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 you 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. These 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 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 suites the situation. Different strokes for different folks. This can only be accomplished through a thorough and holistic evaluation. It is not about 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.
In these tough times when households are under pressure to make ends meet, perhaps it time to have a closer look at loyalty programs to unlock some value to help get through.The more successful loyalty programs help you to change towards lifestyle behaviours which align to their business models and they reward you with useful benefits for doing so.
Here are some areas you should focus on with your loyalty program to ensure that you max out the benefits on offer.
Understand the program
Understand as much as you can about the program. What you have to do to get the most out of it. If you just, say, join it for a free gym contract, then you probably will miss out on a whole lot more.
There was probably a lot more to understand about the program in terms of its philosophy of say” wellness”. It probably would encourage you to eat well and focus on other areas like stress and metal health. The program probably also offers much more and the more instant the rewards the more gratifying it will be. So, getting to understand the program completely will obviously unlock a lot more value.
Are the values real?
As a premium member on one of my loyalty programs I have diligently kept up the required behaviours towards a healthier lifestyle. The rewards, in the main, are real and immediate with discounts on healthy food and retail items. However, when booking an air ticket recently, I realised that my 35% discount was applied to the “rack rate”. This ended up being no cheaper than similar air tickets available on the “Travel Start” website. So this reward had no real value. Check out the actual value of what is promised and try not to be lulled into perceived values.
Commit fully to the program
You will do better with fewer programs. You should align your goals with the program. If the program sets out to encourage you to improve your health, help you to drive better or manage your money more efficiently then you should commit fully. By so doing, you will enjoy most of the rewards on offer and improve your lifestyle at the same time. Dabbling in the program won’t unlock much in rewards and will just end up being a cost to you in membership fees.
Short term solution in the current environment
As our economy is technically in a recession investment options are very challenging. A great place to invest in the short term is the money market. Accounts can be opened at all financial institutions such as your local bank. Why?
Well because it is very difficult at the moment to get a return of around 7% with extremely low risk of losing your capital. I say low risk because there is a very extreme possibility that the bank where your investment is made could run into trouble as did in the case of Africa Bank.
What is it all about?
A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market trades at the so called ‘interbank’ level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offer by banks on their savings accounts.
Money markets do better when interest rates rise
The current rate varies between as the underlying instruments reach their varying maturing rates. These instruments are also dependent on the interest rate cycle. As interest rates rise so too will money market rates.
Make sure you understand the actual rate offered
The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Nominal rate of 7% per annum yields and effective 8.25% over a 5 year period.
If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.
Real rate is the adjusted rate received after subtracting the inflation rate.
In an environment where cash is king money market accounts are very useful parking bays.
Don’t forget dependents Whilst you are alive you take into account all that you own and deduct all that you owe. You then embark on a financial journey to own more and owe less. If you die, however, you need to also include a provision for your income which your dependents rely upon.
The sum total is the essential amount of life assurance that you will need to have in place in the event of your death.
Whilst you are alive you should then aim to payoff the things that you owe and then build up a nest egg that you and your dependents can live off into the future.
Life assurance is the a way to provide for dying too soon before you have had the time to accumulate enough pay off debt and leave behind enough to support your dependents.
The way forward So it stands to reason that you need to take snap shot of where you are right now in relation to your debt and your monthly lifestyle needs.
You then put in place a life assurance policy to cover yourself in the first instance.
You then embark on a dedicated financial journey to wean yourself off the dependency of the life assurance policy. The more your worth improves the less life cover you will need.
Aim to accumulate enough while you are living which is what financial independence is all about. Work on being less dependent on life assurance.
The most powerful tool in the financial world is that of compounding. It is a phenomenon which even amazed Albert Einstein who was said to call it the 8th Wonder of the World.
So what is it all about?
Essentially compounding is reinvesting the returns you make on an investment back into the investment.
You invest R500 in a unit trust fund which makes 10% in a year amounting to R50. Buying more units in the investment for the R50 starts the next year with R550. The following year the same 10% return is now made on a larger amount and the result at the end of the year is now R55. By reinvesting the 3rd year starts with R605 which returns R60,50 at the end of the year.
Consistent positive returns
So the way to maximise your savings is to save for the longest time possible in investments that consistently give high positive returns and then reinvest these back into the investments, creating the magical compounding effect over the period.
Time is needed
The longer you save the greater the effect. The same R500 in our example got to R605 over 3 years. If you continued over 10 years you get to R100 728 and over 20 years R361 993.
Be mindful of inflation
You need to beat inflation. The value of money into the future depreciates against the rise of the cost of living. This is called inflation. To keep the value of your investment real you need to achieve returns above the inflation rate. So, investments that achieve more than 6% (which is the current rate) will compound over time to provide real value which improves your wealth.
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%
REASON 1 – Tax rate lower than 30%
The first reason why you should not have an endowment is that if your tax rate is less than 30% you will pay more than you should to SARS. You would be better off investing in the same funds directly without the endowment wrapper.
REASON 2 – No cash fund in place
The restrictive period of 5 years ties your money up and if you need to access cash before hand then you could be penalised. A sound financial plan starts with cash fund which you can access for unforeseen expenses. The ideal balance in this account should cover your monthly expenses for between 3 to 6 months. If you don’t have access to enough cash for emergencies then you should not have an endowment.
REASON 3 – Debt not under control
If you have high interest bearing debts such as credit cards, personal loans, overdrafts and mortgage bonds then these should be tackled before investing in an endowment. The returns after tax, costs and fees from the funds in the endowment are unlikely to achieve the same rate as your credit card, for example, 22%. Paying off your debt is a sure thing, without risk of losing capital, effectively providing a guaranteed return at the rate the interest is being charged. Therefore, the third reason you should not invest in an endowment is if your debt isn’t under control.
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 just under $1800 and ounce a few years ago in 2012 to around $1100 of in 2014. The big question is, “Will it be the safe haven when investors take flight from the stock market and look for what has traditionally been their storage of wealth?
There are some very good reasons to consider gold as part of your portfolio.
The ups…….. There seems to be upside on gold. It is has turned the corner from its low to levels in the upper $1200’s presently. This points to a latent appetite for the precious metal as investors are not being compensated for the high prices they are paying for their shares relative to the returns received.
Rand hedge on offer…….
The rand value of gold improves if our currency weakens. So if you are concerned about our rand sliding further into the abyss with all the political and economic problems we are facing then you will certainly benefit. If the dollar price of gold moves upward and the rand weakens then the rand value will certainly be worthwhile.
The rand tends to surprise. Just when you think it is on a path to nowhere, it turns a corner just like of late when it strengthened from R17,00 to the dollar breaking into the range of R12,00. The recent political events leading to our downgrade weakened the rand back to levels of R13,50. Somewhat surprising, as one would have expected it to free fall much further. This again shows how unpredictable our currency is.
No compounding……. Gold on its own does not provide a yield. Therefore, there is no opportunity for compounding returns into the future which is how the growth on your investment is enhanced. If you buy gold in the form of coins or exchange traded funds, then you rely entirely on the price movement and the currency differential. So it boils down to the rand price of gold over time. You can buy gold shares, however, but then you need the mine to make a profit before it pays you a dividend. There are some unit trusts which invest in gold shares and the yield, if any, in these portfolios can be reinvested and compounded.
Do your homework and take a longer view with gold. It does look attractive at the current levels given the aversion to risk which is taking place in the markets coupled with the downgrade and the possible weakening of the rand over time.
The recent political debacle which triggered a downgrade of South Africa has pushed our economic prospects into the dark. Whilst we try to fathom out where we are heading we anxiously await the outcomes of the Rand, Inflation, rising interest rates and low GDP.
It is far easier to change your sails before a storm than during one. We left to our country’s downgrade far too late.
Don’t make the same mistake with your personal finances. You should be well ahead in your ability to service your debt even in the face of a sharp rise in interest.
Essentially, ratings agencies assess countries ability to service and repay their loans. This provides investors and lenders with assessments of the associated risks in dealing with that country. Your personal money lenders do the same thing. They stringently assess your ability to afford your debt using key factors which provide a credit rating.
Start with your personal credit rating which you can get for free from various online credit bureaus.
Update your personal balance sheet and quantify your debts taking a hard look at your exposure to debt.
How easy can your income cover the cost of the debt, is the important question? Talking into account a sharp rise in interest rates.
Work on having more disposable income by living well under your means. Buying a home or car which you can comfortably afford leaves more money behind each month. It is here where you will find the money to build up your savings and cash reserves.
Reducing your dependency on debt and increasing your savings will improve your credit rating and avoid a personal downgrade.
The investment horizon is never really certain. However, the current global economic climate is definitely more uncertain than before. Economies throughout the world are battling to create employment and dig themselves out of the debt. Doubt, fear and worry loom. Yet the markets are performing at all time highs pointing to hope and expectations which, frankly, do not align with economic fundamentals. This all adds to further uncertainty. So how should you approach your investments in these uncertain times?
Be realistic with your expectations
Past performance is not a prediction of future performance. Yes, looking back through a rear view mirror is pretty accurate. However, predicting the future is pretty well impossible. So, understand how your investment achieves its return and measure this reasonably against future expectations. If the share market. for example, relies on a a healthy economy, then it stands to reason that future returns should be better. However, the converse applies. You cannot reasonably expect double digit returns when the economy is benign.
Time in the market
Firstly, you need to decide on how long you intend to invest for. The basic principle being that the longer your horizon the more risk you can afford to take. Risk is found in the share markets where historically you receive higher returns than the other asset classes. Shares are bought in expectation of profits made by companies which are passed onto the investor in the form of dividends. If companies make consistently high profits over time then investors are prepared to pay more for the shares. However, there is a problem. The share market is driven by emotion and speculation in the short term and this often defies the fundamental view. Case in point, the current economic condition of our planet and the all time high performance of our stock markets.
Spread your investment
Once you have your time horizon established then you should consider your options. Look at a balanced fund approach. Take two or three unit trust funds that offer a flexible balanced objective. These fund managers make the calls for you deciding on where and how much to allocate to various options. If you choose a few funds then you get the advantage of different styles and choices from different points of view. That’s a lot of attention on your money.
Investing a lump sum in the markets in times like these is very risky as you have a strong possibility of loosing capital. If you lose 50% of your money you need 100% to get back to even. Who knows what the new normal returns will be into the future? It could take years to break even.
A safer way is to spread your investment into your new funds over time. The longer the period the less risk. Choose to keep your money in cash and then phase in over 6 to 12 months to avoid any severe loss of capital. If the markets correct during your phase in then you can take a position with the remaining balance at a discount. If you save on a monthly basis then you benefit from a bearish falling market which, if sustained for a long period, will mean that you will be buying discounted shares for a while and benefiting when the valuations pick up again. It’s all about preparation and patience in the end.
A word of caution. Don’t be lulled into the expectations of your investment based on the past fews years. Be realistic, understanding that there is a long way to go before the world gets back to normality and the returns in the new normal will probably be more benign than the performances of the past. At the moment cash at 7% is more certain than other assets. So not a bad option for the time being.
Our Minister of Finance announced in the budget proposals this week an increase in withholding tax on dividends from 15% to 20% which further erodes the returns you receive from being invested in shares. This gives you even more reason to be invested in a tax free savings account (TFSA).
If you move quickly there is still time to get invested before the tax year end on the 28th February.
If you are invested in unit trusts or exchange traded funds you should consider the comparative advantage of having the exact funds invested through a tax free savings account.
Tax is applied to all sources of returns If you are invested in a balanced unit trust fund, you are probably attracting tax on interest from money markets and bonds, rental income from property investments and tax on dividends from shares. These deductions erode the return on your investment.
Beef up your compounding effect Growth on your investment is largely dependent on compounding of your returns over time. If you reinvest the growth every year you effectively achieve growth on growth into the future. Over time this becomes a mathematical phenomenon rocketing your investment value over time.
So it stands to reason that if you invest in the exact same unit trust through a tax free savings account your return will be that much bigger because not tax is deducted. Compounding on this higher return simply means more for you in the future on the exact same fund. A no brainer!!!
Capital Gains is neutralised If you disinvest your current unit trust and reinvest in a tax free savings account up to the maximum annual allowance of R30 000 (next tax year R33 000) you will significantly beef up the performance of your investment. The potential Capital Gains Tax which will be applied to selling off your unit trust will be offset against your annual exclusion amount of R40 000.
So if you made the investment before the end of February you have taken full advantage of the tax break for the year on CGT and maximised your allowance for investing in the TFSA into the future.