then have to pay off a bond of R440000. With the prime rate at 11% and assuming you could get 0.5% below prime (not nearly as easy as it used to be) then this would leave you with a monthly repayment of just under R4400 (R4393). In order to qualify for this bond you would need to have a combined monthly household income of ±R14500 per month.
Here in lies the problem: the average salary in South Africa does not even come close to this amount. According to Finscope 2008, the average household monthly income in SA is ±R5750 (R10000pm in Joburg and ±R6400 in CT). So how do Mr and Mrs Average buy the average house? They cant!
So who is buying all the houses and why would they do this?
Conventional wisdom states that you cant go wrong with buying residential property as an investment. Currently a R500000 house might realise a rental income of ±R3000 per month (before commission, rates etc). If we assume a net income of R2500 after expenses then this equates to a rental yield of ±6% per annum. This is not a great yield and seems to decline even more as the value of the property increases. In fact, rental yields have not been good for quite a long time now.
If I took my R500000 and put it in the money market, I would get a yield of ±8% at this stage so the rental yield is not that attractive (in both cases these are pre-tax yields).
So why would I buy the property?
Capital growth of course! After all, property only goes up over time! Apparently this is not a given and as property prices have fallen over the past 2 years not only have people seen their values decline but many people are also sitting with negative equity on their properties (i.e. they owe more on the property than it is worth and in many cases the rental income does not even come close to the bond repayment).
Now my problem is this: if Mr and Mrs Average cant afford the average house (because they don’t earn enough) and as a result they need to rent, how are they going to be able to afford increased rentals either? As I see it, they cant afford to buy their own place (prices are too high) but neither can they afford to subsidise someone else’s retirement plan and desire for rental yield and so either rental yields will have to stay low (and you should rather use the money market for income) or else property prices have to fall (and you should stay far away from this). Why take good money and stick it into an investment property with a poor yield and little prospect for growth?
If you are seriously thinking about buying a property to rent it out then my advice would be to be patient, something’s got to give.
That’s all for now!
The Financial Coach™