The main objective of an investment is to achieve consistent returns over time relative to the risk you are prepared to take. The principle to follow is the higher return you expect…. the higher the risk you should be prepared to take.

These returns are subject to tax and fees. Certain investment vehicles such as tax-free savings accounts and retirement annuities escape tax but all investments are subject to fees.

You should be aware of these fees as they have a direct effect on your returns as they are deducted before being passed onto you.

In the main there are three components of fees:

Advisor fees
Your advisor recommends appropriate investments which should align with what you are aiming to achieve from your investment. The choice of funds and structures is the most important decision to consider and sound, qualified advice is crucial to a successful investment outcome. You pay for this advice in two ways.
An initial fee – which is usually a percentage of the amount you invest. Whether this is a lump sum or a monthly amount the fee is deducted upfront and the balance is allocated to the fund. This fee is in lieu of the advice and preparation of the investment.
Annual fee – which is charged to the value of the investment. This is paid to the advisor for the duration of the investment for ongoing advice and attention to the investment in relation to the plan or objective set out. Investing should be monitored along the way ensuring that it keeps in line with your objectives and circumstances. This annual fee is normally paid to the advisor on a pro-rated monthly basis.

An initial fee can be as high as 3% and an annual fee can reach 1% of the value of the amount invested.

Administration fees
The service provider you invest through charges an annual fee on the value of your investment which is applied in the same way as the annual advisor fee. Access to reports and statements of your investment and attending to changes and servicing requirements are all covered by this fee.

This annual fee is normally 0,5% of the value of your fund.

Fund manager fees
The fund manager you choose has the responsibility to invest according to your objectives. There are many types of funds which have specific offerings ranging from aggressive to conservative approaches. Fund managers charge annual fees based on the value of your investment and thesis fees are applied in the same way as the advisor and administrators fee… pro-rated on a monthly basis.

This annual fee depends on the type of fund. Generally, the more aggressive the fund the more you pay. For example, an pure equity fund could charge around 1,5% and a conservative money market fund 0,5%.

All these fees also have VAT applied to them so SARS also is a beneficiary of your investment.

So fees are a reality and should be carefully considered when making your investment choice and you should be very aware of how they affect your returns over time. If you are not getting value from the fees then you should question alternative options to ensure that you are getting what you are paying for.

Endowments are policy contracts which commit you to a minimum investment period of 5 years after which the proceeds are tax-free. They basically provide a so-called “wrapper” around various funds of choice which may be invested in various assets, such as equities, property, bonds and cash. The returns from these assets (other than equities) are taxed inside the endowment at a flat rate of 30%.

Dividends from equities – 20%
Rental income from property – 30%
Interest from bonds – 30%
Interest from cash – 30%

Tax rate below 30%

The main reason why you should not have an endowment is if your tax rate is less than 30% you will be paying more than you should to SARS.
You would be better off investing in the same funds directly without the endowment wrapper.

Endowments don’t offer exemptions on interest
You get an exemption on your interest depending on your age. So if you invest in an endowment you are taxed fully at 30% and no relief is given. So let’s say you have an endowment invested in a money market fund, the full amount will be taxed at 30%. If your rate of tax is below 30% you should invest directly into the fund and you will get

Furthermore, when you cash in your endowment you pay capital gains tax. This rate of tax is favourable if your tax rate is higher than 30%. However, if it is lower, again, you will enjoy a better result on CGT as you get a deduction on your tax return of R40 000 on capital gains before paying the tax. The same fund inside and endowment doesn’t get this relief.

So do you homework carefully. Endowments are generally more beneficial for those with a higher tax rate of 30%.

The 2018 Budget speech created a lot of hype against the backdrop of major political change in our country for the better….. without question.

From my point of view, I found the budget proposals pretty clinical and distant from the current situation in which South Africa finds itself. Easy routes were taken to close the deficit and opportunities were missed to raise the anticipation of radical change. It was by no means a bold budget.

It’s not just about money….
This brings me to compare things to our own personal financial planning. The ultimate outcome of a successful financial plan is… peace of mind, which our budget proposals aim to achieve but don’t get there. We are left to hope that things will play out to improve our economy and well being of South Africans. Questions are left about the political will to enact the proposals. We need to believe that our precious resources will be allocated for the benefit of South Africans. This is the new message from our new president. Can the responsible players deliver?

It’s about peace of mind…
Peace of mind over money is found when you don’t worry about it. You are secure and safe in the knowledge that if and when a life-changing event occurs you have financial provisions that will see you through. So, a successful financial plan is not about having a lot of money as much as it is about having enough to maintain your lifestyle. Obviously the higher you raise the bar on the way you live the more you will need to maintain it. If that leads to worrying about things then you haven’t found success.

It’s about having provisions to cope when needed…..
The 2018 budget proposals do the job of rationalizing income against expenditure and proposing ways to balance it over time. They don’t convince us that we will get there. We still have to borrow more money to balance it. The soundness that whatever financial disaster may occur we can handle it is not there. If a devastating collapse in the markets of 2008 happens again do we have the capacity to cope with it? If we have a natural disaster (Cape Town doesn’t get enough water) can we cope?

The budget is laid down and now we have to work with it. It delivered a timid and clinical approach. We weren’t left with peace of mind that we are in control no matter what befalls us. Like a successful financial should do…..

The rand has recently strengthened extraordinarily against our weak economic conditions. The strength points to changes on the political front which are more promising for South Africa’s future. Investors like certainty. By weeding out corruption and presenting confident and well-intentioned leadership our economy will open up to foreign investment which leads to a stronger currency.
However, crazy as it seems, the rand shouldn’t get too strong and needs to find a level somewhere in between strong and weak. It’s a Goldilocks currency which shouldn’t be too hot or too cold but just right. Let’s explore some of the effects.

Why do we want a strong rand?

Oil
The good news is that the pump price of petrol will fall on Wednesday by 43c. This is a result of the rand’s surprising strength of late, trading under R12 to the US$.

Essentially, we are dependent on the oil price which is quoted in US$ and the exchange rate of those dollars to the rand at the time we purchase the oil. The cost affects many industries in the country that particularly rely on vehicles to transport their goods and services. Therefore, these costs are directly affected improving the value of the rand’s purchasing power into the future (inflation).
Unfortunately, prices go up very quickly when the oil price goes up but somehow they don’t come down that quickly when the rand falls.

Why we want a weak rand?

Resources                                                                                                              Exports are our lifeline. Especially resources, as we produce many commodities for world consumption. There is currently an upward tick in the resources cycle as global demand improves. A weaker rand improves the price we get for these exports which has a direct impact on our mines’ profitability, which in turn maintains and creates jobs.

Tourism                                                                                                                    Tourists find it cheaper to visit us with a weaker rand as their currency goes much further. Tourism creates and maintains employment which in turn adds to the growth of our economy.

What can we do?

Economics is one thing and all we can do is work with the things we can control. The rand at these stronger levels will keep interest rates lower, so take advantage of the lower rates by paying off your debts quickly.
If you see an improvement in your disposable income then save it rather than spend it. The savings will make you less reliant on debt in the future making it easier to keep up with the cost of living when the rand weakens sometime in the future.

Working hard for your money needs careful consideration over how to use your income effectively. If you allocate carefully you will ensure that you are living within your means and not above them.

Does a car salesman ever question whether the car you purchase is too costly and whether you should consider buying a smaller cheaper option and save more for yourself?
The same applies to the bank when applying for a mortgage. The bank works out the maximum you can afford to buy for and does not encourage you to buy smaller and save more.

Well, you should take charge of your own story and choose to use your money according to your plan and not be enticed by the money lenders. After all, they make money out of lending to you and the more the merrier.

Before you spend you need to make provisions for life-changing events and unforeseen expenses. This includes life assurance, pension, medical aid, short-term insurance and savings. A broad allocation should be 30% or more of your income to these provisions.

The cost of your debt which includes credit cards, home and car loans and any personal loans should not exceed 30% of your income. This ratio keeps your debt healthy and affordable allowing for sharp increases in interest rates.

The balance of 40% of your income should be used to live on during the month. You have already provided for savings and so you can spend the rest.

Following this formula will ensure that you have investments which provide your financial independence into the future. Your debt will be your target to pay off as soon as possible which will result in you having more to live off or more to save into the future. Hopefully, you will choose the latter….

The beginning of the new year is a great time to update your personal balance sheet.
The exercise is invaluable in your personal financial planning as it creates a snapshot of your actual worth in relation to what you own and what you owe. Your so-called “Net Worth”.

OWN – OWE = NET WORTH

All it takes is a sheet of paper with two columns listing the current value of all your assets on one side and your liabilities ( the outstanding loans) on the other side. Subtracting the total liabilities from your total assets leaves you with a current value of what you are actually worth. This net worth provides you with a realistic view of how well to you are doing with your financial planning. If the figure is growing year on year then you are on the way to improving your wealth. If it is not growing you are effectively getting poorer.

Bear in mind that your net worth needs to improve above the inflation rate to keep its value. So if inflation is running at 6% then your net worth should be improving above this rate year on year to keep your net worth value real.

Ways to improve your net worth are found in the:

Reducing your liabilitiesTargeting your loans and getting rid of them sooner. Interest on debt is often higher than the returns found on investments. Especially, when one considers the risk needed to achieve the return.

Acquiring high-growth assets
Investments that grow consistently over time should be targeted. Especially, those which compound your growth. In other words, investments which produce returns which you reinvest, effectively buying up more. Compound interest is a magical phenomenon in the financial world and needs consistent positive returns over the longest possible time to make its magic.

2017 was certainly a year of uncertainty from which many questions were asked.

Here are three of the biggest questions asked from my desk.

Should I invest in Bitcoin?                                                                                              

In hindsight, you would have made a fortune. Investing rests on the risk you are prepared to take in relation to your expected return. Therefore, the call is in the future. The surge in the price of Bitcoin to these dizzy heights is a phenomenon, to say the least. Yet, do investors really know what they are investing in? Markets do not go up infinitely in a straight line. The fundamental problem with Bitcoin is that investors are speculating on past performance and have a straight-line mentality. Sometime sooner or later the momentum will shift leaving the newer entrants hung high and dry. The momentum could well shift to fear when the price falls so be very careful.

Is Gold the next best thing?
Ideally, this investment has the protection of the rand weakening as the price of gold is priced in US$. The question looms around the global appetite for gold. The price has been range bound between 1300$ and 1200$ for a while and there is an anticipation of the price moving upwards sharply in the event of a correction in the markets. Be aware of the dynamics – Rand/$ exchange rate and price movement in US$.

Is the rand doomed?                                                                                                      Just when you think that the rand is going to weaken it does the opposite. The recent strength from the R12 to the US$ range proves that our currency is very resilient. This has a direct effect on our inflation numbers and in turn also affects your investment performance with many funds which invest offshore.

The year has been governed by uncertainty and surprises. 2018 will be packed with surprises of this I’m sure. Keep on a fundamental course and try not to be lulled into speculation.

Our Rand continues to surprise

Just when you think the rand is heading in a particular direction it turns the corner and surprises.

A while ago just after Minister of Finance Nene was fired the rand easily weaken to nearly R17 to the US$. We all then assumed it would continue with some predictions of R20 to US$. Panic struck and many South Africans took money out of the country in the fear that the rans would devalue dismally.

But then the opposite happened the rand took a turn and started to strengthen over a short period of time to levels in the range of R13 to R12.

When President Zuma reshuffled his cabinet recently firing our Minister of Finance, Pravin Gordhan we saw the rand weaken again but this time it settled in the R14 range and never got anywhere near the previous weakness.

Now we have been downgraded with a key political event taking place in December and see that the rand has now strengthened to mid-R13 levels.

Can we make sense of the direction that the rand chooses? Back to fundamentals. The rand should depreciate at a rate of the difference in inflation of our trading partners. We do the most trade with Europe so technically we should weaken by around 4% per annum against the Euro. The same applies to the US and other countries.

Pundits have calculated that the rand is probably 30% undervalued. So there is a lot more potential for it to strengthen than weaken if technical analysis is still valid.

A weak rand has some positive effect on our exports but at the same time hurts more on our imports and where we see it directly is in the petrol price which is heading to over R14 a litre next Wednesday. This in turn fuels inflation which makes everything that much more expensive.

So…what should you do? Essentially you should spread your exposure between local and offshore investments.
The offshore exposure can be made indirectly through a range of hedge stocks such as Billiton and Anglo America. Even Resource ETFs would provide some hedge against the rand.
Otherwise, there is a huge universe of options to invest in directly. This requires more homework so need more understanding and detail.

The rand will continue to surprise and to work with it you need to invest in it and away from it.

S&P Global Ratings downgraded South African local currency debt to “junk” territory on Friday, citing a further deterioration in the country’s economic outlook and public finances, sending the rand tumbling.

Essentially the downgrade points to the risk investors face when lending money to South Africa. Our economic weakness questions our ability to repay the loans we make.

Not much the man in the street can do about it. We rely on our finance authorities to navigate a way back to being upgraded. In my opinion, we should have been more focused on improving things to avoid the downgrade instead of now having to dig our way out of it.

So how would stand up to a review?
In a very similar way, banks and money lenders assess our ability to pay back debt. Income, (which is our personal GDP), is measured against our exposure to debt (credit cards, cars, personal loans, mortgages etc…). The higher the cost of debt the more risk you present to the institution.

Avoid your own personal downgrade.
Take action by assessing what your own credit rating is. There are many credit bureaus which offer a free assessment for you. Once you know where you stand you can make a plan to improve your situation.
Step one
Stop going further into debt.
It is a great opportunity in the current weak economic environment to pay off debt as the high cost of interest offers higher returns than other asset classes. Where can you, for example, get a solid return of 24% which is being charged to your credit card?
Step two
Rank your various debts by the interest rate you are paying. Target the higher one first and then use the savings to pay off the next highest.
Step three
Look for opportunities to be less dependent on debt. This will be found in working realistically on your spending habits. If the cost of your debt is above 30% of your income then you are living above your means. (SA’s debt is currently 60% of GDP). It’s better to earn interest than to pay it. So after your debt has been settled invest the money you so readily paid the bank and save it for yourself.

Easier said than done. South Africa has a long hard road ahead to work its way towards an upgrade. Getting yourself back to a healthy status will be just as hard. It is a problem that doesn’t get better until you take charge and turn it around.

On its own advice is just advice and probably not that effective. Let’s consider a retirement annuity, for example. In isolation, the product has many features and benefits which provide many reasons to invest
In one. A main advantage is the tax deductibility of the premiums from your taxable income.

So should every have one? Well, if you are young and just starting out in your working life, perhaps not yet. You see a retirement annuity cannot be accessed until age 55. If you need money for a deposit on your home or a car there is nothing you can do if your savings is in a retirement annuity fund. You may be better off saving in unit trusts which will give you accessibility to your money when you need it.

Good advice comes into its own when total provisions are considered, including pension and provident fund contributions. This place limits on the amount that can be deducted from retirement annuity contributions. Having carefully calculated the maximin deductibility would set up an appropriate contribution and any excess could be diverted to different investments making the overall provisions far more tax effective. You see, it’s not just a product. It’s really about taking everything relevant into account and making a financial decision on your circumstances.

So good advice boils down to appropriateness. Advice that suits the situation. Different strokes for different folks. This can only be accomplished through a thorough and holistic evaluation. It is not about the best but rather suitability.

• Good advice is therefore not product focused. It is rather solution-focused. Just like visiting a doctor, you are taken through a medical evaluation which then leads to a diagnosis and then suitable treatment is prescribed. A competent financial advisor will take you through a financial planning process which will highlight opportunities which will form the basis of his recommendation. This is good advice. It is not premeditated. It is objective and appropriate.

Next time you are given advice be aware of the way the advice is delivered. If it is all about features and benefits, past performance and speculative opinions into the future then be careful.

A qualified financial planner is able to find appropriate solutions through a professional planning process. Make sure that your financial decisions are made through this approach.