The Best Gifts to Yourself

-By Sunél Veldtman

 

This year our family embarked on an adventure, although it wasn’t one that we had planned.

When you wake up every morning too exhausted to face the day, this “adventure” is knocking on your door. When you are told repeatedly by specialists to reduce your stress levels, you know you have no choice but to go on this journey. Something had to change, and we are very much still changing the way we live. I guess you could call it a journey to conscious living.

The funny thing is, I’ve always thought that I lived consciously. After all, I’ve read countless books on time management, healthy relationships, parenting and health. I’ve never thought of myself as stressed. I exercise, watch my diet and work on my relationships. Clearly, my body experienced stress, signaled by my subconscious.

What has this got to do with financial advice, you may ask. How we live has a direct impact on our money. Investing in your wellness is a long-term decision with potential for a high return. Lower healthcare costs. Higher earnings potential. Higher productivity. Greater enjoyment of your money. The opposite is true, sometimes disastrous, when you’re faced with burnout or a terminal illness, the direct result of stress. It’s the best financial advice I can give to my clients. Live well.

What I have learnt on my journey can be summarised in four words, or gifts. My hope for you is that you give yourself and your family these gifts in the year ahead.

 

Slow

We create stress by our frenetic pace. Most of the craziness is self-inflicted but driven by our culture. Where I live in Johannesburg, everyone lives and works at a hectic pace. Instead of “Howzit?”, we ask, “Are you busy?” We consider it a sign of success.

I’ve come to realise that it’s the opposite. It’s a sign of an unconscious decision to be swept up in the torrent of the ruling culture.

It is possible to stay in this city and your job but change your pace. It involves being committed to your values and priorities and saying “No” to most other things. It asks of you to become aware of your pace and the impact it’s having on your well-being. When was the last time you made time for thinking about your work? When was the last time you did something unhurried like cooking a meal without doing something else at the same time? When was the last time you drove somewhere without fitting in a phone call? When was the last time you noticed the birds in our city?

It all starts with our thoughts. We obsess about what we should have done, what we shouldn’t have done and what we have yet to do. Our lives reflect our thoughts. Meditation has helped me to slow down my thoughts. Frenzied thoughts produce anxiety. Since calming my thoughts, I am able to benefit from a slower life.

Give yourself the gift of slowing down. Start with your thoughts.

 

Sleep

“For years, studies upon studies have shown how bad sleep weakens the immune system, impairs learning and memory, contributes to depression and other mood and mental disorders, as well as obesity, diabetes, cancer and an early death.” This is according to an article published by the New York Times entitled Sleep is the New Status Symbol.

We’ve lost our connection with one of the most natural things: sleep! We need to reconnect urgently to this source of wellness, creativity and success. Our society praises people who survive on little sleep. We should change that. We should be bragging about how much we sleep.

This year I learnt the value of sleep, after suffering for the first time in my life from insomnia. I am now religious about sleep. I’ve started a sleep routine, a ritual for winding down: switch off from screens, relax in an Epsom salt bath, use essential oils, and an easy read to send me off to dreamland.

I’m waking up before my alarm clock. It’s improving my energy levels, productivity and quality of life.

May sleep be with you!

 

Sabbath

Most ancient cultures or religions had a form of the Sabbath, a day for rest. In our modern Western culture, we destroyed this tradition with a seven-day trading week. We have lost something in the process.

If we don’t stop, at least one day a week, and break our routines, we never find rest. Rest is essential to our wellbeing but also vital for productivity. If you think that working or keeping busy for seven days a week makes you productive, think again.

In his book Deep Work: Rules for Focused Success in a Distracted World, Cal Newport stresses the importance of rest for productivity and creativity and specifically doing the type of work that will be essential to success in the future.

You can read a summary of the book here.I highly recommend this book. Even for parents, this book will highlight the importance of play, sleep and nature and the danger of screens.

Our family has slowly claimed back our Sundays to be a rest day – a day of pottering, simple lunches and sitting around a fire. It takes conscious decisions to stay away from shopping or entertaining. For me, it’s a day of spiritual reflection, journaling and connecting with myself.

I hope that you will create a routine of rest every week.

 

Support

As I get older, I value the support of my friends and family more than ever. A phone call at exactly the right time, a cup of tea shared, or a hug from a friend can save the day.

Research lists loneliness as the top health risk  . Loneliness is a phenomenon of modern society. Social media, work pressures, security concerns and the loss of community have all contributed to increasing loneliness.

It takes courage and determination in our isolated society to seek friendships. We need to consciously build on existing friendships and cultivate new ones. It should be a top priority in our diaries. If our jobs or lives leave us permanently too exhausted to see friends, we need to wake up to the risks of such a life.

We should also ask for support. We should tell those closest to us what we need to feel supported. It’s not a sign of weakness to state your needs. Sometimes this means, being honest with others about the impact of their behaviour and choices on you. And sometimes simply saying ‘No’!

Gift yourself the gift of healthy friendship in the year ahead.

May you be blessed with Slow, Sleep, Sabbath and Support – these are worth giving to yourself and your family and worth striving for in the new year.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

The Finance Series for Millennials: #5 How to Manage your Finances over the Holiday Period

 

-Thiart van der Merwe

 

In this series of articles, we’re giving you the advice you need on how to set yourself up for financial freedom. Our aim is to give you practical steps each month – action points that you can take immediately. Follow these steps over the course of the series and you will be set up for financial wellness.

Our fifth article focuses on managing your finances over the holiday period.

When it comes to holidays and spending most of us are in the same boat. We have that feeling that for the next two weeks we will close our eyes, enjoy ourselves regardless of the cost and sort it out in the New Year. We don’t want to think about budgeting, reigning in our spending or any of that whilst on holiday…sound familiar?

The big problem is the dreaded overspend we are faced with in January and how to get out of it. Some of us might take months to pay off our holiday spend and live in debt for longer than needed.

Instead of explaining the financial impact of overindulgence, I am going to suggest some tips to try out over the next month. It might not be the magical wand that keeps you debt free over the holidays, but could save you a lot of money.

Set up a daily budget

Give yourself a daily allowance for discretionary spend over the holidays and stick to it. At the end of each day, tally up what you’ve spent to check if you have kept within your budget. If you have overspent on one day you will need to exercise more self-control the following day. Budgeting takes self-discipline but it’s a great tool if you can manage it. Work out your daily budget before you go on holiday.

Avoid the “I will buy it there” mentality

It may be easier to shop for toiletries and groceries once you’ve arrived at your holiday destination rather than packing everything you will need. I totally understand that it’s convenient, but it’s also a waste of money. Buying a new bottle of shampoo, shower gel, spices for the braai etc. adds up. Most of us have these things in our pantry or bathrooms. Just pack what you will need and save yourself the unnecessary spend.

Use your credit card last

No one wants their holiday spending to ambush their monthly budget. To make sure this doesn’t happen, we put all our holiday expenses on our credit cards and feel great because all looks well according to our debit card balances. But this is misleading – and we forget to keep track of our credit card spend until we receive our statement at month end.

Try to pay all your holiday expenses as and when you incur them. At least limit the credit card spend by paying mostly with your debit card. Again, this will take self-discipline but could save your bacon in January.

Avoid the triple threat of eat outs

Close to my heart but oh so expensive – going to a restaurant for all three meals of the day. For me, and I am sure for many of us, food will be the item on your statement that shocks you the most in your post-holiday recon. Even though we love the convenience of eating out, we don’t need to do it three times a day. If you are one for dining out, limit yourself to eating out once a day. Eating out may add value to your holiday but be selective about where you eat and spread out your treats over your holiday. PS: Try local hang outs, they’re generally cheaper as well.

Christmas presents

At big family gatherings everyone needs a present. The bigger the family, the bigger the debt. There are many crafty ways to make gift-giving affordable. Pick a name out of a hat and everyone buys one present or be creative and give handmade presents. Celebrate the time together with family and enjoy the moments rather than filling your stockings with unwanted goods.

Evade the Sale

The big red banner that will pop up in most shops this festive season: SALE. It will be there before Christmas to lure you in and stay there afterwards to show you what you have missed. Ask yourself one question, “Do I really need to buy this item”? If you don’t need it there is no reason to buy it, even if it is marked down 50%.

None of us want to go on holiday and constantly think about money. We don’t want to stay home and miss out on fun activities either. Paying off your December bills in June is just as bad. By putting in place a holiday spending strategy, you will be able to enjoy your time off and avoid debt.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

How Much are You Willing to Pay for a Bottle of Wine?

-By Elke Zeki

 

For most of us there is something romantic about being a wine farmer. I find it amusing how the wine farmer always seems to get the most letters on the popular local dating show “Boer soek ‘n vrou”.  Yet earning a living as a wine farmer in South Africa has become hard. So much so that many industry experts believe it’s unsustainable. At the current rate many wine farms will not survive.

A recent video by DGB called “The Inconvenient Truth – South African wine industry”  revealed a few alarming statistics. It seems the current average return on investment for a wine producer is 1%.  It doesn’t take an investment guru to know that this is not enough for any business to survive. Many producers are replacing their vineyards with better-yielding fruits.

An alarming 35% of wine producers in South Africa are making a loss. They’re simply not getting enough for their grapes.  Johann Krige from Kanonkop says that on average wine producers get $1 200 a ton for their grapes compared to $10 000 a ton in the US.

 

 

For producers to charge more for grapes, the price per bottle needs to increase.  The report reckons a structural increase of at least 30% would be necessary.

The South African wine industry is a global leader in terms of traceability, compliance and sustainability.  Yet the world pays much less for a similarly rated South African wine compared to other regions.

 

Why is it that the world and South Africans are not willing to pay more for their favourite bottle of Cab Sav?

It all comes down to perception.  Even though our wine industry is old, the world has only been exposed to our wines since the early 90’s, when we became a democracy.  Since then, the world was flooded with cheap and cheerful South African wine. This created a perception that we are now struggling the shake off.

Yet we’re making some of the best wine in the world.  These winemakers can easily compete with the world’s best.  Recently, the acclaimed global wine critic Tim Atkin rated the 2015 Kanonkop Paul Sauer a perfect score of 100 points.  Kanonkop has also been the only winemaker to be crowned the international winemaker of the year three times. Yet we pay considerably less for a bottle of Kanonkop Paul Sauer than we do for similarly rated international wines.

Surely this is not sustainable. It’s a complicated issue with many moving parts.  We need to produce more and better-quality grapes. There needs to be support from government and a focus on tourism.  But most importantly, we need to start paying prices that South African winemakers deserve. So the next time you select your favourite bottle of wine, think about what you would be willing to pay for that bottle.
<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

Want to Make Drastic Changes to Your Financial Planning Strategy? Read this First.

-By Sunél Veldtman

 

In my three decades of working in investments, I have rarely seen investor confidence as low and pessimism reign as we are seeing now. The past three years have been grueling for South Africans. Not only has our own economy hovered in no-growth terrain for years, but global developments seem disturbing. I suspect that many of our readers are questioning their financial planning strategies. It feels like time for action. We have identified three critical questions for making drastic changes to your strategy and even your advisor.

 

Do you have a strategy or a plan?

Any investment should be part of a holistic financial plan for your future. It should never be considered on its own but as a tool to a goal in the plan. We know that financial plans rarely turn out exactly as we set it out, but a plan is better than no plan at all. People with no plans are rarely better off than people with plans. Our experience at Foundation Family Wealth shows us how planning can bring both relief and positivity to our clients.

Your cash flow should inform your financial plan. We believe strongly in this principle at Foundation. Your current and future income and obligations should form the basis of your investment decisions because it is the basis of your risk profile. For example, if you plan to build a house next year, you should have money in the bank to cover that cost.  If you plan to send your kids to overseas universities in five years’ time, then you should have overseas investments that can grow in line with that need. If your financial plan is not based on your current and future cash flows, you should review it.

Any well thought out investment portfolio will often include a poorly performing investment. You should not expect to have well performing assets in your portfolio. You should be concerned about such a portfolio.

A plan and a well-designed investment strategy should not be based on one view of the future. We love to think that we can predict the future. We also prefer to see the future through our own filtered lens of our past. It is how our brains work.

We also feel more comfortable if our friends confirm our views. It is precisely why money moves in crowds, at exactly the wrong time to the wrong assets. When the most recent returns on the local share market are at their lowest, money moves out of shares into safer assets, which often and sadly leads to wealth destruction. To benefit from the long-term gains available in risky assets like shares and property, you should avoid this behaviour at all cost. When everyone around you starts moving money around, review your plan. Your plan should have foreseen these circumstances.

Financial plans should include the very high probability of low short-term returns! You cannot expect any financial advisor to have the impossible ability to foresee exactly when low returns will occur, – but worthy financial advisors should have forewarned you that a well-diversified portfolio is likely to deliver low returns at some point.

Any financial plan that promises you high and steady returns is a fraud: that combination of returns does not exist. Low and steady, yes. High over the long-term, but up-and-down in the short term, yes. If your financial plan is based on ‘guaranteed’ high returns or even steady returns, you should review it.

 

Am I making this decision due to the most recent experience?

Over the past three years, you were fortunate if you received over 6% per year growth on your long-term investments. The local equity market barely beat inflation over this time. It is also likely that one element in your investment portfolio performed poorly, even lost you money, such as property which declined over the past three years. On the positive side, global investments performed well in Rand and USD. Headlines in South Africa hardly foster confidence in further investments in the country. You may be thinking of making changes such as moving all your retirement money offshore or to the money market.

It is very difficult to see right now that there is the possibility that local equity markets may recover and that we may look back in three years’ time to a reverse situation. It is very difficult to imagine a different outcome to our most recent past. This is human.

We think that the recent past will repeat itself. It seldom does. Statistically, the winners over the most recent past are more likely to be the losers in the near future. You

We also mistake certain ways of thinking as logical or given. For example, most people believe that there is a strong correlation between economic growth and investment returns. In fact, a recession does not necessarily mean low future returns – the inverse is more likely – a recession is more likely to be linked to high future returns.

If you are considering changes due to your most recent experience, think again. It may be exactly the wrong decision.

 

Am I making this change because I want to DO something?

When your car breaks down, you take it to a mechanic to get it fixed. They diagnose the problem and find a remedy.

It may be obvious when your car is broken. How will you know when your financial plan is broken? Perhaps you are experiencing normal volatility of any good financial plan. Upheaval is part of any plan.

However, the media ‘experts’ make out as though volatility needs to be fixed and can somehow be avoided.

The power of compounding over long time periods is necessary for investment success, which means that your investments should be left untouched. Warren Buffet’s key to success is not his investment selection skill, but his long-term view, which allowed his investments to benefit from compounding.

In addition, investment growth does not come in a straight line. Poorly performing investments can catch up astonishingly quickly. Just this year we experienced that a fund with a poor three-year return, gave 15% in six months, catching up quickly to the long-term expected growth. Just because an investment gave you slow growth over the most recent past, does not preclude fast growth in the future.

We like to act, especially when we’re experiencing pain. The pain of poor investment results is no different to physical pain. We just want to fix it. It also leads to us looking for advisors who will take decisive action based on strong directional views. It not only sounds more intelligent and convincing – but also makes us feel safe.

At Foundation we believe that no one can predict the future. We must plan for uncertainty. We take different potential scenarios into account and think about the impact of those scenarios on our clients’ holistic financial plans, considering all known risks to their plans. To some this may seem like indecision but to us and our long-standing clients, who have reaped the benefits, it’s the only way to build robust financial plans and secure our clients wealth.

To find out the difference between a financial planner and a wealth manager, click here.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Foreign Investment Allowances

Every South African resident over the age of 18 has a discretionary investment allowance of R1m per calendar year. In addition, you are allowed to take a further R10m offshore for foreign investment purposes – but you will need to apply and obtain a Tax Clearance Certificate.

As these foreign investment allowances are set per calendar year, you need to keep records of any amounts that you take offshore every year.  Unused portions of these allowances are not carried over to the next calendar year, and investors who are keen to make foreign investments may forfeit an opportunity to get more funds abroad if they don’t utilise their full allowance annually.

With the end of the year in sight, it may be a good time to get the administration in order for your tax clearance certificate – it remains valid for 12 months.  If you are considering taking monies offshore, we can help with the application process and the underlying investments. Foundation Family Wealth is highly experienced in taking funds abroad and we will ensure that process is easy and without hassle.

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

Should I Accrue Wealth with My Spouse?

-By Michelle le Roux

 

A few months ago we took a bird’s-eye view of the different marital regimes in South Africa (read the article here)This month we’re focusing on marriages outside of community of property, with the inclusion of the accrual system. This seems simple on paper, but can get technical and confusing.

 

Out of Community: The Two Basics

Being married outside of community of property is commonly referred to as being married with an “ANC” (ante-nuptial contract). While the provisions of the ANC can be as detailed as you want it to be, it usually means that spouses keep the assets that they acquired before the marriage separate. In addition, spouses do not have a claim on those assets at dissolution of the marriage through divorce or death.

From here on (after the wedding, that is) there are two options:

  • We share a home, but not a wallet. We continue to accumulate our own assets and keep our financial affairs separate. Our assets and liabilities are our own, equally so for profits and losses. At death the two estates remain separate.
  • We build wealth together. We make accrual applicable – we each keep assets accumulated individually before the wedding, but share in each other’s assets accumulated during our marriage.

Anyone who entered into an ANC after 1984 is automatically married with the accrual system, unless accrual is specifically excluded.

 

Commencement values

When a couple includes the accrual system, they have to take note of what their estates are worth at the start of the marriage. This is called the commencement value. Both parties have to agree to these values at the start otherwise it can become a point of contention at a later stage (if either party disputes the commencement value of the other). Take divorce as an example – where one or both parties make a case that the spouse’s commencement value was overstated or completely incorrect. The larger the commencement value, the smaller the accrual, and the possible claim.

What is excluded from the commencement value?

Not all the receipts of funds and assets during the marriage will necessarily be included in the accrual calculation. This list includes:

  • An inheritance received during the marriage from any third party;
  • Donations between spouses;
  • Payments for damages suffered by a spouse (e.g. lawsuits for slander);
  • Any asset specifically excluded from the accrual system under the ANC;
  • Future assets that you do not own yet, but this will have to be described in great detail.

 

Calculating the Accrual Claim

When the marriage is dissolved by death or divorce, the net value of each estate is determined. The larger estate then has to pay half the difference to the smaller estate. The simple format for the calculation is:

 

The commencement value in the ANC is first adjusted for inflation to make provision for any change in the value of money since inception of the marriage.

 

Accruals and Estate Planning

Regardless of the possible impact at divorce, the accrual system is also significant in estate planning. An accrual claim is always calculated and implemented before the bequests in a will are carried out.

If one spouse dies (or both simultaneously), the accrual will be calculated. This could play out in one of the following ways:

  • if the surviving spouse had the smaller gain, he/she will have a claim against the deceased’s estate, or,
  • if the surviving spouse had the bigger gain, he/she will be forced to make a payment into the deceased’s estate.

In the first case, the surviving spouse’s accrual claim will rank behind other creditors, but ahead of heirs. This could mean that heirs are unable to inherit if the estate is illiquid or insolvent.

It’s important that the ANC and the will speak to one another so that there are no unintended complications. If there are not enough liquid assets in an estate, it’s worth investigating the possibility of a life policy that will provide extra liquidity to meet an accrual claim at death.

 

To Accrue or Not…

There is no simple answer to this! It’s not a question of “what’s right?”, or “what’s better?”

Consider this:

 

Whether or not you choose to include the accrual system will depend on your relationship and your specific needs. This is something that you need to decide as equal partners.

 

Important Boxes to Tick Off

  • Do you have sufficient knowledge of the different marital regimes before you sign on the dotted line? Are you certain of the implications?
  • If you opt for the inclusion of accrual:
    • Agree and document the commencement values of your estates before the marriage;
    • Set up a system where you can keep accurate track of accruals, as it occurs. Keep supporting documents.
  • If you are already married with the inclusion of accrual, have you recently revised your estate planning to ensure that there is enough liquidity in your estate to meet the obligation of an accrual claim?

Foundation is able to assist with estate planning and accrual calculations. Contact us if you would like more information. Know the numbers and the possible shortfall while you can still plan and make provision for it.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

 

Topline Quarterly Review: Q3 of 2018

The third quarter of 2018 was a tough one for emerging market economies. Turkey led the way with the Lira weakening significantly. Argentina applied for a $50 billion bailout from the International Monetary Fund, and the tit-for-tat trade battle between the US and China didn’t help the cause. South Africa fell into a technical recession as economic growth contracted for the whole of 2018.

 

Economics & Politics: A match made in heaven?

Source: SA economic review presented by Kevin Lings (Stanlib)

 

In September, President Ramaphosa announced a stimulus package to ignite growth and create jobs. Much of this had to do with restructuring government spending – however there was the announcement of an Infrastructure Fund that speaks to the two graphs above.

Over the last eight years infrastructure and fixed investment from Stated Owned Entities was non-existent. On the other side you have corporate South Africa hoarding billions of Rand’s in cash.

President Ramaphosa invited the private sector to partner with government to invest in infrastructure expansion and maintenance, which could lead to job creation and potentially be a catalyst for economic expansion. The newly appointed Infrastructure Execution Team will need to ensure projects are finished timeously as this has been a problem with similar partnerships in the past.

Smaller changes such as changing visa requirements for minors and certain countries could also lead to a boost in the tourism sector. The inflow of investments could lead to job creation on various fronts, which we drastically need.

 

Naspers falls from grace

Source: PortfolioMetrix

 

Naspers is the biggest company on the JSE making up more than 18% of the All Share index. Naspers’s major holding is a Chinese tech stock – the biggest social media and games publisher in China called Tencent. Tencent was rocked by a sell-off in tech stocks globally, but more importantly, the Chinese government has not issued a gaming license since March of this year. This creates uncertainty on the future potential for growth and the share price has tumbled since.

Given the size of Naspers in the All Share Index – this has serious ramifications for our local markets (as can be seen by the swings in the grey line above). At the time of writing this article, Naspers is down 11% for the year up to the end of September and down 21% for the year. Active fund managers are unlikely or even limited by regulation to assign such a big weighting to one stock – but it’s still worth noting that no company or sector is too big for a correction.

 

Technical Recession: What Now?

Source: StatsSA

 

In September, South African Gross Domestic Product (GDP) growth was in the red for a second consecutive quarter, which means that we are now in a technical recession for the first time since the financial crisis in 2009. With unemployment over 25% since 2016 and business confidence at very low levels, this comes as no surprise.

Agriculture was the main detractor down 29% from the previous quarter. Mining made a healthy contribution towards growth as commodity prices recovered. But what do we do to get out of this? The investor conference at the end of the month could provide some answers. The conference is part of President Ramaphosa’s drive to get $100 billion in new investment into our country. Some analysts predict that we might exit the recession as soon as the third quarter, which would mean that we see growth above 0%. The growth targets have been revised from 1.5% to 0.6% for the year so analysts are not expecting a massive turnaround.

 

Turkey: Is South Africa next?

Source: SA economic review presented by Kevin Lings (Stanlib)

 

Contrary to South Africa, Turkey reported second quarter GDP growth north of 7% in 2018. This was, however fueled by foreign-currency debt racked up by the corporate sector. As the economy was overheating, inflation jumped above the central bank’s target all the way to 16%. President Erdogan did not allow the central bank to raise interest rates to combat inflation. This led to the Lira weakening by 40% which means the foreign debt got a lot more expensive in a matter of weeks.

The single biggest difference between South Africa and Turkey is our corporate debt levels compared to GDP. As per the graph, SA Corporate Debt to GDP sits just under 40% where Turkey’s is well over 50%. Secondly, we still have an independent Reserve Bank that has managed to keep inflation well within the inflation band of 3-6% and has the flexibility to hike interest rates when needed.

Even though Turkeys situation has negatively affected the Rand and all emerging market economies, it is highly unlikely that we will see a similar situation locally. The situation in Turkey brings with it uncertainty which in turn contributed to the selloff that we have seen in recent months.

 

In Summary

Source: PortfolioMetrix

 

Locally, resources led the way over the quarter, continuing its stellar performance up 21% in 2018. However, equities in total declined by nearly 4% over the quarter. Cash was the best performing asset class (+ 1.7%) for the quarter. The Rand lost ground to the dollar due to the emerging market selloff. The US also raised their interest rates for the third time this year and suggested a possible four hikes to come, which could lead to further dollar strength.

Global equities had a good quarter, ending up 4.3%. America led the way with the S&P 500 up more than 7% this quarter bringing the total return to 10% in 2018. Japan’s Nikkei index reached a 27-year high on renewed optimism for earnings growth and a weaker Yen.

With global markets running hot, emerging markets out of favour and South Africa still sorting out its own house – it may seem hopeless. We have rarely seen a more pessimistic environment. The reality is that we’re all hoping for a quick fix to an eight-year mistake. This process of dismantling the Zuma-era-damage will take longer than anticipated, but if we look closer we are certainly on a better path compared to a year ago. Furthermore, Rand weakness is not necessarily bad for investor returns – a large portion of the local market is exposed to global currencies. Goldman Sachs called South Africa “the big emerging market story of 2018”.  They may have been out by a year.

There is not much correlation between current economic conditions and future investment returns. At times of pessimism, remaining calm and invested in growth assets, is key. In the wake of this, we leave you with a final quote by Benjamin Graham, also known as the father of value investing: “The intelligent investor is a realist who sells to optimists and buys from pessimists.”

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

The biggest financial risks in retirement

-By Elke Zeki

 

Planning for retirement can be challenging as there are many unknowns and uncertainties that you need to consider. There are a few financial risks that can have a significant impact on your capital and your ability to draw income comfortably for the rest of your life.

What are these risks and how do we deal with these challenges?

Not saving enough

This is the biggest risk you face.  A recent Sanlam Survey (find the link here) shows that most South Africans don’t save enough money for retirement.  The average savings rate is 7% versus the suggested minimum savings of 15%.  The result is that retirees expect market returns to make up for the shortfall. Market returns are unpredictable, and this is an unreasonable expectation.

What can you do?

  • If you are young or have young children – encourage an early start.
  • Postpone retirement.

Assuming no further savings, a balanced portfolio and 6% drawdown, the example below shows the impact on our client’s capital if he postpones retirement by five years.  The impact is significant! Instead of the capital declining over time, it’s possible to protect and even grow the capital.

 

  • Earn some income.

Assuming no further savings and a balanced portfolio, the example below shows the impact on our client’s capital if he draws less than 6% for the first five years.  He supplements his income through consultation or part time work.  Again, the impact is significant!

  • Reduce drawdown.

The example below shows the impact on our client’s capital if he reduces his income drawdowns from 6% to 5.4% per annum.  It’s possible to extend the lifetime of your capital significantly.

 

Investing too conservatively

We often see retirees de-risking investments at retirement to preserve their hard-earned savings.  Without growth assets to track inflation, you will erode capital quickly!

What can you do?

The example below illustrates how you can extend the lifetime of your capital by increasing the overall risk of the investment portfolio.  Diversification between asset classes locally and globally is important to achieve your long-term goals

Sequence risk

This is a risk not often spoken about or recognized by retirees, however it can have a substantial impact on your retirement.  When we calculate what income you can draw in retirement, we have to assume what returns you will get from your investments going forward.  We assume an average return each year (illustrated by the blue bars below).  However, returns are volatile and don’t come in a straight line (illustrated by the orange bars).

More importantly, the ORDER in which you get these returns will impact the overall capital.  Over the long term you may look back and see the average investment returns were in line with expectations BUT two different scenarios can have two different outcomes.

  • Scenario A: First five years you experience returns higher than the average. In this scenario you may extend the lifetime of your capital;
  • Scenario B: First five years you experience returns lower than the average. In this scenario you may reduce the lifetime of your capital.

What can you do?

The only way to deal with sequence risk is to adjust your income withdrawals through extended periods of low returns. You need to be flexible around your income. Therefore, distinguish between your needs, wants and wishes.

 

Poor advice and portfolio construction

We believe that the role of a financial advisor in identifying and mitigating these risks is crucial. Studies by Morningstar and Vanguard show that good advisors can add as much as 2-3% to returns per annum.  These are some of the areas where significant value is added:

  • Behavioural coaching: Set long-term strategic goals and help clients stay invested through market fluctuations;
  • Tax efficient withdrawals and liquidity: Managing withdrawals from voluntary and compulsory investments efficiently;
  • Dynamic withdrawal management: Income flexibility and budget guidance through periods of low returns;
  • Efficient portfolio construction: Good portfolio construction is critical to achieve expected returns. Sophisticated asset allocation and fund manager selection is not easy and a skill worth paying for. To illustrate this, we share annualized five-year performance:
    • The average return of all medium equity unit trust funds in South Africa: 7.4%
    • Our client medium equity portfolios: 10.7%

It can be difficult to know how to counter these risks but we’ve shown you that it is possible once you have awareness of these risks. At Foundation, we believe that sound advice and working together before and after your retirement around withdrawal strategy and portfolio construction, can help our clients navigate these risks.

 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Treasury withdraws punitive unit trust tax proposal

Treasury recently published a draft Taxation Laws Amendment Bill, suggesting changes to the income tax treatment of disposal of assets within a collective investment scheme (CIS) or unit trust fund.

We gave an initial update on this last month, read the article here.

Subsequently, industry players were asked to make comments and in the draft response to the bill on 12 September 2018 the proposed amendments were put aside.

The main concerns were as follows:

  • Withdrawals by large unit holders can have a negative tax impact on other unit holders as well as the fund due to the tax liability created within the fund.
  • The suggested 12-month rule will hamper efficient portfolio management as all transactions such as unit holder withdrawals, rebalancing and index tracking falls within the scope of proposed changes.
  • An actuarial study is underway to do a quantitative impact assessment which cannot be completed within the submission deadline.

Treasury partially accepted the submissions and the bill has been withdrawn. Government and industry has been given more time to find a solution that may have less negative impact on unit holders. These amendments will be considered in the 2019 legislative cycle.

 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

The Glass Half-Empty Syndrome?

-By Elke Zeki

 

I’ve been on maternity leave for the past three months, having given birth to my second child in April. This is a beautiful and crazy time for any family.  Going from one child to two has been a huge adjustment for us.  Maternity leave is hardly ever relaxing, but this time it’s been especially manic trying to balance the ever-changing needs of a newborn and a toddler. Hence, I stepped away from the “real world” for a while, not even reading news headlines for days at a time.

Now, back at work I’m somewhat perplexed at the environment I find myself in.  It feels like I’ve come back into a different world.  It seems the ‘Ramaphoria’ has rapidly been replaced with disillusion and runaway pessimism and I’m baffled as to how this could change so quickly and so dramatically.  I’m confused by Ramaphosa’s approach to the land reform saga and wonder if the EFF-type narrative will really pay off for the ANC in next year’s election.  Why is the tail wagging the dog? Ramaphosa is actively participating in raising unrealistic expectations, and the media is magnifying this by focusing on a few populist and extremist views.

Add to this an already struggling economy, policy uncertainty, volatile currency and high oil price and we have a recipe for disaster.

South Africans are already not very good at seeing the glass half full!  I read the results of a survey, titled The Perils of Perception, that concluded South Africans tend to be the most overly pessimistic society in the world. South Africans are, on average, most likely to think things are worse than they actually are.  This was based on a number of questions including whether participants thought murder rates had increased or decreased over time.

 

Source: World Economic Forum

 

So, how do we stay positive amongst all the negativity and uncertainty?

I’m not an expert at these things, but for me, there are a few key points that will help us navigate this landscape:

  1. We have complex issues, and our history has left us with far reaching social issues and economic inequality.  This has been compounded by years of corruption and maladministration.  This is not something Ramaphosa and his team can fix in a few months.  Many of these structural issues (such as poor education and high unemployment) will take years to address.  We need to adjust our expectations.
  2. We are not alone. The world is an uncertain place. There are many external factors from Turkey to Trump that affect our economy, and which we have no control over.
  3. Make decisions, especially financial decisions that give you options amongst uncertainty and unpredictability.  One of the best and easiest ways to do this is to diversify your investments globally. South Africa only makes up 0,4% of the global economy.  True optionality is financial independence in global terms.  You need to make sure your investments have a large global allocation.

 

Source: Stanlib

 

We should refrain from getting too negative.  This can become a self-fulfilling prophecy.  South Africa is not like Zimbabwe.  We have an active civil society, free media and a world-class judiciary. I understand that there are risks and policy uncertainty is dampening economic growth, but it’s unlikely that growth will come from government.  The biggest catalyst will be private and foreign investment spend (the graph below shows all time high corporate deposits).

 

Source: Stanlib

 

Businesses are sitting on this much cash, instead of investing, due to negative sentiment and low confidence.  A change in sentiment could have a significant impact on our economy.  We can only hope that the new leadership understands how powerfully their messaging impacts the sentiment and our view of South Africa and the world.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>