This week saw trillions wiped off global markets in a very short space of time as investors panicked over the developments in China. By the end of the week some stability was restored mainly in US but other markets, especially emerging ones, were left battered and bruised. South Africa was a victim of the carnage. Was this a dress rehearsal of things to come? Or are we through the worst? What we can learn from this week is how volatile things are around the world.
So what are 3 concerns for South Africans in the face of this risk?
A weaker rand
The rand easily found R14 to the dollar in no time before settling back to its current range. This showed how vulnerable our currency is during a panic. This has a knock on effect on our imports which in turn impacts on our inflation resulting in more pressure on households.
Increase in interest rates
The Reserve Bank has been very hawkish over the rising inflation rate and we are already in an upward interest rate cycle. It is likely that interest rates will move upwards which again adds more pressure on households.
The risk of losing capital
The stock market has corrected during the week but by no means is the risk off. Valuations are still very high relative to the fundamentals and returns will be affected.
In the short term you can expect big swings as markets navigate through the uncertainty.
So what can we do?
It is far easier to change your sails before the storm than during one. This week sent out a strong signal to all of us. We need to get our personal finances in order, curb spending and get debt under control. Yes, it’s about tightening your already strained budget and squeezing out whatever you can, diverting the savings to pay off debt. In the short term the savings on high interest bearing debt will be a much better bet than the probable yield on the markets.
Gold has always been a storage of wealth. The lustre of gold has attracted investors for centuries. Over the best part of the last decade, however, it seems to have lost its shine. Peaking at levels around $1900 a few years ago to $1100 of late the big question is, “Will it be the next best investment when investors take flight from the stock markets and look for what has traditionally been their storage of wealth?
If you think that gold still has it’s traditional place as a “safe haven” from risk then you have some options. From a South African point of view gold has the benefit of being priced in US Dollars. This provides a hedge on a weakening rand. So if the rand keeps on weakening the rand price of gold will improve.
These have traditionally been the popular option as they give investors a tangible feeling of wealth. You can touch them and you can move them. They will cost you about 5% on the “buy and sell” and you should also remember that you should account for capital gains tax on the sale.
ETF New Gold
ABSA have a gold fund which invests directly in the bullion. You get the same return as a Kruger Rand but at a lower cost. You do not have to hold the gold as it is done for you. So no worries as to where to store it your gold or concerns about it getting stolen or lost.
ETF in a Tax Free Savings Account
What about opening a tax free savings account investing in New Gold? Here you get the full benefits of the gold price (if it moves in the right direction against the rand), at a low cost and you don’t have to pay any tax on disposal.
Do your homework before considering this as an investment. It is purely reliant on the Rand/Dollar exchange rate and the US Dollar price. It is risky as we don’t know with certainty which way either will move. So, perhaps a portion of your investment will do
Your credit card can be a great financial tool if you understand how it works and how to use it effectively. In the same breath it can be the single cause of your financial demise if you let it run away from you.
How credit cards differ from debit cards.
The credit card differs from a debit card in that you pay an exorbitant rate of interest currently around 21% on the outstanding balance at the end of each month. The other main difference is that credit cards do not charge transaction costs at the point of sale, whereas, debit cards do.
Use your credit card wisely.
Understanding that you pay a huge rate of interest on your credit card balance you should only spend up to an amount that you can comfortably afford to pay off in full at the end of each month. Bear in mind that your get up to 21 days to pay your credit card off from the statement date. So, effectively, you can have free use of cash for the whole of the month plus. You need to keep a careful eye on the due date and settle just before.
Squeeze out the extra.
If you are really savvy you should keep the agreed amount that you decide to spend each month in your access bond earning some interest and then settle the credit card in full one or two days before the due date. If you don’t have an access bond then a money market account would be the next best thing as the interest rate is a little lower.
The bottom line is that you are keeping your money during each month working off interest and making use of free cash without transition fees. This does, however, need control and discipline.
One of the more complex financial products is a life assurance policy. You need to understand the definitions of the benefits taken and the conditions under which they will be paid out. You also need to be aware of the various exclusions that are applied. The explanations have over time been simplified but you still need to study the policy carefully so that you know what to expect in the event of a claim.
Here are some answers to questions which should help you understand the broader aspects of life assurance.
What is the purpose of life assurance?
Life assurance is a provision in your financial plan which becomes available in the event of you dying, becoming disabled or contracting a severe illness. It follows the basic principle of insurance where a group of people contribute to a pool which pays out should anyone have a life changing event. Those that claim are effectively subsidised by those that do not. It’s about paying a small premium to cover you for a large amount should something happen, thus taking away the financial risk. Ironically, you do not really want to claim from this policy. You really are paying for peace of mind should some happen.
How much cover should you have?
The payout is normally a lump sum which should be enough to pay off all your debts leaving enough behind to maintain the lifestyles of you and your dependents well into the future. Make sure that you include enough cover to wind up your estate. There are certain costs and debts which need to be paid when you die and if you do not have sufficient cash available in your estate then your executor may need to sell off assets which may not be ideal. Don’t underestimate the effects of inflation on your provisions over time.
How long do you need assurance?
You need it for as long as you are in debt and have dependents.
If life assurance makes a capital provision for a life changing event at a time when you do not have the money, then you need to have the cover for as long as it takes you to build up your own capital through your investments. Let’s face it, assurance is very expensive if you never use it. The price you pay for the cover depends on your age. So the older you get the more it costs. Ideally, you need to wean yourself off the dependency of assurance as your wealth growths over time. You should frequently evaluate the amount of cover relative to your personal balance sheet. If your financial plan is on course your debts should be diminishing as the value of your assets appreciate.
Life assurance is necessary in a sound financial plan. You should frequently evaluate your need for the cover relative to where you are in your stage of life.
Taking the option to go it alone with your investments takes some work. The financial universe is huge and navigating your way through the options takes a lot of research and study before making an appropriate choice. You could choose investments that are actively managed by specialist investment managers or you could go the passive route investing in funds which offer the average of certain markets.
Unit Trusts – The active route
They are managed by fund managers along specific guidelines. So you can choose funds which align to your objectives. In South Africa alone there are over 900 to choose from and globally there are thousands more. Each fund provides a fact sheet which is a good resource to help you understand where and how the fund manager invests. It explains the risks associated with the expected returns providing past performances relative to their benchmarks.
You will need to carefully study this information to get a better appreciation of your investment. If you don’t have the time or inclination to do this work then perhaps a financial planner is the better route.
Exchange Traded Funds – The passive route
You may want to simplify your plan by investing in the average of certain markets. Exchange Traded Funds offer investments in various sectors and asset classes.
For example, an index of the Top 40 shares on the JSE. You can invest in these quality shares and get the average of their returns without having to trade yourself. You simply invest an amount per month or a lump sum and you then track the performance of the 40 shares.
The costs are very low ( around 1% per annum) compared to unit trusts ( 2,5%) and share portfolios ( 2%) and you can start with as little as R300 per month.
Where to go
To help you understand what you are doing, there is a lot of information on websites that offer these investments, such as, www.satrix.co.za and www.etfsa.co.za, where you can invest in specific assets like gold and property.
As a general rule, it’s time in the market that will produce your results, Shares are for the long term so don’t look for get rich quick results.
Your wealth is created over time with the phenomenal effect of compounding.