01 June 2020
We live in an interconnected world where people are inclined towards self help and “googling it”. Instant information about seemingly everything is seemingly available. Not only is there information – there is too much of it. Often the problem – like with many “ Covid “comments” - is that we don’t know whether they are “official” or “trustworthy”- or fake news. But Covid aside, when it comes to other things – like what we buy or invest in , are those resources sufficient for me to be able to act on the information I collect? And, because as human beings we love to receive information that is “insider” – as in not generally known – but which information we hope puts us in a better position than someone who doesn’t have it – it’s not surprising that most financial scams – like Madoff – rely on the “hot tip” route to wreak ultimate financial ruin for those who follow the tip. And , as we all know, we live in a World where people love to differentiate themselves from others – not too much to avoid group displeasure – but sufficiently. So most of us would feel good about owning an item which is “a one off”. It could be anything. If we buy it on the open market – we may , or may not , come with some kind of guarantee about its quality or authenticity. If, however, we subsequently find out it’s not “the real thing” or is in some other way deficient , then we may or may be at a literal or proverbial loss. So if you are contemplating following the above self-help route before you finalise any course of action – do a little test. Run your ideas or prospective purchases or plans past an expert in that field. By way of a personal example, I love watches. I read about them on and offline. Seldom a day goes by when I don’t spend a few minutes or longer picking up information about them – and especially prospective purchases-or sales. I have looked at more watch auction catalogues than I can remember. I have asked for condition reports and pictures. I have studied the Houses and I know who the makers really are – not what is recorded on the dial. I have a friend who I do business with on this front – who is a watchmaker. He has saved and made me lots of money. And the reason is – he knows more than any resource I can access and he, in turn, has access to experts who I cannot access – neither online nor directly. And I am sure his colleagues could do the same. He knows me – what I like – and what I should or should not buy. He does not waste my time – but his answers are telling in every instance. So, what about financial planners and their role and how can they assist you? The analogy above is really quite simple. Financial Planners do this stuff for a living. They do not “sell” things – they provide advice. That is what you pay for. And its more than that. Financial Coaching is what most provide. You and your approach to money – they will find out and remember the key drivers that will affect you( as well as your family) – and how you will respond to various options. Perhaps, most importantly, it is what financial planners tell you not to do that is at the top of the list of benefits they bring. Vanguard – the index managers – did an analysis in 2019 of their advice teams – and highlighted their benefit to clients in terms of what was seen as “an increased return for the client using a financial planner”. It came in at 1.5%pa improvement. Not 10 % - or 20% - but if that happens over 10 years – it is an incredibly significant figure you are looking at. That call to check? It really only involves you making the call. _______________________________________________________________________________________________Disclaimer: The content above contains my general observations on an issue. No course of action of any kind , is being recommended and no financial advice is being given.
Read more01 June 2020
Adding to concerns for our personal and family’s safety, the past three months have been for most of us - a financial worry – whether its our businesses or incomes being disrupted or reduced. We have seen or heard of stock-markets collapsing and then rising again – and while I write this the Biggest Stock index in the World ,the US S&P 500 is now gone beyond the February height it was at , pre- crash. At the same time the results for SA based or referenced investors -from their traditional retirement fund portfolios – which overwhelmingly have been Balanced Funds. In a nutshell they consist of equity in the majority , government bonds as the next biggest segment - and other asset classes like property. Typically they provide steady growth – as equities drive the growth and bonds provide the income and the stability. And, in the context of Retirement Funds, about 1/3 of the asset allocation is allowed to be offshore. But two things have impacted on the returns that investors have obtained in these funds over the last 5 or so years. The S A economy has ground to a virtual halt. Listed stalwarts have not seen growth in their income and poor returns in mid- single digits – have been delivered. And if companies share prices depend on income growth – then – shares have largely traded side-wards. Obviously if your manager had not simply “bought the market” and differentiated his holdings from what makes up the index then results would differ. But the traditional driver of growth – equities – have disappointed over the last 5 or so years. And really modest returns in the mid- single digits have prevailed. The only place to have “been” to avoid this disappointment would have been in global equities – and local cash – or bonds. 2019 was an exceptionally good year for those who had some of that international exposure. But the ongoing disappointing results have led many to say, “I am getting out of the market – I will come back when things have turned.” And many who are investing in unconstrained portfolios have done just that – dumped their equities and gone into income or cash funds. This is reflected in the figures showing where people have been invested over the last year or so – they have moved out of diversified funds into income or funds. The sideway local stock-market has led to pressure has recently been on savers – and those drawing incomes. In particular – if you were offshore in growth – you did alright – but if you were in value you didn’t. And this is all happening in the volatile stock-market which is a rough neighbourhood to play in. And since the “Covid crash” this has got worse. We moreover find ourselves in a unique situation - in that both supply and demand – have dried up as the brakes went on. Furthermore, the stock-market has been very volatile –daily movements at the 10 percent level in both directions have happened – a very unstable environment. One can say a lot more about this – and I will in time to come – but here are a couple of points: a) “Headline Investing”- destroys your wealth- if you follow what the market is saying then you are behind the curve already – and you are likely paying too much for what you are presently buying. Or, as badly, you are selling out too cheaply. But this is precisely what is happening for many people. b) If you are investing long term – as one should be when it comes to your retirement money( doing this is desirable whether you are still employed or working or actually drawing an annuity or pension) trends are not overnight things to be followed. Bill Gates has said that most people focus too much what change brings over the short term - on the next two years – and forget about the impact over the next 10 – which is more important. That is valuable advice. And that is what investment managers – get paid to do – traders focus on “the next 5 minutes”. c) Simply looking at a fund price alone and saying – “it’s down” – is ‘doing nothing’. In almost every case managers have been moving money around to align the portfolio with its objectives and to seize opportunities. But you don’t know that - unless you find out – and asking your financial adviser this sort of question is part of this information flow. d) Some key developed market stocks are expensive. US tech stocks have done brilliantly. But 17% of the S&P 500 index is made up of 5 tech stock shares. Are they good companies? Yes – and very cash robust. But are you paying too much? It is likely you are. These stocks – like Amazon – saw their revenue grow at 384% over the period 2011 – 2018.” It’s got to be a winner you and I say – but if we say that we are forgetting a golden rule. Price is what you and I pay, but value is what we end up with. And if we pay too much…. e) Charlie Munger – Warren Buffett’s partner said the following which pretty well sums up where we presently find ourselves – and headline investors should read this carefully: “People are trying to be incredibly smart- all I am trying to do is not be idiotic, but it’s harder than most people think”. So what am I suggesting ? 1. To say that the days of diversified Balanced Funds are over – is wildly premature. And carries a huge risk with it if you act on that assertion. When you are feeling that things are in freefall and you want to pull the ripcord – stop. Find out what you are actually giving up – its 100% likely to be more than the current price of your units or investments- Steinhoff’s and Abil’s of this world excepted. 2.Find out what your options are. Yes perhaps there are changes you can make. But make sure they are logical – and contribute to you improving your chances of reaching your goals. Do not make short term decisions which could be long term value destroying without the benefit of advice 3.Do not act without first consulting a Financial Planner. I will come back to this matter and the markets again and how you access your retirement funds._________________________________________________________________________________________________________________Disclaimer: The content above contains my general observations on an issue. No course of action of any kind, is being recommended and no financial advice is being given.
Read more01 June 2020
Part of the problem in answering lies in the fact that mortgages generally run for 20 years or longer – and that is a long time. And during that period many different economic environments can exist. For example, interest rates can be high , or low. In SA rates are at record lows. Two years from now, it could all be different. Other external factors could come into play such as cashflow needs. Here are a few thoughts to bear in mind if you are either paying off or considering paying off your mortgage at a faster rate than required – or, perhaps even considering paying off the balance completely. In the present situation we find ourselves in , people will tend to focus on the short term. And because a mortgage is a long-term commitment we should not forget to look at the big picture. A fear is that inflation will suddenly revive, and this fear has been there , mostly unnoticed since the Global Financial Market crash in 2008/ 2009. That said , SA’s inflation is currently low - and it seems that the likelihood of a long slow recovery is not pointing towards inflation increasing suddenly. BUT , if we head into a period of low economic activity – and it folds into a depression – where asset prices start to fall- then I think the question I need to ask myself is – what is the upside for me if I repay my house mortgage faster? In a climate of declining prices I will be aware that I am probably concentrating risk – and also its more likely that my house will sell for less in a depression? It might help to restating some points regarding this : 1. What you save when you repay your mortgage “faster” is always the interest rate you are paying - say, 8% NOW, that sort of return is not a bad investment when things are “normal”. But, firstly, interest rates are at historic lows, so, what I will earn will be less and less…. As rates stay low – or decline further? 2. I have to ask where I am as regards the bond’s term – at the beginning or near the end – more interest is payable in the former case? IF at the end I save less interest! 3. If I am increasing my equity in my house – the only way I get that money back is when I sell the house - which is okay – but then the question will be – at what rate will my house price grow – and what happens if my house price – goes down - it declines in price? I will end up owning 100% of an asset that has declined in value. Oops. 4. So given the present uncertainty an interim step might be to stick to the minimum for the present or a little above that? Adopting that approach contributes to the following advantages : a) I get to keep the cash I am no longer putting into the bond capital reduction. Keeping Powder dry stuff. b) If things turn out differently – I have the cash which I can repay into the bond – and I am no worse off. c) If things turn out to be less attractive and house prices decline then I have shielded – not saved myself to some extent from the problem above - simply by not having all my eggs in one basket? . My general advice would be -think around the above……and perhaps keep your cashflow – intact and pay less for the present?BUT here is what I have to immediately add in . Not everyone is the same -and circumstances could dictate a different approach. Getting personal advice on this is a good start – because any action you take should fit your circumstances.___________________________________________________________________________________________________________________Disclaimer: The content above contains my general observations on an issue. No course of action of any kind, is being recommended and no financial advice is being given.
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