Tag Archives: Investments

A great way to save?

Heard a radio ad this morning for RSA Retail Bonds…it went something like this…“There’s no fees or commissions therefore it’s a great way to save”. I disagree strongly with this statement – it is not a great way to save.

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.

Do the Mickey Blue Eyes…

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!

Appropriate advice?

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:

  1. If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
  2. 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.
  3. 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:6a00d8341c500653ef00e54f0f05ac8833-800wi

  1. 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?
  2. 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

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.”

Anyone seen the fat lady?

So fat-lady2it 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?

  1. 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).
  2. 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!
  3. 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.
  4. 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.
  5. 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…
  6. 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 inflatioA-game-for-the-bulls-and--200809n.

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™

It aint over till its over

I cant help but think that with the markets having run as hard as they have since their lows in November last year and March this year (JSE is up >34% since then) that either we have been duped into believing there was a huge crisis which never actually existed and have now missed the best buying opportunity (perhaps ever), or else, the crisis is not over, the issues have not suddenly gone away and things have not returned to normal as we knew it. As a result there is probably still quite a bit of volatility lurking about…if you are investing money, be careful…

At this stage I would be inclined to phase funds in over the next ±3-6 months to try to iron out some of the potential volatility that is still lurking. I don’t think it is over yet…

So take a step back from all the noise around you (in the form of the daily newspapers, websites and TV shows) and get a little perspective. Also give some serious thought to investing funds offshore – developed markets are still offering reasonable value and the rand is still strong (remember we were at R14/$ at and R20/£ at one stage).

Thats’ all for now