Category Archives: Blog

Tips for when markets recover

The last few years have seen more market volatility than anyone could have predicted, with the icing on the cake being the COVID-19 pandemic. But the best and worst thing about markets is their cyclical nature. All markets recover, eventually.

We know what to do when there’s a downturn and experience has taught many investors some hard lessons with recent stock market crashes. But what about an upswing? What do you do when the markets recover – and what should you avoid?

Don’t.. let it get to your head

Sometimes, it’s helpful to think of the stock market as a wild animal: make no sudden movements. Just as good financial advisers tell people not to panic and sell low in the nadir of a stock market crash, people should also not get overly excited when markets start recovering and buy everything in sight.

An economic downturn is not the time to cash in your retirement and an upswing is… also not the right time to do it. So, when is?

Do… keep to a big picture plan

The best time to do something like cash in your retirement savings, add something new to your portfolio or dump certain stocks is when it works in line with your long-term goals, specific to your goals and your risk appetite as carefully thought out by you and your financial adviser.

If you watch only the market, you will be tempted to buy and sell everything you own several times a day. If markets are nose diving but you are thirty years away from retirement, that nosedive has absolutely nothing to do with you. Keep to a long-term plan as worked out by your financial plan to avoid going crazy and not being blown about by every single headwind.

Do… stick to the classics

Tried-and-true brands and names that have stood the test of time are likely to survive your long-term plan. Go for “Think of your Warren Buffett-type companies: the Visas, the Microsofts, the Coca Colas of this world… the biggest companies that you are 100 per cent sure can get through recessions, coronaviruses, or any other panics that may come along,” advises David Coombs on This is Money.

If the markets are just beginning to recover, you can likely acquire stocks at a lower price than usual. Just make sure you get it before they get too expensive again.

Don’t… go it alone

There is a reason why financial advisers, wealth managers and stockbrokers have full time jobs. Not only is being able to deeply understand the stock market a very hard-won skill honed over years, it’s a very risky one that can turn on you at any moment.

The value of expert financial advice is irreplaceable when it comes to anything on the stock market, even seemingly simple scenarios like a market recovery.

Mid-Year Money Check

Many of us only look at our financial plan when we receive a windfall (this is not often…) or when things go terribly wrong. It could be the loss of a job, the loss of a loved one or another crisis (like a global lockdown…).

These aren’t necessarily the best times to make investment decisions or changes to our financial plans as emotions are often running extremely high during times of transitions and our stress levels will be elevated.

That’s why taking the time to do regular (quarterly or biannual) reviews gives you a better baseline from which to assess your portfolio and keeps you in the practice of being aware of what’s going on with your money. This is often easier said than done, and if you currently find yourself needing to make some changes, and are highly emotional or stressed, make sure you include an impartial third-party to assist you with this.

Your review should consider each of your financial priorities and your strategy for reaching them. If the conditions have changed, adjustments need to be made to make these priorities attainable in your desired time frame. Again, don’t feel pressured into doing this alone – include the others in your family who contribute to making and spending your combined income, and bring in your financial adviser.

As you do this, you will quickly notice that your priorities will change, you may need to rebalance some of your investments or portfolio products. This is okay – being flexible inside of your plan is as important as checking in with it regularly.

Thinking about a will, health care proxy, and power of attorney can be uncomfortable, but the alternative is letting someone else make these decisions for you. If you don’t have these key documents, take the time to set them up. If you already have them then a review might be in order. Life events such as moving, having children or grandchildren, or losing a loved one can have a big impact on your overall plan.

Careful, regular planning is essential in all economic climates. Are you preserving your assets? Are you protecting your income? Are you saving tax efficiently? A review can help prioritize financial decisions that you need to make to support your own and your family’s goals across generations.

Living annuities and how they affect your living

Oh, the ironies of life… 

One of South Africa’s most contentious laws regarding annuities states that a retirement fund may not be completely withdrawn in a lump sum, but a minimum of two thirds must be invested into a compulsory living annuity in an attempt to aid preservation of retirement money. Even those who are well informed about their retirement money sometimes forget this element of their annuities.

Then along came the Coronavirus pandemic with global lockdowns.

On 23 April, Treasury announced new living annuity drawdown relief measures for COVID-19 that effectively neutralise their living annuity laws.

The new proposed measures are to be disseminated under the Disaster Management Tax Relief legislation, and will be rolled out between 1 May and 31 August 2020.

So, what do we need to know?

Living annuity drawdown changes

Under the existing annuity regulations – the owner of a living annuity is currently restricted to an annual drawdown (which is usually paid monthly) of between a maximum of the investment value of 17,5 percent and a minimum of 2,5 percent, paid out monthly. These were designed to help us avoid spending too much too soon – some agree, some don’t.

This will be effectively side-swiped by two relief measures which once again unlock your annuity – but is that for better or worse?

Changing drawdown amounts

The first COVID-19 concession, obviously thought up for people experiencing cash flow issues in the wake of the pandemic, is that annuitants can increase or decrease their drawdowns (the amount of cash they receive at any one time from their annuity) as soon as they need to. Ordinarily, annuitants can only make such changes once a year at the annuity’s anniversary date and there are a whole lot of rules governing it, so that people can’t ill-advisedly just elect to get higher and higher drawdown amounts and run the risk of their retirement money running out too quickly.

This is a useful concession for one of the worst-hit segments of the population in terms of COVID-19’s financial impact: the elderly. However, the danger is that less financially astute retirees will see this as a nice payday and draw down a large amount and spend it, not taking into account the many years of economic hardship still likely to come from the pandemic. Of course, the other option to decrease drawdown amounts is also there, but realistically, it will be an unlikely choice for many.

Drawdown limit changes

Just as with the above meaning that people can change their drawdown amounts now, the second rule allows for the amount to change as well. The existing regulations attempted to encourage preservation by limiting drawdowns to a maximum of 17,5 percent – now annuitants will be able to withdraw 20 percent. While this number may seem small, it adds up quite a lot when dealing with the large sums in annuities. Think, for instance, of the difference between R175 000 and R200 000 in a modest living annuity. That is R25 000 less for the unknown amount of years still to go which this annuity needs to last for.

Conversely, the minimum amount has also been changed, from 2,5 percent minimum to 0,5 percent, in a bid to encourage people to save more and not less.

The danger, as with almost all things retirement, is that annuitants’ money will run out too soon. And retirement during the fallout of the Coronavirus pandemic promises to be no picnic: we have no idea what the value of the rand, inflation and various asset class values will do in the many years it will take for the world and country to economically recover. Treasury runs a serious risk of annuitants joyfully giving in to instant gratification and viewing the relief measures as a windfall or unexpected extra payday, with an eye on spending rather than keeping a watchful eye on their dwindling retirement savings.

If you have a living annuity or know of someone with one, good financial education is key to understanding the temporary regulation changes and the inherent flexibilities as well as dangers that they hold. Here, as always, sound financial advice is worth its weight in annuities.

Words that will make (or cost) you money

Communication around your finances is crucial if you want to be more mindful and intentional around wealth creation.

There are some conversations that will help you ascribe meaning to your money, and these should happen early on in your planning process (and regularly thereafter). Then there are conversations that will facilitate the actioning of your financial plan and will be important when you need to make changes to your portfolio.

Here is a quick guide to five key terms that you’ll hear crop up again and again as you take action in your financial plan.

1. Dividend
A dividend is a portion of a company’s earnings that are distributed to shareholders. The dividends can take various forms but is most commonly a distribution in cash or as a portion of a share of the company. Furthermore, companies have their own policies as to when and how much of earnings are distributed in the form of dividends.

2. Bonds
There are many types of bonds, but in simple terms, a bond is a way of borrowing a sum of money – to be repaid by a fixed date in the future, with interest in the meantime. The buyers of bonds are essentially lenders, which means that if you buy a government savings bond, you become a lender to the local government.

The interest rate received is often referred to as the bond’s yield, and is the compensation that the investor receives for ‘lending’ their hard-earned money. According to an article published by Investopedia, “bonds are often referred to as fixed-income securities because the borrower can anticipate the exact amount of cash they will have received if a bond is held until maturity.“

3. Annuity
An annuity is a type of investment account that uses lump savings to generate a regular income stream – typically these are used for retirement planning.

There are two types of annuities – fixed and variable.

The key feature of a fixed annuity is that you enter into a contract with an insurer who subsequently guarantees a set income for life. This income is dependent on a number of factors such as your age, gender or whether the payment will be level or increasing. The annuity payment is guaranteed by the insurance company, so it is a good option for those who are risk averse (don’t like risk).

With a variable annuity, the risk of the investment is transferred to the annuitant in that her capital (saved money) and subsequent annuity is dependent on market performance.

4. Unit Trusts (also known as Mutual Funds in the US and UK)
According to an article published by The Balance, a “mutual fund (unit trust) is a pooled portfolio. Investors buy shares or units in a trust and the money is invested by a professional portfolio manager” who invests the capital in an attempt to produce an income and capital gains (profit) for the investors. The pool of funds is collected from many investors who wish to invest in stocks, bonds and similar assets.

One of the main advantages of unit trusts are that they offer investment vehicles where smaller investors have access to diversified, professionally managed portfolios in which each shareholder participates (wins or loses) proportionally in the gain or loss of the fund.

5. Asset Allocation
In order to invest your money, you essentially need to give it to someone who will in theory use it to make a profit by working with your assets (invested money), and you then enjoy the profits from that. If they make a loss, you make a loss too. That’s the risk you take.

Asset allocation is therefore the process of deciding how much money, based on your appetite for risk and objectives, is invested in the different available asset classes – such as equities (stocks), real estate (land and property) or commodities (eg. gold and silver).

Being able to talk about your money and how you are working with it is a powerful step in gaining confidence and power over your money, rather than allowing it to have power over you. The more we can learn together, the more we can build the lives that we want and enjoy what we have!

Hold onto your life cover

Sometimes it feels like this conversation is a broken record, constantly going round and around on the same track: people the world over are feeling the financial pinch and tightening belts.

It’s not just a local issue, and it’s not a new concern.

A few minutes on Instagram or Twitter will reveal just how many are building their third, fourth or fifth ‘side hustle’. This is partly because our internet age has made alternative streams of income more viable, but also because our current economic pressures make it almost impossible for families to cope with a single, or even dual, income.

When external pressures leave us feeling hard-pressed, it may be tempting during such times to reduce or release our risk cover policies – with life cover being a common policy to cancel. Sometimes, these decisions are made in order to maintain a certain living standard – however, this could have dire financial consequences for your loved ones.

Life cover is never an easy conversation to have. And when things are tight, you have to weigh up paying your monthly premiums against the potential effect on your family if they were to lose your income entirely in the event of a disaster.

The problem with cancelling your life cover isn’t just that it is a massive risk, but that it also may be impossible to replace it as you grow older.

Many people may assume that you can simply cancel your life assurance then reinstate it when it’s easier to afford. However, premiums are likely to be substantially higher when you’re older (cover is said to cost double at the age of 45 what it costs at age 25). Health conditions may also be excluded from the cover and, in the worst case, you may even be uninsurable if you are diagnosed with certain illnesses.

Even missing the payment of a few premiums can have a negative effect. Not only may you need to undergo the underwriting procedure again, but any deterioration in your health would be taken into account when considering policy reinstatement and premiums.

So what are the alternatives?

4 possible alternatives to cancelling life cover (this is not financial advice)

1. Reduce your monthly expenses
Cut back on items that aren’t essential, such as your television subscription. Critically evaluate your budget and examine what is imperative versus what you just would like. Remember, this is not forever, it’s about prioritizing your financial security.

2. Re-negotiate your debts
Try approaching creditors or your bank to negotiate terms of any repayments. They may be willing to accept smaller sums over a longer period.

3. Press pause on your savings
Consider taking a ‘payment holiday’ on your contributions to an investment portfolio.

4. Negotiate your premium payment pattern
Request to change to an escalating-premium pattern for your life cover, which means that your initial premiums will be lower and increase over time.

Please note that the above four points are suggested options, if you would like to review your plan inside of your changing situation – please arrange a meeting for us to objectively make the best decisions according to your individual needs. It is important to stay educated about life cover and informed about affordable solutions, so please discuss this if it is a concern.

Finding the fungibility in commodities

Depending on your level of investing savvy, you may or may not be comfortable with the term ‘commodities’. As our global systems currently enter one of the toughest times experienced in over a hundred years, you may hear this term bandied about a fair amount.

Essentially, commodities are the basic building blocks of the global economy, upon which most other goods are created. They fall into two broad categories – hard and soft.

Hard commodities are natural resources that must be mined or extracted. These include energies such as oil and natural gas, and metals such as gold and aluminium. Soft commodities, on the other hand, are agricultural products such as crops and livestock.

When it comes to investment strategies, commodities and stocks often move in opposite directions to one another. Hence, commodities can offer a good opportunity to diversify an investment portfolio — either for the long-term, or during unusually volatile periods.

Commodities are essentially uniform across producers, and this uniformity is referred to as ‘fungibility’. For example, oil would be considered a commodity, but Old Khaki’s jeans would not be, as consumers would consider them to be different from jeans sold by other stores. When traded on an exchange, a commodity must meet specific standards, which is known as a basis grade.

A commodity market is a virtual or physical marketplace that is dedicated to the buying, selling and trading of raw or primary products. There are currently about 50 major commodity markets in the world that facilitate trade in approximately 100 primary commodities.

Over the past few years, the definition of ‘commodities’ has expanded to also include financial products such as foreign currencies, indexes and exchange-traded funds (ETFs). Technological advances have also led to new types of commodities, such as mobile phone minutes and bandwidth, being exchanged.

Commodities can have a big effect on investment portfolios. Basic economic principles of supply and demand tend to drive commodities markets, so lower supply increases demand, which equals higher prices (and vice versa). For example, a major disruption, such as a health scare among cattle, might lead to a spike in the generally stable demand for livestock.

Slumping commodity prices can also provide opportunities for investors. However, investing in commodities can easily become risky because they can be affected by eventualities that are difficult to predict, such as weather patterns, epidemics, natural disasters, and even politics. As a result, it is important to carefully consider your risk appetite and the length of time you have until you wish to achieve your goals, as this will affect the recommended allocation of your portfolio to commodities.

As with all elements of your portfolio, it is important to ensure you have a solid understanding of what you have allocated and why. Don’t be afraid to ask questions if you’re ever unsure of any terminology.

Working with different money personalities

As the 2020 global pandemic for COVID-19 becomes forever etched in our history, most of us will remember how the term ‘lockdown’ moved from a novelty to a serious psychological threat. At the point of writing this blog, it’s not clear just how vast and integrated the knock-on effect of lockdown will be, but for most of us it’s confronted us with conversations we’ve never had to have before.

Being confined indoors, or a specific area for an extended period of time brings out the deeper facets of our personalities and stress coping skills. Several years ago an article by Maya on Money spoke to money personalities – and whilst this has perhaps been overlooked or avoided by many, lockdown will most certainly be a catalyst for addressing it now!

Money has been cited as the biggest reason for divorce, and differing attitudes towards money in any relationship can cause friction. So let’s take a look at some basic ‘money personalities’ and you can decide with which you most identify.

This may not only help you manage your relationships in both trying or triumphant times, but also how to go about managing your wealth creation as a couple, family or shared living arrangement.

1. The Spendthrift
A spendthrift tends to be extravagant and spontaneous with regards to money matters. However, sometimes they can be irresponsible and need protection from making financial mistakes and getting into debt that they can’t afford.

2. The Saver
Someone who saves may have quite modest tastes and needs, and long-term they may well reap the rewards of their cautious approach. However, their financial prudence and love for budgeting could be a turn-off for someone who is not that way inclined.

3. The Cinderella
Maya Fisher-French refers to the ‘Cinderella Complex’ in her article when she considers a woman’s unconscious (or conscious) desire to be cared for. Some people are simply looking for a partner who can spoil them, which Fisher-French refers to as a Blesser.

4. The Financially Independent
Other people make it their main focus to become financially independent so that they can manage their money and responsibilities on their own. They pride themselves on working hard to become financially organised and not needing to rely on anyone else. This type of person may fret about being pulled down by someone who is less financially astute.

5. The Power Hungry
Power plays can arise if someone uses money to wield power over others. The adage, “he who holds the gold, makes the rules,” may be true in some relationships – especially if there is a big difference in earnings. Money can create a shift in power that can be easily abused if all parties are not careful.

Rules should be agreed on by all who rely on each other. Different money personalities can be compatible if a balance is achieved; everyone needs to recognise the strengths they are bringing to the relationship.

For example, a Saver can help a Spendthrift to avoid some financial miscalculations, while a Spendthrift can teach a Saver to loosen up and enjoy splashing a bit of cash sometimes.

Likewise, someone who enjoys spending money on their family could be compatible with those who enjoy having money spent on them.

If there has been a major change (loss of income or work for any of the income earners in the home) it can be enormously stressful if we don’t have the words and tools to have better conversations about earning, saving and spending the household money.

It’s powerful to know what type of money personality you are and to find synergy in your relationships. It’s not necessarily a question of having the same attitude and approach to money issues, but rather finding compatibility and compromise.

Investing amid uncertainty

Anything of any value takes time. Likewise, creating wealth is a long-term process.

Well-structured investment strategies have always taken uncertainty into account. Patience, resilience and a robust strategy are imperative to weather the global investment storm that has been raging in recent times.

As you embark, or continue, upon your journey to great financial security, it is important to wholly understand the investment landscape. This is one of the areas where having an adviser you trust will help you successfully navigate the ups and downs of a stormy market and exploit the nuances of profit-yielding opportunities.

If you experience pangs of fear or doubt along your journey, then it means that you’re taking it seriously and you’re engaging in what’s going on around you. No-one is immune to these experiences.

What exactly has created the stormy conditions?
Recent market events are focussed almost entirely on the effects of the global lockdowns relating to COVID-19, but in the months leading up to 2020, we’ve been seeing volatility in the markets. Some of these relate to oil prices, trade wars between China and USA as well as credit ratings from the big three credit rating agencies — Fitch Ratings, Moody’s and Standard & Poor’s (S&P).

Add in the winds of political uncertainty and the high pressure systems of a fast changing global economy, many investors have at best been treading water or have seen their wealth decline in real terms, as portfolios have largely been unable to beat inflation over the short term.

Goodbye to the Past
It is important to put things into perspective and appreciate that investment markets often go through weaker growth periods of consolidation (this is technically known as a process of reversion to the mean).

Given the current global climate, 2020 and possibly 2021 are likely to be a time of consolidation in the markets. However, if you’re looking to achieve a long-term investment goal, it is important to not be swayed by short-term ideals or emotions, as you have a higher probability of growing your wealth if you stick to your investment strategy.

The Five Steps to Long-term Investment Success and Financial Independence

  1. Determine your investment objective by specifying a realistic goal you wish to achieve.
  2. Set your time horizon, which is the number of years you have to achieve your goal.
  3. Decide on an appropriate investment strategy by selecting a combination of asset classes in which to invest – bonds, property, cash, offshore assets, and equities.
  4. Select the most appropriate investment platforms, products and asset managers through which your chosen investments can be made.
  5. Monitor and review all of the above on an ongoing basis.

While a great deal of uncertainty remains for all investors, it is important to understand that uncertainty, and even volatility, in investment markets do not only represent risk, they also represent opportunities. Uncertainty is not new, either. It’s easy to blame current conditions, but if your strategy is prepared for uncertainty, if you are in the right headspace, you will be able to remain prudently invested in the markets.

It’s important to remain informed and seek to improve your knowledge about your investments, then keep the various elements of your investment plan aligned to navigate uncertain waters and continue on your journey to wealth creation.

A level head saves skewed vision

As Nelson Mandela said, once we’ve climbed a great hill we only find that there are many more hills to climb. When you’re looking up or down the hill, it’s easy to have a skewed vision of what’s really going on. We spend more time going up and down than resting at the top; it’s difficult to hold a level head in times of turmoil.

You may look at your bank statement this morning and see that there won’t be enough to cover your debit orders and upcoming expenses. This is scary! Conversely, you may see plenty of money and fear wasting it!

Money will always flow in and out; the longer we live and earn, the more we are reminded of this.

Whether your financial resources are lean or lush, you may be tempted to make some big moves to manage the coming months as wisely as you can.

When it comes to managing your investments it’s crucial to stay focused on the bigger picture – even when recent events may have you itching to move your investments out of the market and into cash. We need to keep a level head and not skew our vision.

The herd mentality, or groupthink, to ‘cash in’ arises from the fact that cash investments are readily available for use and are mostly free of investment risk. The low risk of a bank failing is essentially the only concern as they are investments on short-term, variable-rate deposits with reputable banks.

However, in an article published at the start of April 2017 in Personal Finance, Leigh Kohler, the head of research at Glacier by Sanlam (South Africa), explained that it’s important in uncertain times to remember that even though a cash investments may seem like a comparably safe option, the returns don’t often beat inflation. According to her, only once between 2001 and 2016, did cash investments outperform local equities and bonds.

Furthermore, if you had been invested only in South African equities over this period, you would have received an average return of 17.12%, compared to just 7.96% if you had only invested in local cash investments.

You are also taking two market-timing risks if you wish to move your investments into cash then back again once things have calmed down, and research shows that getting the timing wrong can be a devastating blow to your portfolio.

What should you do in lieu of making an emotional decision?

  • Slow down your decision making process and include your trusted adviser;
  • Invest in a combination of asset classes in line with your needs, time horizon, and risk tolerance;
  • Invest in a suitable multi-asset fund;
  • Ensure you have sufficient exposure to offshore assets;
  • Understand and believe in your long-term investment strategy, then stick to it.

Scary times come and go – the burden of responsibility weighs on us regardless. How we protect and use our hard earned wealth and accumulated assets need to reflect what’s truly important to us, and not be a reaction to current trends and happenings.

Avoid these investment decisions

Do you know what’s going to happen in the markets tomorrow?

Neither do we!

All we know is that the markets are an opportunity to invest our money in helping the economy grow, and watching our money grow with it. That’s a really simplistic view, but it helps us extract our emotional reactions from the final decisions that we make.

Should we ignore fear? Absolutely not – we should talk about it lots! That’s one of the benefits of having a financial adviser that you trust on your side. Talking things through is a great way to avoid knee-jerk reactions.

Having recently researched some articles on Investopedia and USnews – here are some emotional reactions to avoid.

1. Avoid isolating your decisions
Rather examine the potential impact that each decision could have on an entire portfolio. This applies to selling AND buying. Failure to do this can result in you investing too much in a single asset class, industry, or geographic market. It could also result in your selling off when the market is at its lowest. Remember to step back, look at the bigger picture and then make your decision.

2. Avoid looking at the immediate conditions
Don’t just ignore the potential of long-term wealth accumulation in favour of short-term losses or returns. Statistically, losses happen more frequently over a short timeframe and, as people tend to be very sensitive to losses, a behavioural phenomenon known as ‘myopic loss aversion’ occurs, which affects willingness to take short-term risks. This, in turn, results in people making emotion-based investment decisions that can have a negative effect on a portfolio.

3. Avoid blindly following the crowd
A good investment strategy is to buy low and sell high, but if you follow the masses blindly, it’s easy to end up buying high and selling low, which may have opposite results and prevent you from taking advantage of the same market opportunities. A buy-and-hold strategy is often far superior.

If you know that you can be prone to having knee-jerk reactions, you may wish to try to avoid constant information about how the market or your portfolio is performing, so that you can just focus on sticking to your long-term investment strategy. Don’t chase the news or get swept away by fear and groupthink.

4. Avoid frequent trading
Again, if you are prone to having a sometimes irrational bias towards action you need to slow things down. Moving too quickly can result in higher investment costs and an increase in making poor decisions.

If you ever have itchy feet, it can often be a good idea to wait a few days before executing a big financial decision and seek advice by organising a meeting to discuss an option.

5. Avoid investing money that you cannot afford to lose
It’s important to keep cash on the side for emergencies and opportunities. You may not feel happy having some of your money just sitting there, not earning boastful returns, but having all your money tied up in the market is a risk that’s arguably not worth taking.

To help you make healthy financial decisions, set yourself some rules, such as only contributing a percentage of your monthly income; and establish some realistic targets, such as aiming to save a certain amount of money by the end of the year. Some people can even find it helpful to limit their options by purchasing more illiquid investments to avoid the urge to simply sell or switch on a whim or when the markets aren’t performing as desired.

Many people also find delegation a handy tool. By delegating your financial decisions to a professional who you trust to manage your portfolio, you can spare yourself a lot of stress and rest assured that you will receive sound advice as to how best to execute your financial plan to achieve your goals.