Category: Blog

Not to be confused with the EFF (the South African political party or the lesser-known Electronic Frontier Foundation…), ETFs have been gaining popularity in investment portfolios for about a decade.

ETFs (exchange-traded funds) were first developed in the early 1990s by Nathan Most, they offer both retail and institutional investors a great passive investment option.

Nathan initially started thinking about the ETF option in this way:

“I started thinking about a warehouse receipt holding the shares in the fund, which could then be divided up into pieces,” said Most in a 2004 interview with CBS MarketWatch, recalling his background in commodities trading. “You could reassemble the pieces and get back the stocks, but otherwise only the pieces would trade.”

It took him about six years to finalize the offering that we now recognize as ETFs.

“I never thought they would be this big,” said Most. “But the ETF was designed with the investor in mind, and they have low fees. Also, ETFs are a natural fit for stock exchanges, which have gotten behind them.”

Andrew Goldman, in his 2020 blog on ETFs vs Stocks, draws a much richer definition that speaks more directly to those looking to enjoy some DIY investing lessons. He puts it like this:

“The difference between a stock and an ETF is like the difference between a can of soup and a whole grocery store. When you buy a stock you’re investing in a single company [a can of soup] — Apple for instance. When that company does well, the stock price goes up and so does the value of your investment. When it goes down? Yipes! When you buy an ETF (which stands for Exchange-Traded Fund) you’re buying a whole collection of different stocks [the whole grocery store]. But more than that, an ETF is like investing in the market as a whole, rather than trying to pick individual ‘winners’ and ‘losers.’”

This is a very general definition that is painted with broad strokes, but it helps show that ETFS offer benefits like:

• Automated diversification
• More discretion when it comes to buying and selling
• Lower cost entry and management
• Higher level of transparency
• Can be more tax efficient

ETFs are not the be-all and end-all of investing and they’re not the answer to volatility in the markets – but they offer a healthy space to develop savings habits and understand the markets a little better without having to spend all of your investment budget in one place.

As the markets mature, these products are going to start to offer complex sub-types (like Leveraged ETFs) and will require more prudent and experienced management, so even if you do want to learn a little on your own, make sure you bounce your ideas off your financial adviser first.

Otherwise, remember this: a robust portfolio succeeds only in the scope of its diversification and time to grow with the markets. Don’t place all your bets on one horse and, unless you’re an investment specialist, don’t go it alone.

If you’d like to read even more, here are some great articles:

https://www.marketwatch.com/story/etf-inventor-nate-most-dies-at-90

https://www.wealthsimple.com/en-ca/learn/etfs-vs-stocks

https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp

Markets don’t make you money; your habits… make you money.

As creatures of habit, we ultimately become our own best friend, or our own worst enemy. This is why it’s important to be mindful of how our emotions affect our choices and influence our behaviour.

We can remind ourselves of this time and time again, but still we might find ourselves slipping into old habits and allowing emotional decisions to vilify our investment strategies.

This is largely due to the fact that if we step back and take a broader look at the market performance of the past three to five years, most local markets have underperformed. Many will say that only offshore has been showing growth, but even that is another way of saying that the ‘grass is greener on the other side of the fence.’

We all know that the grass is greener where it’s watered!

But here’s why this concept throws us so easily: performance doesn’t follow calendar years.

We do. We follow calendar (or financial) years. The reality is that three bad years doesn’t necessarily mean that your investment strategy is wrong. There will ALWAYS be a better performing asset class, share or fund. There will always be that temptation to jump ship when we see another vessel moving ahead a little quicker than ours.

And this is typically where we lose our money. This behaviour assumes that the markets will make us rich, and forgets that it’s our habits that make us wealthy. Markets yield the best returns over time, and not at a specific time, which speaks to the importance of following the ‘buy and hold’ strategy rather than the ‘buy and sell’ strategy.

Emotional awareness and diligent behaviour have the biggest impact on our portfolio. Managing these two key elements to our future wealth are not easy as both can be easily swayed under the right conditions – and poor market performance (especially after a Black Swan) creates these exact conditions!

Don’t try to go it alone when you’re feeling like this.

Having an objective partner on your side to help you process the emotional turmoil that rides the wave of a crashing market is invaluable to building your wealth. People who work with an adviser typically enjoy 1-2% better returns; over 25 years that can be almost double the return of someone who invests without an adviser.

They will also be able to remind you that maintaining your premiums during volatility allows you to purchase shares or allocations at cheaper prices (effectively acquiring more stock) and benefit your portfolio even more in the future.

Remember, it’s not the markets that will make you wealthy; it’s your habits.

In a 2018 article, Tim Davis (President of The UPS Store) said this of small businesses:

“Small business is the backbone of the economy. … It’s these businesses that are driving local economies, providing jobs for local residents and impacting key community organizations, through charity and service.”

Whilst small businesses are crucial to the infrastructure of a robust economy, they are equally affected by the health of that very same economy that they drive.

If we think about our own bodies – everything is connected. Having good posture is not just about sitting up straight!

“To maintain proper posture, you need to have adequate muscle flexibility and strength, normal joint motion in the spine and other body regions, as well as efficient postural muscles that are balanced on both sides of the spine.” livelifebetter.ca

When we think about our spine, or back bone, we tend to initially focus on the bones. We may think of a skeleton that we once saw in a book or classroom. But a healthy functioning body is more than just a skeleton – it’s everything in between and around it! Even the foods we eat and drink can have a serious impact on our health. Any change in one area of our bodies can affect everything else.

In the economy, financial distress caused by the effects of black swan events will cause the majority of small, medium and micro-sized enterprises (SMMEs) to come under severe strain, and possibly even leave their future survival uncertain.

During the COVID-19 pandemic, many countries are finding that as many as nine in ten small businesses are struggling or temporarily closed as a result of the impact of the virus (a black swan event) on the economy. A fraction are able to operate as normal and almost none would ever say that they are thriving. Decreased revenues and lack of financial resources mean that the backbone of the economy is heavily strained during these times and needs serious recovery and therapy time.

Cash flows dry up and small businesses are unable to operate for much more than three months without conditions changing. This affects their ability to pay rent (hitting landlords hard), salaries (hitting staff hard) and other service provider contracts (hitting other SMME’s hard).

Despite all of this, we find that the spirit and determination of small business owners to be far more resilient than the economy! It’s for this reason that the economy can indeed recover, and new opportunities can be found – but we all have to work together.

If you’re not a small business owner, try and find out from your immediate network how you can support local businesses. This may mean buying veggies from a local supplier, or using smaller retail outlets for your purchases rather than going through bigger branded chain stores. If you already use the services of SMMEs, try to pay their bills on time and encourage your friends to use them too.

This is how we boost the strength and resilience of our economy when major events occur. This is how we keep our friends and family employed and how we pull the very best of ourselves through the toughest of times.

One thing we can always know for certain is the past; but with far less certainty, the future, and even ‘later today’… eludes us. Despite knowing this, we often fall into the trap of thinking that we should have done certain things better, because we can see (looking back…) what a difference it would have made in our lives today.

Some of the lingo we repeatedly hear says: “Do something today that your future self will thank you for.”

Market updates are full of articles telling us that if we’d invested $1000 in Amazon, Tesla or Google etc, it would be worth tens of thousands now. But a good financial adviser or wealth manager will tell you that this information only tells us one thing: we can learn from the past, but we can’t predict the future.

When it comes to personal financial planning, we need to be aware of what’s going on around us, but we can’t put that first. What’s going on in the world (past and present) should colour our decisions, but not form the heart of our personal financial plan; your personal financial plan needs to be about YOU!

Even when we look at our own personal financial situations, we can fall into the trap of looking back and wishing we’d played a few of our cards differently. Sometimes, this pertains to habits we’ve formed from our very first paycheck.

We can’t change what we’ve done with the last 12, 36 or even 120 paychecks, but we can decide what we will do with the next one.

1. Get into the habit of saving

When we receive our paycheck (or a few bulk client payments for those who are self-employed) it can feel so well-deserved and the urge to spend is overwhelming. We need a plan to avoid spending it all, thinking to ourselves all the time that we’ll save next month.

Warren Buffet says: “Do not save what is left after spending, but spend what is left after saving.”

Saving is about paying your future self a bonus. It’s a habit that will only benefit you – if you haven’t been able to form this habit from your first paycheck – try and start it this month.

2. Personal finance is personal

It’s really hard to see the things that our family and friends are buying and not feel tempted to make similar purchases, simply because they have done it first. If their money decisions make sense with your personal plan (like buying a practical car or investing in a course to upskill) – then learn from their homework and outcomes. But, if it’s outside of your dreams, your goals AND your income… don’t do it.

Many people look like they are doing really well, but they’re actually drowning in debt. Try not to be one of those people. If you are, remember that your finances are personal – they’re yours; you’re in control. We can work together to manage your debt, we can also work together to help you make personal financial decisions that make sense for you. Use your next paycheck to make decisions that are unique to your personal financial situation.

3. Avoid bad debt

Spinning off that last thought; avoid bad debt!

Not all debt is bad, but it makes no sense to pay the high interest rates attached to credit cards when a bit of planning and patience will allow you to buy the things you really need. Especially when times are tough, it’s easy to take out extra credit rather than reign in our expenses. This is the advantage that you have in a financial adviser – together we can help you make objective, positive choices for your next paycheck.

In a recent article on Allan Gray’s website, Phiko Peter wrote the following:

“You are at your most powerful today to take care of the “future you”.”

You can’t change what you did with your first paycheck – but you can change what you will do with your next one.

Here’s the thing about the lighthouse – it’s focus is always offshore. At the time of writing this article, the world is still flailing under the storm of the Coronavirus and the conditions have caused us all to rethink many of the foundations in our lives that we once thought secure.

Just like the view from the lighthouse, the seas can go from calm to savage in a matter of hours, the visibility can decrease from clear to cloudy in minutes and the boats in the bay may find themselves in sudden peril.

Do they stay – or do they sail off for calmer seas?

Whilst the lighthouse is always looking out for ships, it’s purpose is to warn them that there are rocks nearby. It’s not actually there to locate ships (even though it’s a helpful vantage point), it’s up to the ships to decide whether to risk the onshore conditions, wait it out, or find a different port.

Depending on the skill of the captain and the crew, the size of the boat and the value of the cargo, they can choose how they react to the prevailing conditions. Likewise, when it comes to investing and your portfolio – you too can decide how to react to the prevailing conditions.

For some, the option is clear: go offshore.

For others – they would prefer to handle the risk of the rocks that they know are there and try to navigate them safely into harbour.

It’s not a straightforward decision. Right now, there are enormous differences in the crests and dips of the current and forecasted waves as economists look at the short, medium and long term. The IMF (International Monetary Fund) forecasts global GDP to decline nearly 5% in 2020 and rebound 5.4% in 2021.

The lighthouse is warning us that there is a lot of forecast risk here and a lot depends on political, medical and economical stability and strength returning. Some feel that the global economy will only return to 2019 levels, in 2023, but possibly later.

The speculations are that our best operational capacity for the economy will be around 90% for the next three to five years. This means that we will have to consider our investment opportunities far more prudently, and consider other avenues of generating, stimulating and sustaining income.

Offshore investment products will be a good solution for most investors during the next few years and may very well accrue a heavier weighting in their portfolio. Before you make big decisions about your investment portfolio, ensure that you’ve consulted with us and that your choices are in line with your personal financial plan.