Category: MARKET

Every holiday season, the search begins for gifts that keep on giving. From music to cooking classes and other hobby-related courses – scores of us try to find a gift that won’t be tossed onto the pile of unwanted, unused and under-appreciated thingy-me-bobs.

We look for things that are ‘cool’ or ‘trendy’ – but ultimately, it’s precisely the same quality that makes a gift trendy that will give it the shelf-life that we’re trying to avoid. 

Most of us don’t think of accounts or investments as gifts – but maybe we should.

Albert Einstein called compound interest the eighth wonder of the world, accrediting it as the most powerful force in the universe. With an accolade like that – surely it would make a worthy gift?

There are two types of gifts – there are those that we give others (most commonly how we view them) and those that we give ourselves (we often feel guilty about these and do this far less often).

Giving ourself gifts is actually extremely cathartic and helps us maintain positive mental health. In a world where stress, constant change and prolific misinformation abound, looking after our mental health has never been more important.

So – whether you’re searching for a gift for yourself, or someone else, how about thinking about the gift of compound interest?

There are three ways to set yourself up for a successful endeavour that reaps the benefits of the gift that keeps on giving:

1 – Create a habit of saving

Longterm investing that benefits from compound interest is ultimately more about the consistency and longevity of saving than the actual amounts that you’re putting in. In the graph below (purely for illustrative purposes) we can see that someone who commits to investing 500 bucks a month from when they’re 25, will have significantly more growth on their money than someone who clocks into the habit in their 50s.

Putting a small amount away, habitually, for many years, is where the most powerful force in the universe starts to shine.

2 – Investigate the tax benefits

Many savings vehicles that are set up for long-term investing have tax benefits that will inadvertently increase the value of your investment. This doesn’t apply to all types of investments, but it’s worth investigating. Remember, a penny saved is a penny earned!

3 – Buy yourself time

As Warren Buffet says; time is your friend and impulse is your enemy. This ties in with the first point in that building a habit of saving will also buy you time. The longer you can invest your money, the more work compounding interest will be able to do to your end figure.

The above graph is based on someone investing 500 bucks a month with a 7% return and shows the projected return at 65, after investing from 25, 30, 42, 45, 50, 57 and 60. The later you start, the less you get.

Most of us know these principles, but a regular reminder is helpful to either start a wise investment, or stick to one we’ve already started.

If you’re not already enjoying the gift of compound interest, hopefully this blog will inspire you to take the next steps!

Anyone with a mediocre knowledge of investing will be familiar with the term “stock”. 

But few people are aware that there common stocks and preferred stocks. And they’re fundamentally different.

Stocks have been traded for over 400 years – the first common stocks were made available in 1602 through the Dutch East India Company. They form the building blocks of our modern-day economy and have taken on personalities of their own.

In a nutshell, here’s what we need to be clear about when it comes to working with preferred stocks and common stocks.

Both represent a piece of ownership in a company, and both are tools that we can use to try and profit from the company’s future successes. The differences come down to what privileges or rights we will enjoy and how risky our investments are.

The first key difference is in voting rights. Preferred stock owners do not have any say in how the company is run, whereas common stock owners enjoy voting rights. This is most often one vote per share-owned and allows a say in concerns like the election of board members who oversee management’s major decisions. Common stockholders can influence corporate policy and management decisions where preferred shareholders do not.

While they may have less say in the company direction and management, preferred shareholders have priority over a company’s income and are paid dividends before common shareholders. This offers slightly more investment security and predictability when a company performs poorly, as dividends are generally paid out more regularly and aren’t always paid out to common stockholders. In times of liquidation, the preferred shareholders have first dibs on assets and earnings.

Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders. In this way, preferred stocks are very similar to bonds. 

The payoff for common stockholders (the most popular form of stock allocation) is that the gains can be significantly higher in the long term if the company grows and finds a solid footing in the market as a profitable entity. They may not reap the rewards of dividends in the early days, but they stand to reap more in the long term.

Depending on your personal investment strategy and event horizons, it may be worth considering preferred stocks over common stocks or vice versa. It’s good to remember that preferred stocks can be converted into common stocks, but we can’t go in the other direction.

What do you do when a bear attacks?

For many of us, we don’t live near any bears, so we’re likely to be unprepared. When it comes to a bear market, the situation is not too different. No one can predict a bear market, and for some it’s not even easy to recognise when a bear market begins and when it ends.

The general agreement is that bear markets are characterized by a consistent drop in the market, accompanied by negative investor sentiment. The more we work with markets and investing, the more frequently we are reminded that emotions are instrumental in driving the markets. Negative sentiment is, therefore, quite an important element of being in a bear market.

As we look at ways to bolster our investments in bear market conditions, here are a few strategies to employ (taken from Investopedia.com), but before you try any of them, make sure we’ve had a chat to understand your unique situation. If a bear rummages through a campsite, it’s possible for your tent to remain unscathed. Not everyone struggles in a bear market!

Keep calm… and move slowly

Just like the wilderness encounter, experts advise you to remain calm and make no sudden movements in the presence of a bear. The same is true of the stock markets. Sudden movements and panic decisions can cost you an arm or a leg…

Diversify

Diversification is almost like looking for a more solid footing and spreading out a little. This not only gives you more stability but it ‘keeps your head down’ and allows you to physically take up a little more space without placing yourself in a more precarious position. Being caught off guard can also mean that we’re caught off-balance. Diversification of stock allocations helps us ensure balance and encourages stability in our portfolio.

Only invest what you can afford to lose

Bear markets are often accompanied by other market downturns, with people in all sectors needing to tighten their belts and sharpen their pencils. There is less expendable income, making it even more important to focus on covering our bases first before extending our risk. It’s wise to have savings and investments, but we also need to put food on the table and take care of our everyday needs. Even small adjustments in the market (in the wrong direction) can be detrimental to your portfolio, and it will need time to recover. 

The markets always present opportunities, even in a bear market, but it takes a comprehensive strategy and a team of astute investors to survive. Don’t go it alone, and don’t dabble without weighing up the risks.

When lockdown happened, it happened fast. For some, there were only a few days to prepare for an indeterminate time of severe restrictions. For others, they had more to do and less time in which to do it.

Travellers were stuck abroad in foreign countries and had to follow equally foreign regulations. At times like these, risk cover and emergency funding are a crucial crutch when our finances and our freedoms are crippled.

Granted, few people have such extensive financial resources, and many experienced an even more challenging time after the economy was halted. There are legal documents that can give us extended peace-of-mind so that we have less to worry about. A will, last testament, and estate plan are documents that we can use to bolster our financial plan’s reach and health.

Here’s the thing about financial planning: we don’t plan out of fear; we plan so that we can extend our peace-of-mind. This is why wills form such a key role in our planning.

Global panic in early-to-mid 2020 led people worldwide to think about these documents, and requests for them to be drawn up or updated were aplenty. The risk of creating these documents under duress is that we can make mistakes, sometimes in what they cover and other times in their legitimacy when official procedures are overlooked (or not available as in hard lockdown).

We seldom have warning for life-changing events, and while it’s easy to say that ‘we should have planned’, we can be proactive after the event and choose to thoroughly investigate our plan right now – in our time of recovery and rebuilding.

Many of our notable companies who make these documents more readily available and ensure that they’re correctly adhered to in their compilation and execution made a plan during hard lockdown to ensure that their clients were adequately protected. This reminded us that it wasn’t impossible; it was just more challenging. 

As the pressure lifts (for however long), we have the opportunity to reassess our wills (and any other elements of our financial portfolios) and estate plans. We no longer live in the age of a handshake or a gentleman’s agreement. We live in a world striving for equality and freedoms that have the trade-off of potentially leaving us more exposed and vulnerable if we don’t have our responsibilities attended to.

As Mvuzo Notyesi, president of the Law Society of South Africa, says, “If you are a parent, a breadwinner, a homeowner and generally want to ensure that your affairs are in order, it is important that you have a valid will drafted by an attorney.”

Ray Dalio is an American billionaire hedge fund manager and philanthropist who has served as co-chief investment officer of Bridgewater Associates since 1985. As a thought leader and industry pioneer, he also founded the world’s largest hedge fund and firmly advocates that “diversification is a wonderful, mechanical, good way to reduce risk without reducing expected return.” 

So – what’s the next best thing for investors in our current market turmoil? 

Diversification.

Whilst it’s been a long standing ‘good-practice’ in financial planning and investment management, investors still find themselves overloading in areas as they follow market sentiment and forget to apply a diverse strategy to their stock, fund or asset class purchasing decisions.

Remember – much of our investment behaviour is highly emotional, no matter how hard we try to convince ourselves otherwise. With global politics, world markets and local business in a growing state of volatility, emotions are running high.

In an article for Business Insider, Dalio says that “… investors shouldn’t subscribe to the “dangerous bias” that the past is representative of the future, he said. “If you go through history, when you have some of these conflicts, you might have a different result.”

Depending on where you find yourself today, you might be hearing loud messages of ‘invest in property’, ‘buy gold’, ‘invest offshore’ or ‘switch to cash’. The markets are changing constantly and Dalio’s counsel is now more prevalent than ever.

“The most important thing investors can do to manage this risk is to diversify by asset class, country, and currency. Diversification doesn’t cost you anything. Because when your asset classes are going to – if you balance them right – have approximately equal expected risk-adjusted returns, so you can balance them, because they all compete with each other, so not one is necessarily clearly better,” he said to Business Insider.

The exciting thing about investing is there is always opportunity – we just have to know where to look, and cover our bases. There are no quick wins or shortcuts to growing our wealth.

This is not such an easy question to answer.

Many of us may shoot up our hands, quickly realizing that what follows is a tough call-to-action: “Then start saving!” So we shrivel back and think we’ll rather start saving next month, or when we get our next increase.

Others, already encumbered with tough monthly expenses, may take a slightly more cynical response off the bat, realizing that saving often feels like an impossible task in our current world-economy.

But deep down, most of us want to save more. We don’t have to be sold on the benefits of saving.

What we need is a workable solution to actually saving more! 

Self-help books on this topic are a dime a dozen, but here are some ideas from Behavioral Economist Wendy de la Rosa. She wasn’t happy with how much she was spending, and like many of us, felt like she couldn’t stop. Here are two behavioural changes that she employed in her own life to reduce her spending and increase her saving.

1. Take aim at your small, frequent purchases

Big purchases are easy to reign in – but it’s the small ones that are a doozy. 

Eating out is a frequent purchase that many of us make regularly, but, savings-wise, it’s death by a thousand cuts. A lunch here, a smoothie there — it all adds up and decreases our savings ability. It’s not just the big dinners or take-outs for main meals, it’s the small snacks and convenience foods that we spend on when we haven’t put proper planning into our meal prep.

You may have other small ‘luxuries’ that you afford yourself, but if you spend longer than 30-seconds thinking about them, you could probably avoid them.

A helpful hack to reduce these is to switch from using a credit card for daily spending, and using cash or a capped debit card. Using a credit card to pay for meals on the fly or last-minute lunches keeps us detached from the accumulating costs until we receive our statement a month later. But, spending a finite amount of cash from our pocket or seeing our balance drop on our debit account keeps us far more in tune with just how much we’re spending and influences our behaviour.

2. Commit your Future Self

De la Rosa says: “Fundamentally, we humans think about ourselves in two different ways: there’s our present self and there’s our future self. We have an optimistic view of our future selves. Our future selves are the one who will work out, who will call our parents more, who will save for retirement. And one reason we don’t save is because we believe that our future selves are going to take care of it. We forget that our future selves are actually the same as our present selves and that our present selves need to start doing this good thing now.”

Here’s a great hack that she offers – plan to save a percentage of your tax refund. It doesn’t have to be a massive amount, but it’s something! In their research they found that if they asked clients how much they would like to save BEFORE they received their refund, it was 10% more than those who were asked after they received their refund.

Our present self… is actually more likely to make better decisions than our future self! 

We can apply the same to our annual bonus, or payback from our rewards schemes. Deciding today, and committing to that, is far more effective than saving as an afterthought.

One of the key points to saving more is looking at the behaviours that need to change in our lives. Financial success is based on financial behaviours – not just knowledge. There is a lot of time spent on financial education, but if it doesn’t change our choices for the better – they’re just words on a page or sentiments in a conversation.

Start with one thing you’d like to change, and take it one behaviour at a time.

Medical aid (including insurance products) contributions need to form part of our overall financial planning. Every year these products are adjusted slightly – both in how much they cost in monthly premiums and in what they cover. These increasing costs can feel burdensome and unnecessary to those who seldom use their medical cover, but they remain a crucial part of our financial planning.

Unforeseen medical expenses can completely decimate our savings and future opportunities if we don’t have some form of cover in place.

The tricky question – for EVERYONE – is how much cover is enough?

Often we think of really hard scenarios, like a freak accident or the life-changing diagnosis of cancer or another dread disease. But the reality is that there are so many scenarios and we can’t possibly plan for them all. And, if we have a run of good health, we might feel like we have the space to reduce our medical cover – especially given that budgets are being stretched tighter than ever and private medical care doesn’t come cheap.

Everyone’s situation is unique, so it’s never 100% appropriate to base financial planning on averages, but a good understanding of trends is helpful in guiding us to making prudent decisions when there are so many variables to sway us.

In a late 2018 article for New24, Jillian Larkan (then head of health consulting at GTC), advised that their benchmark is around 10% of the household income, for the whole family. This is less if there is higher confidence in the state-provided medical care.

It’s quite easy to understand how this will become a grudge-purchase for those who reach the end of a tax year having had zero claims on their medical aid. For those who have benefitted, it’s a no-brainer.

The general rule-of-thumb is that for those members who are younger, healthier and have no dependents, a lighter medical plan is sufficient. It’s not all-encompassing but the average risk for that member is considerably lower. For members who are older, have dependents and may have developed underlying health conditions, a more comprehensive (and more expensive) medical plan would be most likely.

Inside of a good financial plan, a contingency should be made for possible short-falls in all scenarios. It’s wise to remember that in every scenario there will be unforeseen outcomes, if we think we are ‘completely’ covered for ‘any eventuality’ we are setting ourselves up for frustration and disappointment.

We are now living in a world where even the best government or state-provided medical care is not the first choice for most people. Having access to private medical care gives us increased autonomy in our decisions when a health tragedy has already placed strain and stress on our lives.

You may not need to spend as much as 10%, or you may need to be budgeting closer to 15%. Depending on your lifestyle and your current responsibilities, your personal financial plan needs to have a medical cover review every year around November as most providers only allow for changes and upgrades once a year.

The largest factor in our wealth creation, and our wealth protection, is our behaviour. How we choose to save and how we choose to spend are the habits that will determine if we are able to grow our money over time, or if we will erode it over time.

There are other factors, certainly. We can’t forecast all the transitional events in our life, nor precisely when they will happen – so attitude and external factors also play a role, but even these two can be considered influencers of our behaviour.

22Seven recently conducted research on the top 10 spending categories in the City of Cape Town (and certain out-lying suburbs and metros) to understand how the Black Swan of COVID-19 and lockdown influenced consumer behaviour in those areas. Whilst these are geographically unique they help us understand the trends in other major cities too and can help us find deeper meaning in our own spending habits.

Unchanged habits

Spending on groceries remained a top priority both before and after lockdown. This is partly because we can’t go without food, and also because they were the only stores which we could, and needed to, visit during the lockdown period. Two other consistent areas were on cellphone (and data) and transport costs. 

Spending habits that dropped

Entertainment and takeaway meals pretty much zeroed out, but started showing more growth as industries opened up and lockdown lifted – but the caution of consumers has clearly played a role in reshaping this habit. With many informal traders and small businesses unable to operate, ATM and cash withdrawals also bottomed out. The fact that cash is a physical payment method, and the virus being contagious, and that ATMs require public touchpad engagement would have played a considerable role in the change of this habit too.

22Seven also said that: “Home & Garden and Health and Medical also dropped off the list completely post lockdown. Home & Garden spending decreased mainly because those who offered the services were not allowed to operate and many of us had time to attend to those services ourselves while we were at home.

You may [be] wondering how counterintuitive it is that spending on Health and Medical related expenses dropped off the list during the lockdown? Well, it boils down to two things mainly: firstly, the health-seeking behaviour of [those surveyed] would have dropped during the lockdown period. People would’ve put off any non-emergency trips to their healthcare professionals to avoid contact with people. Fewer trips to your doctor also mean fewer trips to the pharmacy, which equals less spending.

Secondly, people would’ve stocked up on their essential medication before the lockdown period started to avoid having to visit pharmacies, and increasing exposure to others, once the lockdown commenced.”

Spending (saving…) habits that improved

According to 22Seven, “Investments, Savings, Insurance and Card Repayments all climbed up the list. While there was a portion […] who saw a reduction in or lost their incomes completely, those who had stable incomes during the lockdown suddenly had extra money left over – mainly because they could spend their money on fewer goods and services.“

This proved to be a good habit-forming contributor as debt and card repayments increased and both long- and short-term investments were bolstered with the extra money that was available to those still earning salaries.

It’s helpful to take some time to review how big events have affected us, not just financially, but emotionally, relationally and mentally too. All of these will play into the habits that we form and reform around our wealth, and to our perception of value. 

Some habits we may have forgotten through the trauma of an event and would want to work on again, other habits we may decide to release and form new ones that have greater meaning to us and our family.

If you’d like to read even more, here’s the link to their article:

https://blog.22seven.com/2020/07/visualised-pre-lockdown-vs-post-lockdown-expenditure/

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.