Category: MARKET

At the very surface level of constructing a financial plan, the journey can feel linear. We begin with what we have and plan to move towards an end goal of ‘having enough’ and being financially independent. But this is not where financial planning ends; it’s just the toe-dipping beginning as we gain courage and confidence to engage more with our financial planning.

It feels linear because financial independence has always been closely associated with retirement, and retirement has been seen as our final epoch. There are not simply two stages of financial dependence; there are several, and we don’t necessarily go through them all, neither do we all end up fully financially independent.

Life is a little like snakes and ladders – we can be moving forward (upward) on our chosen path until illness, divorce, or retrenchment changes our financial dependence status. Or we may have a windfall or unexpected success that boosts us up several spaces in our plan.

The importance is not in sticking to the linear journey but in creating check-in points to mitigate stress and measure success according to our personal milestones. 

This gives us the freedom to make choices that might move us up or down a level in our financial dependence – like extending our bond to buy a larger house, or turning down a better job offer to spend more time with our family.

Understanding different levels of financial dependence helps us with the framework of our financial plan.

Dependence is where many of us start. At this level, our lifestyle depends on others for financial support. Support from parents, needing to spend more than we earn, or if our debt payments (credit cards, personal loans, student debt) exceed our income, are all common at this level.

Solvency is the ability to meet our financial commitments. We reach this level when our income exceeds our expenses and when we are no longer accumulating debt. We are fully able to support ourselves with our income.

Stability is a stage of financial dependence where we have no credit card or personal loans, have established an emergency fund, and are growing our asset base.

If we can keep growing our wealth, we will start to have free agency, meaning that we can work and live how and where we want. Typically, we will have eliminated all debt (including property loans), and have enough savings and invested assets to have the confidence to quit our job at a moment’s notice.

After this point, we now have a certain level of financial independence. We have financial security when our investment income can cover basic needs for the rest of our life. It’s not about luxury or comfort; it’s about financial security to have all the basics covered.

Full financial independence is a stage in life where we can fund our chosen standard of living for the rest of our lives. You can afford the basics and some comforts too. This is what many term as “having enough”.

Abundance is a rare stage where we have enough — and then some. We can share our wealth with others or indulge in luxury.

Remember, these are levels of financial dependence and not levels of happiness or peace of mind! They are purely a helpful way to frame where we are on our financial journey but do not make our journey wrong or right, or complete or incomplete.

“How much should I be charging my clients?”

This is a common question as we work with an increasing number of people setting up their own businesses. In the wake of a radical economic downturn, our creativity and necessity to generate an income spark new business ideas. The entrepreneurial spirit begins to take centre stage in the micro economy, and we have an awesome opportunity to create value for others.

And this is how we answer the question. Because it’s not about the fees, it’s about the value.

In our own industry, we’ve learnt that our fees should be linked to our value proposition. Whether you’re talking about products or professional services, there needs to be some benefit or value to the end-user. This benefit is measured by the difference that the product or service provider will make for the consumer.

It sounds like a simple formula, but it can get fairly complex. We need to consider factors like experience, expertise and the need for the product or service that we’re providing.

There’s an old story of Pablo Picasso, who, at the height of his fame and influence as an artist, was asked by a fan to sketch something for him. This happened when Picasso was out for dinner at a restaurant. 

The fan gave Picasso a napkin to sketch on and said he would pay for the sketch. In fact, he supposedly said to Picasso, “Name your price.” Picasso took a charcoal pencil from his pocket and quickly drew the image of a goat.

He then said to the fan, “That’ll be $100 000.” The fan was astounded, saying, “But that only took you 30 seconds to draw.” Picasso then crumpled up the napkin and stuffed it into his jacket pocket. “You are wrong,” he said. “It took me 40 years.”

Another way of looking at this concept is to remind yourself that it’s not the hour you spend in that meeting with your client; it’s the years of experience you bring to that hour. Or, it’s not the price tag of the widget you’re selling; it’s the hours of frustration it will save your customer – or the hours of joy it will bring them!

When you start a new business, you will have a learning curve where you will need to adjust price, service, experience – all of it, but remember that it all starts with confidence in your value. It starts with being confident to charge what you believe you’re worth. Price influences our perception of value. Experience confirms it.

As a rule of thumb, always start higher. It’s easier to negotiate down than to negotiate up, and, if you need to, you can always walk away if they aren’t willing to pay you what you’re worth.

Have you ever gone down the #Fintwit rabbit hole? According to fintwit.ai, #Fintwit is a vibrant community of investors on Twitter, who tweet trading ideas, active trades, personal portfolios and well thought out insights about financial securities. Millions of investors around the world are increasingly using Twitter to stay abreast of the financial market and make informed investment decisions.

This financially savvy community is almost as popular as the #BTC (bitcoin) and #crypto communities who are determined to be the next billionaires from investing in cryptocurrencies. They create boundless content on how to best the systems and one could easily spend days scrolling through all of the tweets.

The challenge with these strongly supported content-creating communities is that they have enormous influence and create the perception that investment planning and management is the main (or only) focus of financial planning. The reality is that investing is just one area of about six.

Financial planning is more about managing behaviour than managing money. This is why the first area is cash flow management.

CASH FLOW MANAGEMENT

Some people refer to this as budgeting or a spending tracker. Ultimately, the goal is to have an enlightened conversation about where your money is going every month. Once we know that, we can plan how we can protect your assets and grow your assets.

RISK MANAGEMENT & PLANNING

From a financial perspective, we typically look at the different assets that need protecting; from your personal health to your income, accumulated savings and investments, this is a list that will keep changing throughout your life. Risk planning falls into two categories – your short term and long term risks. 

INVESTMENT PLANNING

Your accumulated savings are great for emergency funds and rainy-day savings, but for long term growth with the benefit of serious compounding interest, we need to plan on how you invest your wealth. This is all about growing your wealth and allowing your money to work for you. This is where the #Fintwit bunch are always abuzz with ideas – but at the end of the day, you need a person who you can trust and lean on to keep you committed to your investment plan.

TAX PLANNING STRATEGIES

As your wealth grows, your tax liabilities will increase. Optimising your portfolio becomes a necessary discussion in order to reduce the amount of money you will have to pay to The Man. There are loads of strategies to legally protect and grow your wealth without eroding it to tax.

RETIREMENT PLANNING

In a nutshell – this is a sum of money that will help you rely less on income generation later in life. It doesn’t mean you have to stop working, or stop adding value – it just means that you are working to create more freedom for yourself so that you don’t have to work every day in order to pay your monthly bills and finance the lifestyle that you’d like to live.

ESTATE PLANNING

All of this asset building, combined with your risk portfolio, creates value in your personal estate. It doesn’t have to be millions; whatever you’ve built will be taxed when you pass away. To plan for this and reduce that tax liability and associated fees, estate planning ensures that your loved ones will have access to most of what you’ve been able to provide for them.

These are the most common areas of financial planning: cash flow management, risk management, investment planning, taxing planning, retirement and estate planning. They create the starting blocks for our conversations to help you manage your behaviour to ultimately manage your money better.

How do you decide on the better of two products you are not really familiar with or can’t visually tell the difference?

For example – I had to buy a new cellphone charger the other day, and there were two options – one was two-thirds the price of the other, but both were reasonably priced (according to my limited experience of buying chargers!).

I went with the more expensive one because the price tag convinced me that it would be the better choice. If I knew the industry, I would probably know that they were both made in the same factory in some far-off land – but the higher price convinced me of higher value.

You’d probably do the same. It’s the same with buying a car, paying for food at a restaurant, purchasing new shoes and just about everything else that we pay for. Price skews our perception of value.

It’s also the same for investment fees. Sometimes we can assume that the higher the fee, the better the return.

But – as we can see in the graph above, this is not the case for long-term investment strategies. Over time, fees can erode over 60% of our final portfolio value. That’s why, when it comes to hard and fast rules for fees and certainty in investing – they simply don’t exist.

However, we can say that in most cases, lower fees lead to higher returns.

As Occam Investing wrote in a recent blog, “There are no such things as laws in investing.”

When it comes to markets, we can never share the same level of certainty as we do in Newton’s laws of motion.

Trying to prove something in investing is like Newton trying to prove gravity exists in a world where sometimes things are pulled towards each other, sometimes they aren’t, sometimes the opposite happens, and sometimes something invisible comes out of nowhere and throws everything around a bit.

To make matters even more difficult, the environment in which we’re operating is always changing. Newton was able to prove gravity existed because the laws of physics never changed – he was able to run experiments while keeping everything else constant. But markets are always changing.

Investors can never really be sure of anything – we’re left to make the best of unprovable theories and confidence levels while navigating an environment in constant flux. But no matter how much changes in markets, no matter how many theories you choose to place confidence in, one thing will remain true regardless of approach.

All else equal, lower fees will result in better performance.

And although all else isn’t always equal, both the theory and the evidence show that the best and most consistent way to increase returns is to reduce fees.

This is a powerful conclusion for investors. While so much of what happens during our investing lifetime is outside our control, how much we pay for our investments is very much inside our control.

Given that the amount paid in fees is a great predictor of performance in investing, focussing on reducing fees is the most reliable way investors have to increase their odds of investing successfully.

If you’d like to read more of the technical analysis of this conclusion from Occam Investing in the UK, you can click here.

When we experience our first crisis, we think our world is about to end. It could have been our first unrequited love when we were 12, a rejection letter from an application when we were barely out of our teens, bad news from the doctor or an accident that leaves us dealing with a deep loss.

Sometimes it can be our hundredth crisis, and it can still leave us wondering how we can proceed; perhaps it sparks our emotions to do something wild or reckless, or maybe we feel the numbing reality that life is about to change significantly.

As Victoria Reuvers, Managing Director at Morningstar Investment Management South Africa, recently wrote – these experiences begin to feel like déjà vu? From rioting, demonstrations and political unrest to natural disasters, heatwaves and market crashes – we can’t help but ask: Have we been here before?

Not necessarily.

Reuvers goes on to say that “while it’s impossible to comprehend and rationalise what we are going through as families, communities and as a country, one thing that we know to be true, that we will survive this and we will rebuild this nation.

When the dust settles, and we sit at home and reflect, we find ourselves wondering about the future, and we worry. We worry about when/how life will ever return to ‘normal’. We worry about the health of our family, friends, and colleagues. We worry about the economy and work. We worry about money and our savings. While we are not able to guide all these worries, we can provide more context around money, savings, and investments.”

When markets rise and fall with the influence of investor emotion and sentiment, it’s only natural that many investors may grow tired of stomaching the unpredictable rollercoaster ride and would much rather prefer to place their feet on solid ground. As Reuvers says in her article: In the world of investments, the rollercoaster ride is equities, and cash is often seen as the solid ground.

From the graph of Morningstar Direct (featured above), we can see the 15 worst days on the JSE (the red bars) since the end of June 1995 and how the local market reacted after the drawdown. The blue bars show the 12-month returns investors experienced after the worst day, and the green bars show the five-year annualised returns after the drawdown.

For example, during the 2008 global financial crisis on 06/10/2008, there was a loss of -7.12% for the day, but the subsequent one-year return amounted to 22.41%, and the annualised five-year return was 19.24%.

During times of negativity and volatility (which may feel like déjà vu), many advisers would tend to recommend to investors who are in Equities to retain their exposure to this asset class since experience shows us that short-term phenomenon generally should not detract from the long-term value of equities.

When this is the case, price declines may produce buying opportunities. Warren Buffett, chairman and CEO of Berkshire Hathaway, said, “you don’t buy or sell a business based on today’s headlines. If the market gives you a chance to buy something you like and you can buy it even cheaper, then it’s your good luck.”

Ultimately, investors should remain calm and remember that time in the market is superior to timing the market.

Investing in the equity market is a long-term pursuit and is best used to reach long-term goals such as retirement. As the saying goes – a river cuts through a rock, not because of its power, but its persistence.

The habit of investing is one of the best habits you have within your control. Doing nothing and staying the course is still a decision. It is often during these difficult times that we have the greatest opportunity to add value for our clients, acting rationally when others struggle to do so.

(Please contact me if you’d like a copy of Victoria Reuvers’ article)

There’s a rare object known as a tuit. It’s a special gift to keep for yourself, but also has great value for your friends and family. Tuits, especially round ones, will generally have a note or inscription along the following lines:

This is a Round Tuit. 

Guard it with your life!

Tuits are hard to come by, especially the round ones.

It will help you become a much more efficient worker.

For years you’ve heard people say

“I’ll do that when I get a round tuit.”

So now that you have one, 

you can accomplish all those things you put aside,

until you got a Round Tuit.

It’s easy to put off important decisions until tomorrow. When there’s too much to think about, we’d rather do it ‘when we have more time’; we’ll take care of it when we get around to it. The problem is that all too often we never get around to it until it’s too late.

Taking out the extra insurance before we have that accident, fixing the leak before it rains, finishing a presentation before the deadline… we all have our stories of occasions where we were confident that we’d get around to it – but didn’t.

Dread disease cover is one such conversation that is never easy to have and is often put off until we get around to it; partly because it’s not nice to talk about or spend money on, and partly because it’s fairly complex.

Sometimes called CI cover, dread disease cover is different to disability cover, which protects you and your finances after an accident temporarily or permanently leaves you unable to work. 

In a similar way, dread disease cover is there for when a health setback floors you temporarily or for a longer period of time. From strokes or heart attacks to serious illnesses like cancer, this cover helps you focus on your recovery without having the added stress of loss of income each month just when your medical and associated expenses are skyrocketing.

When the average person thinks of cancer, a tumour or a stroke, they imagine the worst. And no one likes thinking about it… it will never happen to us anyway, right?

But in reality, these things are more common than we realise and are not a death sentence – far from it.

“Statistics confirm there is a high likelihood of contracting a major illness such as heart disease or cancer. And thanks to advances in medical technology, people are more likely to survive these illnesses than ever before,” Old Mutual’s Ferdi Booysen says in insurance publication FA News.

Research shows that one of the single biggest impediments to recovery in any illness (barring chronic mental illness) is stress. Research also shows that finances are one of the biggest things that people are concerned about when ill – a vicious and ironic circle.

And they’re not wrong. There are lots of little unforeseen expenses surrounding illness and hospitalisation. Even if you have an amazing medical aid in place, there will be things the medical aid doesn’t cover. And what about other things you may need, like therapy for you and your spouse after the trauma of a stroke?

With dread disease cover, it’s easier to relax and focus on recuperation knowing that everything is in place. In fact, most CI cover pays out a lump sum so that you can decide what’s important for your recovery journey.

Falling seriously ill or having a health episode is never pleasant, but it is a fact of life – and it needn’t be the end of it. In fact, it can be the start of a whole new one.

Those who have experienced these things with the support of insurance and the ability to focus on themselves rather than being forced to work when physically unable, often describe their journeys as powerful wake-up calls that helped them “get around to it” and improve their lives.

For many years we’ve been having better conversations about retirement. It’s no longer a matter of finding a job, staying in it for 40 years, and then retiring for fifteen years under the assumption that the company pension scheme will finance that entire period for us. 

It simply doesn’t work that way anymore.

Finding a job can take considerably longer; the chances of us staying in one position for more than ten years, saving early (and long) enough and the span of our retirement years have all changed and created new challenges for how we plan our lives and our money.

In a recent article by Dinash Pillay, National Business Development Manager at Glacier, he also highlighted the impact of global lockdowns that have forced thousands of businesses to close or downscale. This has led to an increase in employees, who are a few years away from retirement, being offered early retirement without the usual penalties for cashing in prematurely.

As the article says, this may be an attractive option if you are an employee in your mid-50s. 

However, before you grab the opportunity, make sure you have a robust plan in place. In this blog, we look at the first part of Pillay’s commentary; the next blog post will have a handy to-do list to help with the decision-making process around early retirement.

Retirement needs a plan.

Most people don’t think about their retirement before they are already in it.  Planning is of paramount importance, and financial planning is central to the big decision that you’re facing. 

Here are some questions to answer long before you exit your workplace for good:

• Have I saved enough during my working years? 
• Is my employee retirement fund the only retirement savings that I have accumulated?
• What monthly income will my retirement savings provide after I retire?  
• Who depends on my income now?
• Who will depend on me financially into the future?
• Is the home I own fully paid for?
• Am I debt-free?
• I’m healthy now, but what if I get ill or develop a chronic illness or I’m disabled – what do I do then?
• At work, I have purpose, focus and tasks that fill my day. Will I have a new purpose as a retiree?

It’s important to remember that the basic principle around investing is that the longer we can stay in the market, the more time our money has to grow from the benefits of compounding interest. For most retirement investment plans, the most growth happens in the final few years. Often, but not always, it’s wiser to try and push back your first date of drawing down on your retirement savings.

Everyone is different and it’s best to check with your personal financial adviser when considering these profound life changes. Take a look at the next blog for the checklist of five to-dos before taking early retirement.

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If someone is selling something, their primary goal is most often to convince you to buy what they’re selling. If you follow financial accounts on social media, your timeline is likely crowded with people touting the next big winning investment.

As we look back on market history, there is an obvious attraction to finding the big winner – the tiny tech stock that turns into the next Amazon or the virtual coin that makes overnight millionaires.

Winning is ingrained into our psyche. It’s coded into our core ideologies from formative schooling and is reinforced through our induction into adulthood and the working world. 

The class that raises the most money gets free burgers on Friday, the kid with the highest grades earns the scholarship, the student with the best performance wins the grant, and the employee with the best ratings secures the promotion.

But what if, instead of chasing the big win, we invested our money with the goal of simply not losing? It’s a powerful mental trick that doesn’t seem to ‘come naturally’.

Chances are, you’ll come out ahead, says behavioural finance expert Brian Portnoy, founder of Shaping Wealth and author of “The Geometry of Wealth.” 

He says that “Adopting inverted thinking — facing problems from the opposite point of view — is such a powerful mental trick. The world becomes a brighter and cleaner place once you get used to it.”

Here’s what he means.

Win by avoiding big mistakes. Portnoy’s perspective on investing has been around, in one form or another, for decades. In a recent Twitter thread on the topic, he cited investment consultant Charley Ellis’ 1975 research paper “The Loser’s Game,” in which Ellis argued that winning at investing was akin to winning at tennis.

There are two ways to win with a racket, Ellis wrote. If you’re a pro, you hit high-speed, well-placed shots to defeat your opponent. But for amateur players, the vast majority of points are won and lost when an opposing player makes an error. Amateurs can triumph merely by keeping the ball in play and making fewer mistakes than their opponent.

When we see someone selling “the next big sure-investment win” – we mustn’t get taken in. 

“That’s sample bias at work,” says Portnoy. “We see the winners because they’re on the cover of magazines, but there are many more losers out there. We don’t see them, but they’re there.”

If we’re honest with ourselves, “we’re amateurs at most of the games we play,” Portnoy says. “Trying not to lose is often the most prudent thing to do.”

Great thinkers, icons, and innovators think forward and backwards. They consider the opposite side of things. Occasionally, they drive their brain in reverse. This way of thinking can reveal compelling opportunities for innovation and lies at the heart of inverted thinking. It’s a powerful mental trick that can help us master the markets by seeking to stay invested for the long term rather than trying to time a winner and potentially lose everything.

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