2019 has been a financially hard year for many and for South Africa. Investors in particular, have seen low returns in a high-risk (election) year after several lean years.

In financial climates like this, many panic and thoughts of losing money can lead to impulsively pulling out of investments.

In the words of Warren Buffett: “The investor of today does not profit from yesterday’s growth.”

Past performance is no guarantee of future returns. Stock investors sometimes closely watch how certain funds performed over the previous 12 months, then switch to higher performing funds thinking the following 12 months will be exactly the same.

However, it is important to stick it out. We need to resist acting out of emotion and impulse when it comes to selecting investment funds. It helps to gather all relevant information and really understand our goals, investment horizon and how the funds are affected before taking the jump.

A successful investment strategy needs a level head and requires due diligence to understand everything rather than pulling out at the first sign of danger.

Economies also move through seasons. In stormy seas, you don’t jump ship. This is different to discovering your own ship has a leak – Steinhoff or Enron, ‘ships’ with serious ethical problems, come to mind – this is about uncertain and unkind macroeconomic conditions and various headwinds that slow progress down. That’s stormy.

And in a storm, everyone’s ship is getting tossed and turned, however calm their crew may look. It’s about sitting tight and riding it out, the priority of stormy weather is staying safe and in the game.

The good news is, sooner or later, better conditions always come – and patience pays out.

September celebrates National Wills Week, a reminder to us all about the importance and necessity to create a Last Will and Testament. According to recent statistics, only 30% of South Africans have a will – which means that we have to be talking about this a lot more!

We have seen countless movies and TV series detailing the hijinx that can occur without a will. Unfortunately, in the movies all people with wills are either rich or eccentric, leaving many of us with the impression that a formal Last Will and Testament isn’t really for ordinary people.

However, it’s an essential element of a robust portfolio.

If you have loved ones and/or any possessions to your name, or children who would need to be cared for – you would greatly benefit from a professionally drafted will.

The dangers of DIY

Some may feel that it’s cheaper to simply write up their own will and keep it as general as possible so that ‘everything is covered’. The reality is that it’s generally not expensive and having sweeping generalities only complicates matters.

Legal details and regulations change regularly regarding wills. Unless it’s your job, it can be hard to understand and keep up with the constant changes. Even a small detail in a will that’s incorrect or not in line with legislation can leave your loved ones paying extra legal fees and waiting months and even years to iron out the details – or worse, left without enough income to cover monthly expenses.

Vague wording like “I leave my cars to my sons” is typical of a DIY will, and may be disputed – turning into an expensive and lengthy legal battle. What if the one car is worth R80,000 and another is worth R300,000? What if someone arrives, claiming to be a son? Words like ‘descendants’, ‘my business’ or ‘personal items’ are also legally vague, pitfalls and loopholes are hard to spot if you’re not a trained lawyer.

Legal terminology like “bequest of the residue” are terms you may have never heard of and would certainly not put in your Last Will and Testament – all the more reason to hire a professional and save your family the additional heartache and stress later.

There is a lot of good financial advice out there which goes something like this: ‘you know that money you don’t use every month? Well, take R50,000 and invest it in X now, and you’’ be happy later.’

Sound familiar?

The problem with this advice is that it’s incredibly alienating for the other 92 percent of people out there who a) don’t have money left over at the end of the month and b) would laugh and rub their hands with glee like Scrooge if 50,000 unaccounted-for rands came calling. That’s not real life, for the average Joe. So, where does one find financial advice for people without the silver spoon?

This blog post is for you. It’s about a term which may well answer many of your problems: microsaving.

What is microsaving?

Just like the name says, this is putting small bits of money aside. Think of it as the digital equivalent of what your grandparents did with a kitty back in the day, dropping spare coins regularly.

Microsaving is about taking whatever amount of money is small and unnoticeable to you and tucking that away in a place you can’t spend it. So, for instance, you buy a weekly wrap at work that costs R35 and so your microsaving method of choice squirrels away the R5 into a savings pocket, separate account or another wealth preservation vehicle like your RA. If you know that you regularly come out at the end of the month with about R900 aside for your daughter’s ballet things, which often comes to R800 actually, microsavings pockets that extra hundred.

These are by no means big amounts and – caution – no microsaving tool will get you the returns that investing R50,000 in a reputable vehicle would, but they are certainly better than not using microsavings. Here’s why.

Mindfulness matters

For most of the people that can’t afford to save or invest traditionally, it’s not entirely true that they don’t have one single spare cent unaccounted for each month. It’s more a mindfulness issue. Money coming in like salaries are given vague budgets at the beginning of the month and then, like a black hole, it juts vanishes into a million little things and unforeseen expenses. Do you have an emergency fund each month? Do you estimate and account for how much you spend tipping car guards and paying for parking? And because savings and investing are often the last in line, the if-I-have-enough amounts, by the time their turn rolls around there is no money to save or invest.

A microsaving app, banking feature or some other investment vehicle (Liberty’s Stash and FNB’s Bank Your Change are quite good) takes into account this lack of mindfulness by taking off that R5 from the wrap, R100 from the ballet recitals money, knowing you won’t notice. And then you have something like R400 at the end of each month saved away – certainly not the R2000 you were hoping to save, but better than the zero you were headed for.

From microsaving to microinvesting

Of course, it’s not just saving that this approach is good for. Instead of sending your loose change into a savings pocket, what about into an investment vehicle? Or your retirement fund? Or the trust you as a couple set up for the kids’ university fund? The possibilities are endless and, especially when coupled with intentional saving and investment of larger sums, microinvesting can be powerful.

Sometimes it pays big to go small…

It’s Women’s Month, and we’ve been thinking lately about all the ways in which women are wonderful in matters of money.

Women as investors don’t get praised often enough – there’s been an unfortunate stereotype in the past that keeps finances in ‘man territory’. Today, we’d like to honour the ladies in our stock markets and on our shareholders’ boards and count the ways in which they rock and the things male investors can learn from them.

They consistently outperform on returns by being faithful

A Financial Times article cited two studies a couple of months ago. It had this to say:
“Warwick Business School conducted a study of 2,800 UK men and women investing with Barclays’ Smart Investor, tracking their performance over three years. Not only did the women that were examined outperform the FTSE 100 over the time period, they also achieved better returns. The men in Warwick’s study managed an average annual return 0.14 per cent higher than the FTSE 100, but women outperformed the benchmark by 1.94 per cent, beating men by 1.8 percentage points. A separate study by Hargreaves Lansdown also found women investors returning on average 0.81 per cent more than men over a three-year period.”

The reason for this, according to spokesperson for insurer Liberty Daphne Rampersad in an article this month, is that women tend to stick with investments, “getting higher returns over the long term, while many male clients choose to switch when markets go south”.

Those that do go against the grain

Despite these impressive results, the woman investor is certainly the minority. The same FT article cited earlier stated that “55 percent of women said they had never held an investment, compared to 37 percent of men. Just 21 per cent of women said they held a current investment, compared to 35 percent of men” in the UK, famously less sexist than South Africa.

Many reasons have been attributed to this, from a dearth in financial advisers to older generation South African men teaching their sons about investing but not their daughters.

Also, where are the women’s role models? Despite giants of the industry being female – JSE CEO Nicky Newton-King comes to mind – there are no articles on Warren Buffett-type female investors, here or abroad. That makes the women who do invest that much more impressive.

They stick with what they know – and that’s a good thing

“Men tend to favour new, untested shares, whereas women will stick with tried-and-trusted, recognisable names”, says HSBC private bank in an article on its website. Unsurprisingly, this also often results in women getting more tried-and-trusted, recognisable results than male investors, thanks to their tendency to stick with a ‘sure thing’.

… Despite ‘bucketing prejudice’

That being said, women are often stereotyped unfavourably by asset managers and their portfolio managers in general. This is thanks to the notion of ‘risk profiles’ – somewhat outdated now in developed markets yet still used widely in South Africa. Due to women being seen as more ‘risk averse’ than men, they will be given investment options with lower returns because, well, higher risk means higher potential returns.

This is how it often goes. A woman will go in/phone in to set up a new investment. The manager, often male, will give her a risk profile assessment rather than ask her what her goals are and what assets she would prefer. Instead of saying ‘if you want X returns, you can only get that with equities, although you stand to lose more there too’, he will more often ask ‘how much are you comfortable with losing per annum?’ This is called shortfall-based rather than goals-based. Most women, baffled, will reply that obviously they would like to lose as little as possible. Thus, women are consistently given scores of less risk appetite than men, due to both the phrasing of the questions and the way they are automatically bucketed for being female. Research has shown that less women invest in equities is the reason given – but it has been socially acceptable for women to invest for less time than men, and women are given equities by default less often.

It is a tiring, unknown prejudice which shows women’s greater returns and their involvement in equities at all as even more impressive.

And they get impressive financial gains despite more obstacles than men

Apart from all their obstacles from within the financial landscape, there are numerous other things standing in the way of financial success for women. Women are given higher insurance premiums and less life cover than men consistently, despite being labelled ‘more risk averse’ than men, and receive on average 28 percent less for salaries than men doing the same job in South Africa.

More than 60 percent of South Africa’s households are run by single mothers paying for everything, according to Statistics South Africa, while less than four percent are run similarly by single men.

Higher returns and better staying power despite more obstacles and often less money to work with? To paraphrase the 1955 Women’s March anthem, a woman investor is solid as a rock. You go, girls.

Source: Investopedia

If there were a set of commandments for investing, the first commandment may well be this: know your seasons.

Just like a surfer or fisherman know the tides of their favourite spots, prudent investors know the market cycles.

“The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase,” says Investopedia. Many investors will come up with a strategy, and it may be a very good one, then with enthusiasm rush out into the marketplace and expect to impose their vision on the market or, in their excitement, misinterpret the signs.

This is like rushing out into a thunderstorm without an umbrella in a T-shirt, because you feel like sunshine. We all need to obey what the climate and environment is doing. A good investor is very much like a farmer, knowing that there is a time to sow and to reap, to keep store for lean months and times to feast as well.

The four seasons

Just like any other rhythm or cadence, markets tend to begin low, climb, reach a certain high point and then fall until a certain low point. Then the cycle begins again.

The four phases are generally referred to as accumulation, mark-up, distribution and mark-down in the financial industry. Allocation is the beginning of a new cycle, when prices are low and savvy buyers are buying. As things in the market settle and rally, the prices rise and this is mark-up. At the investment’s peak, when it has become the most valued and expensive it’s going to get, that’s called distribution because the savvy sell now. Those who don’t sell have to deal with mark-down, the fall from grace, when the investment loses its value as the cycle descends to begin anew and ride the next mark-up wave.

Source: Investopedia

If they sound a bit like shopping around Christmas in fancy department stores, you’re right – stocks are a product and, just like any other product, have a marked-up price and a discount price. It’s wisdom to buy it ‘on sale’, wait until it’s in demand and then sell it for a higher price than you bought it for before it devalues as the next new thing comes in.

Know your animals, too

Then there’s also the global sentiment of the market: bullish or bearish, hawkish or dovish and for what reason. These are directly linked to the four phases. Currently, America is in a fragile, yet still-running, bull market – the longest bull market in history. Many a betting man would’ve lost his shirt by predicting, reasonably, that it would have ended a long time ago. But that’s how markets are – and we must be cognisant of them. It would be just as foolish to not take these into account as it would be to build your entire investment strategy around them.

A man for all seasons

There is a reason for the phrase ‘unpredictable as weather’, which should also be ‘unpredictable as markets’ – it can be famously hard to predict the exact right moment when an investment will reach its peak value, will start to decline or appreciate. The cycle is a law unto itself at times, just like climate patterns and weather – there are rules, but no one knows when there’ll be an exception.

If anything, the cyclical nature of all markets shows the need for good advice. Lean and fat times come and go, but your future security should not depend on it but rather get richer and mature with the seasons, just like you.

There are always bills to pay and money needed for something or another, and few things seem as boring and unnecessary than an emergency fund. While you can enjoy the rewards of spending on, say, a good winter coat, or can see the benefits of saving for something like university for the kids, emergency funds are, by nature, never seen.

Which is why most South Africans don’t have them – and open themselves and their loved ones up to serious hardship and, ultimately, spending a lot more money.

Here’s why you need an emergency fund:

To keep your life goals on track

Most people operate in a space of barely having ‘enough’ or not quite ever having ‘enough’. Granted, we can have a discussion around what ‘enough’ really looks like, but for most of us, the former sentence is the reality.

This means that we can’t afford a major tragedy – even more so if we’re not insured for it – and still keep financing life as if nothing has happened.

An emergency fund can help you avoid having an unforeseen emergency (or multiple emergencies) derail your life. Many of these unforeseen circumstances involve medical or health issues, which are expensive. An emergency fund of three-to-six months of income works well in conjunction with risk cover.

To reduce the impact on your dependents

If you provide an income or lifestyle for others in your family, having an emergency that cripples your finances will impact them too.

This could impact living standards, educational opportunities and their access to care should they need it. Knowing this creates increased stress and extends the time of recovery from an accident or traumatic event. If you’re able to reduce financial stress you can have more energy available for the other healing and recovery that is needed, for you and those who depend on you.

To keep yourself away from truly bad debt

People panic when they have unforeseen urgent circumstances and no safety net cash for them. If they can’t rely on their kids or the problem is bigger than that, debt becomes the only way out of the immediate problem.

Under this pressure, we can get into all kinds of jams. Loan sharks, paying off nothing but interest for decades and surety clauses which mean things like having to give up your house are all real things that happen to real people. Don’t be one of those people.

Misfortunes in life happen, they’re a guarantee – just like the good things in life are. We plan and set aside money for positives like getting married, advancing careers or having children, but we don’t realise that by failing to plan for the unfortunate surprises too, we put those very good things at risk.

If you need help with this, then let’s get in touch – because you never know when your emergency will be.

A well-balanced, diversified portfolio is a joy for all seasons, giving something no matter what various markets or asset classes are doing. An overly concentrated portfolio is the opposite, a ticking time bomb volatile to fluctuations in macroeconomics and other influencers of the share price.

It’s a worry many South African investors don’t know about, yet some of them are probably in danger of just that.

Here are three red-flags that you could be in danger of an overly concentrated portfolio.

When you’re not equal with your equities

Equities has been the favoured asset in South Africa for some time now, thanks to its higher growth next to a gruelling property slump and unforgiving bond conditions. But equities, just like every other asset class, has its bad days, or rather years. In fact, just a few months ago, Moneyweb came out with an article proclaiming that local cash has outperformed local equities for a solid five consecutive years now.

When local isn’t lekker

Then there’s the fact that you might be investing in equities in what you think is a spread-risk, diversified way, but all of it’s in South African companies.

Allan Gray has this to say about the matter:

“South Africa has a relatively small equities market with a handful of dominant shares, spread across a few sectors, which are available to invest in. This presents a significant risk for investors: a highly concentrated portfolio.

“When compared to global markets, the Johannesburg Stock Exchange (JSE) is relatively small, comprising less than 1% of the total global investing universe. It is also highly concentrated, with the top 10 shares on the FTSE/JSE All Share Index (ALSI) making up between 50% and 60% of the index. In contrast, the top 10 shares in one of the world’s major indices, the S&P 500, make up just over 20% of the index. Most of the ALSI’s concentration comes from one share: technology giant Naspers, which makes up 20% of the index.”

Now, if that’s not putting your eggs in one basket, we don’t know what is. And for those who think to themselves: ‘well Naspers is a great bet, so are the others, so what’s wrong with investing in fewer but better market champions?’

We have one word for you: Steinhoff.

No one, apart from a very few smart people in Sygnia and Melville Douglas, ever saw the writing on the wall. Steinhoff was too big to fail, it was getting such great gains, it was even called that exact word: ‘champion.’ And when it did fail, it took hundreds of thousands of peoples’ hard-earned money with it.

When you’re overweight

No, we’re not talking about your body mass index here. Being overweight in a certain company, like Naspers for example, or even in something that seems a ‘safe bet’ like cash as an asset class. Being overweight in any one thing can jeopardise your wealth creation. A simple example: many people comb over their investment portfolio diligently, checking unit trust gains against the market and diversifying extensively, but when it comes to the retirement annuity their company has invested them into, they never check the weighting at all.

So, how do you do it right?

“Because of that consideration, I normally have a minimum of 10 investments in the portfolio and limit portfolio at risk (PaR) — defined as position size multiplied by the downside to the worst-case intrinsic value estimate — on any one investment to 5 percent at cost and 10 percent at market,” says Gary Mishuris on the CFA Institute website.

It’s a simple, moderate way to do it, but something that’s out of reach for the average investor trying to work it out on their cellphone calculator. This is where a professional financial adviser can help you quickly and easily. No centration required.

Last month we talked about interest rate risk – the risk of your investment devaluing and you losing money due to changes in interest rate. In a sense, this is about an investment’s possibility of flailing due to macroeconomic conditions. This month, we’re going to look at credit risk.

Credit risk is a very different type of risk to interest rate risk, and largely impacts the one extending the credit. It’s the risk that credit (what is owed) is not repaid. So, if a bank loans a business capital, the credit risk would refer to the chance that the business goes into business rescue or another situation in which the bank does not get the interest owed to it on the loan and cannot recoup that loss but must, instead, write it off.

Traditionally, credit risk is defined by risks taken in investing/lending to someone without them paying an upfront sum. These types of risk almost always come with interest charged to the borrower or loan recipient, along with the repayment of the loan amount. In a sense, you could almost say that interest on a loan is the ‘payback’ an institution gets for taking the risk in lending out money – which explains why higher interest rates are charged for higher risk entities. A business in its infancy will pose a higher credit risk compared with one that is more established and proven its financial viability.

What do you need to know about credit risk?

Credit risk in your business – This risk affects you very materially if you have your own business and must deal with clients. Unless you charge upfront or require down payments, you are essentially taking on credit risk every time you do work for a client in the hopes that they will pay you later. For this reason, it’s worth looking into companies’ reliability with honouring debts before going into business with them.

Credit risk as an investor – If you are an investor, credit risk signifies the risk to you that a bond you’ve invested in may default and you’ll have to write off the sum you invested there. This can be a good strategy for investors when the company invested in is on a solid upward trajectory and the economy is too. The higher the risk is, generally, the higher the possible reward, so it’s a potentially dangerous game that really requires the help of professional advice.

Credit risk, just like any other type of risk, is not something to be feared or avoided. Not if you want to create wealth, that is. Rather, like each type of risk, it is to be understood and taken seriously, discussed with a professional before making any serious investments and decisions.

Education around the basics of wealth creation and preservation is like a good, solid diet packed with healthy food staples, it can help you enjoy healthy finances for years and create a strong foundation for building your future.

Bonds are a healthy part of any portfolio or ‘diet’, and most people think they understand them. Today, we want to talk about an aspect of investing in bonds most people misunderstand or simply don’t know about – interest rate risk.

In today’s highly uncertain market, bonds remain an attractive option. Not subject to having the sudden market-related dips (or spokes) that equities do, it’s a lower risk option for preserving or growing your money in most environments.

Sounds great, right? Potentially.

Most bonds pay a fixed rate of interest over a defined period of time.

What many investors don’t understand about bonds is that the rate is set according to prevailing market interest rates at the time of issuing the bond, but the market interest rates that occur afterwards during the period of the bond may not be even remotely similar to the ‘weather conditions’ when you first took out the bond.

What this means for your money is that, should interest rates rise, your bond’s value will lessen. Should interest rates fall, the reverse will happen – your bond is now worth more. Because this is directly related to inflation (interest rates rising are usually due to CPI itself rising above what’s been predicted for it), a good way to understand this is inflation. If inflation increases, even though you have the same notes and coins in your wallet, that money is effectively worth less. If inflation decreases, slowly your money will be worth more in relation to the rest of the market (price of eggs etc.). It is not the notes or rands themselves that have changed if the inflation rises, it’s the market.

This is interest rate risk, and it’s a vital element which affects how much return you’ll get once a bond matures.

It is seldom that we truly know what is going to happen to the market in the next two to three years with absolute certainty, but in the case of interest rate risk, it seems that we do. South Africa will be hiking rates for the foreseeable future, as announced at the end of last year when the Reserve Bank’s Monetary Policy Committee (MPC) said it would raise the repurchase rate quite significantly to 6.75% per year as of November 2018.

What does this mean for our bonds? Well, if you look at the above in SA in isolation, it means that a bond’s value will lessen if interest rates rise (which they have) and will continue to do so if interest rates continue to climb (which it looks like they will).

A word of warning – any investment in any form should be underpinned by knowledge. Choosing to put money into a bond of any kind is no exception. Taking interest rate risk by investing in a certain bond without knowing every aspect inside and out is like getting onto a horse and expecting to ride it when you don’t know how a horse moves.

However, if you only ever invest in things you already understand, where will that leave you? Your money may grow, but your own horizons and understanding won’t.

Consider this a call to adventure – not to invest in bonds necessarily, but rather for us to chat about things you don’t fully understand, perhaps interest rate risk being one thing, and start an exciting new chapter in your financial awareness and confidence!

“Never look back unless you are planning to go that way,” Henry David Thoreau once said. Investing in the future is an exciting prospect, but a daunting one as well. And what could be more of a ride than investing in motor vehicles?

But the road can be a bumpy one, even if it is a fast ride, so prudence is paramount when investing in all things motor.

Here are four of the biggest draws for investing in the future of cars:

Electric

According to Allan Gray, Bloomberg forecasts that EV sales will increase from a record of 1.1 million in 2017 to 11 million in 2025 and reach 30 million by 2030. Sounds great, right?

Not so fast – electric vehicles are, like most new technologies, still prohibitively expensive to make and not available to the mass market yet. This means that even if electric cars were to go mainstream, they would be making a loss for investors for some years to come. Except perhaps for Tesla, but that is a big perhaps.

Also, in developing nations like South Africa, the infrastructure just isn’t ready – the Champs-Elysées may have plug points for electric cars, but Jan Smuts and Chapman’s Peak certainly don’t.

Hybrid

This is the other major problem with investing in all things electric – hybrid cars from mainstream motor companies like Jaguar and Mercedes mean far lower fuel emissions comparative to electric cars, yet at a fraction of electric cars’ price.

“…the consumer appeal for electric cars is based on their lower carbon emissions and lower running costs – something that hybrid cars (that are propelled by a petrol or diesel engine with an electric motor) also offer [and] traditional automakers are well placed to compete in this segment,” says Allan Gray’s investment analyst Sibabalwe Kasi.

Self-driving

The most talked-about and Asimov-like motor innovation of the moment is driverless vehicles. It’s arguably one of the more difficult trends to take seriously for those in developing nations who have only ever seen them in Sci-Fi movies, but it could be a real meal ticket for early bird investors if done right.

“The autonomous vehicle (AV) market is going to take years to mature, but a lot of progress is already being made — and investors should start taking notice of its growth now. In 2040, an estimated 33 million driverless vehicles will be sold annually, and Intel and Strategy Analytics predict that self-driving vehicles and their services will create a $7 trillion industry by 2050,” says respected US finance site The Motley Fool.

However, patience is the name of the game here. “While all of these companies have lots of potential in the AV space, it’s going to take years for them to begin seeing sizable contributions to their bottom lines. That doesn’t mean that self-driving cars aren’t coming or that they won’t be transformative when they do; it just means that investors should temper their expectations as this new market unfold,” The Motley Fool concludes.

Car sharing

Another potential avenue for investment isn’t in cars themselves at all, but in the companies behind the ongoing ride sharing revolution. Big name companies like Daimler and BMW are betting on a future in which almost no one in urban spaces will own a car soon – and it’s a compelling gamble.

In an ever more environmentally conscious world with diminishing fossil fuel resources and more strict emission laws, owning your own car may not be normal forever. This is especially true in a future where self-driving cars dominate the roads. If your car could drive itself to you to fetch you from work, why should you pay a larger sum to have that car ‘service’ only you, when you could pay a fraction of the cost and still be picked up whenever you wanted, like your own driverless Uber?

So, which choice is best? It’s up to you, you’re the driver of your own investment, er, vehicles… Just ensure you have an advisor who knows their stuff in the passenger seat.