Sunél’s Blog | What is it worth to you?

As an adviser, I am frequently asked about the investment merits of lifestyle assets such as holiday homes, art, yachts or vintage cars. In South Africa, holiday homes are popular and a signal for some, of status and wealth.

I married into a family with a holiday cottage at the coast and have been going there for thirty years. That cottage contains special memories of firsts and lasts, Christmases with long tables, mix-and-match chairs and mismatched people. It is a symbol of my in-law’s generosity.   They began a culture where there was always room for more at the table – more people, more food and more laughter. It was always joyous and informal and over the years we have spent many happy weeks there.

What is the house worth to us?

This is the issue with sentimental assets. The theoretical worth of an investment asset is the present value of the future income or potential income and the final value at disposal.

We could turn it into a rental property, but it is the home of our treasured memories, a sacred space just for us. Which means it doesn’t generate income. In fact, it costs us. It is entirely our choice, but it makes our lives easier and it means that it feels like home. It is where we gather our dispersed lives together, as an extended family.

Will we sell it even if we’re offered a ridiculous price? And what will it take to let our family part with that cottage?

The same is true of other lifestyle assets. Typically, if you are attached to it, it is not an investment asset.

It buys memories. Not future returns.

Kind regards,

Sunél

//30 August 2019

Sunél’s Blog | 55%

That’s the ratio of people living below the national poverty line of R992 per month in South Africa. That’s 30-million people.

I knew that it was bad. But that number hit me between the eyes again.

These are the homeless and the unemployed. It excludes our domestic Mercy who worked 6 days a week at the local coffeeshop and fed 5 family members on R1 500 per month, which was what she had left over after paying the rent. It excludes people with proper jobs in the formal economy where the minimum monthly wage is now R3 500.

We can blame the government. We can emigrate. But it doesn’t take away from the fact that 30-million people go to bed hungry every day in South Africa, and most people go hungry for some part of the month.

We can never get away from that fact.

Unless we do something about it.

Kind regards,
Sunél

//23 August 2019.

Disruption – opportunity and threat

-By Sunél Veldtman

In May this year I had the privilege of attending the 72nd CFA Institute Annual conference in London. The CFA institute is a global association of investment professionals with the Chartered Financial Analyst designation. I was particularly interested in the theme of the conference, Disruption. Not only is the world facing an economic slow-down, but we are also caught in a convergence of disruption – greater even than that of the Industrial Revolution.   It is the intersection of climate change, alternative intelligence, the explosion of data, tectonic geo-political shifts and demographic change.  All factors that simultaneously create uncertainty and opportunity – and within each lie a myriad of potential pitfalls.  All of which affect our daily lives.

I recall my impressions and some related thoughts in this article.  

Geo-political alignment

Geopolitical strategist, Peter Ziehan, explains that the stability following World War II was maintained through a trade-off between the US and its allies. The US ceded economic benefits to other countries in exchange for their participation in a global defence network. Now however, foreign relations are driven by self-interest and the old global order no longer serves the US interests – which economically,  Zeihan says, it was never supposed to. Zeihan points out that the current landscape, where countries have spent decades building interconnected economies featuring global trade networks, is coming to an end. This is being played out notably in the US and UK.

Historically, the US has spent decades building a military force with no emphasis on trade. Now however, the Trump administration is no longer giving away military protection for free. For the first time the US is looking after its own interests, looking inward, and already this has had a dampening impact on global growth. In addition, there is no clear strategy to this new vision, which is disruptive in itself. Trump’s pronouncements are made in a haphazard fashion, sometimes in early morning tweets, and often contradict earlier strategy. On the other side of the ocean, the United Kingdom is preparing for a hard exit from the European Union. Zeihan maintains that: ‘This combination of factors is bad news for the United Kingdom. There is no version of Brexit that will lead anywhere other than a hard divorce.’ He expects that the United Kingdom will ultimately lose its ability to negotiate from a position of strength with anyone outside of Europe. He also asserts that the United Kingdom will lose its status as a global financial hub and that it is likely that half of those deals will go to the United States.

In the months to come, we can expect a continued unravelling of the global order, with the United States becoming the biggest disrupter.

You can watch the full video here.

Climate change

Whilst in London, I read an article on how the impact of climate change could potentially signal human extinction. It really grabbed my attention!

Climate change will disrupt humanity on every level and in every sphere. It will cause increasingly volatile weather patterns – with an increase in droughts, fires, floods, earthquakes or tsunamis – all of which will impact anything from food production to insurance premiums.

For example, should temperatures rise to levels predicted by researchers (now an accepted ‘fact’ per the Paris Accord), the production of corn in the US could fall by as much as 20%.  Bearing in mind that the US is the world’s top food exporter and that world demand for food is expected to increase by 60% by 2050, the impact of climate change is significant.

Whilst not the only factor, the primary cause of climate change is the rising level of carbon dioxide.  This has an effect, amongst other things, on crop nutrients and human health according to the International Food Policy Research Institute.

My teenage daughters highlighted climate change for me when they started changing their consumption habits, specifically of plastics and harmful materials. My eldest has cut plastic from her life, including her beauty routine! My youngest stood in the kitchen at breakfast and announced that she was no longer eating Nutella because of the harmful impact that palm oil farming has on the environment.

They are part of the Gen Z generation – the first generation of true digital natives.  Mckinsey’s 2018 study on Gen Z, identified their four core behaviours which are all anchored in one element – the search for truth. In other words, they are cause-driven and they will be the generation that pick up the pieces after earlier generations have mindlessly consumed their way through the environment.

It is only when our consumption patterns change, i.e. that we stop our insensible consumption, that we may see a positive impact on global growth. But the patterns of consumption need to go beyond the individual.

The conference panels highlighted the need for increased intervention by both governments and the investment community.  Investment policies need to promote environmentally friendly investments and simultaneously invest in new technologies and companies battling climate change.

Unfortunately, governments have been slow to act: some still deny climate change and some are too busy with geo-political battles to focus on what the Global Risk Report pegs as the ‘greatest risk to our world’

The response of young people, to both the squandering of natural resources  and government’s lack of response to the crises, is increasing anger.  This in turn will force political change as they become involved in politics as an agent of change.  Which is in itself yet another disruptive factor.  

Capitalism under threat

Anne Richards, CEO of Fidelity International, examined three main factors threatening the capitalist system:

  1. The unequal distribution of income
  2. Demographic changes and again,
  3. Climate change.

Young people have suffered the most from the credit crises fallout. They are disillusioned with the system. The association with capitalism across the board is no longer positive.

Wealth is now more unequally distributed in the US than before the French Revolution, which led to the literal rolling of heads. The top 3% of wealth owners now have as much wealth accumulated as everyone else in the system combined.

When there is an impression that the system which created this unfair distribution is itself unfair, the public will increasingly turn against the system.  This is already evident in the rise of nationalism and populism around the world.

On climate change, Richards pointed out that the window of opportunity for the finance sector to direct flow towards climate-friendly investments, on their own terms, is closing. The finance sector has not done enough to stem the impact of climate change. The finance sector runs the risk that changes will be made for the finance sector, in the form of legislation, which may not necessarily be in the interest of the ultimate asset owners like pension fund members.

Ultimately, if people think that the future of the system is not in their favour, they will abandon it. Joseph Chamberlain, a British politician and social reformer in the late 1800’s, said: ‘What ransom will property pay for the security it enjoys?’ This means that the wealthy will increasingly pay for the security of their position. This ‘payment’ can take the form of punitive taxes and increasing legislation to direct the wealth towards the poor, or a changing of the guard in global leadership.

Demographics

I took away three demographic trends which are already causing disruption:

Globally the world is ageing due to longevity and the decline in the birth rate of most countries. It means that there are not enough productive, young people to sustain the systems built when population growth was taken as a given – such as social security or pension systems.

Regions with low population growth or declining populations need young and productive people to boost their workforce – and most of these people will come from poor regions such as Africa or war-torn places like Syria.

In addition, the existence of better economic opportunities and the perceived safety of certain countries will continue to convince immigrants to reach countries like the US and the UK. The immigration problems of these nations are unlikely to go away soon.

Population growth typically still exists in emerging economies with most growth in poor countries, i.e. Africa, India and South America. Population growth, if converted into production growth has every potential to provide economic growth, opportunities in these countries.

The rise of big data causes dilemmas for ethics and governments

Data is the new currency, according to Professor Viktor Mayer-Schonberger. It is the owners of data who have the power and who have benefitted from an ever-increasing share of the profit – above that of capital owners or labour. It’s the likes of Facebook, Google and Amazon who have obtained an early advantage by collecting data.

The concentration of the world’s data in the hands of a few companies and in the absence of regulation poses enormous ethical issues – as seen in Netflix’s searing documentary The Great Hack. The influence of data manipulation in elections and the barriers to competition with smaller companies have already become a major concern. Traditional policy measures such as competition regulation appear outdated to deal with these challenges.

The rise of artificial intelligence poses problems

Artificial intelligence poses threats for any job defined by the routine application of human intelligence. Just as automated machinery and robots replaced routine manual jobs, artificial intelligence will now replace higher-order intelligence jobs such as evaluations or diagnoses.  This threatens jobs, for example, in the medical and accounting profession.

Governments and society have not responded to the potential threats of millions of higher-order job losses in any meaningful way.

Conclusion:

Most of these disruptive forces challenge conventional wisdom and existing government policies. They have already challenged our understanding of cause-and-effect in economics and politics. We can no longer rely on experience for future guidance as we did in the past. These forces bring extraordinary uncertainty to our daily lives and pose real threats to our wealth and even existence.

However, the biggest mistake we can make is to anticipate no response from humans, society or governments. It is worth remembering that humans have had to make remarkable recoveries in the past, and challenging times have often led to great innovation and growth. WWII for example, was a time when innovation in communication and technology sped up and became the drivers of further innovation after the war. University London College professor Mariana Mazzucato, who also happens to be the founder/director of the Institute for Innovation and Public Purpose (IIPP), observed that past great innovations, such as smart phones or green energy technology, were developed off the back of large-scale government-led research.  She maintains that collaboration between the public and private sector is key for determining the success of our future.

We highlight our recommendations on appropriate responses to these disruptive forces in separate articles: “How do we protect our wellbeing in disruption?” and “How do we react to disruption with our money?“.

In closing, I summarise what our response should be, based on the advice given by Mohammed A. El-Erian, chief economic advisor of Allianz:

  • Cultivate intellectual curiosity and open mindedness.
  • Understand that some basic structural relationships have changed.  
  • Explore behavioural biases at a time when behavioural traps have increased: be it the challenges of blind spots, unconscious biases, asymmetrical framing, and active inertia.
  • Most of all, have a relentless focus on resilience, agility and optionality.

<Foundation Family Wealth is an Authorised Financial Services Provider>

How do we react to disruption with our money?

-By Sunél Veldtman

Humans do not like uncertainty, and change inherently carries varying degrees of it.  The rate and pace of change – and hence uncertainty – in our world today is unprecedented.  It is quite literally staggering.  And our brains have not evolved, past our first instincts, to deal with it.  When faced with the potential changes forced on us by climate change, artificial intelligence or the demise of political alliances our first, and very human, reaction is anxiety.

Some of these changes hold very real threats to our wealth and wellbeing. We could lose our jobs to human-like computers. We may have to endure long droughts or food shortages as a result of climate change. We may face WW3, a version of warfare quite unlike anything we have seen before.

So, what can we do? How do we respond to change rather than react to it? How do we protect our well-being?  Just like ancient towns needed walls with drawbridges and castles had moats filled with water to protect the inhabitants against the onslaught of their enemies, we need to create a modern version of a moat around our wealth and well-being. 

Here’s how you can protect your financial capital:

  1. Build a liquidity moat. This is a time to live within your means and use your capital sparingly so that you can have a liquidity safety net. No one can forecast how the forces at work will play out. We’re dealing with uncertainties we have never dealt with in our lifetime and careers. You may need cash in your bank account or assets that you can convert to cash in a short time due to unforeseen circumstances. This is always a good idea but even more so in these times.
  2. Diversify your asset base. Spread your investments across different geographies and types of assets. What worked in the last fifty years may not work in the next decade. It’s as dangerous to extrapolate recent trends, as it is to forecast future trends in investment returns. It is therefore important to have diversification. This is particularly important for families who have concentrated portfolios in property or their area of expertise. Current conditions may present opportunities but if it leads to more concentration in your portfolio, beware. Concentrated portfolios of assets you cannot convert into cash is dangerous at this time.
  3. Focus on what you can control. We cannot control the decisions of world leaders. We cannot control the weather. We cannot control the gyrations of financial markets. More information and attempts at understanding will not necessarily lead to better outcomes for your money. In fact, the opposite might be true. However, we can exercise control over our income and spending – two acts which are the biggest determinants of how successful a financial plan is. We can control our decisions about our investments, such as how much risk we take. We can control how much and what news we consume. Focusing on controlling these personal choices is of more benefit than focusing on aspects out of our control.
  4. Review your financial plan for the likelihood of success in adverse conditions. Many South African retirees have already tasted the product of five years of low returns (as an aside, we do not believe that this will necessarily continue). Financial plans that did not take adverse conditions into account did not serve those people well. Get peace of mind about your plan. Look at various scenarios and know how you can react to adverse conditions to protect your capital. For example, by taking income adjustments in line with the returns on the portfolio – which means that in good times you can draw more and in bad times less – you can significantly improve the longevity of your capital.
  5. Protect your wellbeing. If you don’t it may cost you loss of income and/or an increase in medical bills. Protecting your wellbeing involves creating a moat of habits around you and your family. Simple habits like exercise, making time for eating around the dinner table, limiting screen time, sleep and spending time in nature can protect you and your family from the impact of stress and anxiety. Read more about this in a separate article in our newsletter.

At Foundation Family Wealth we are committed to helping our clients protect their capital so that it lasts a lifetime – but also for that capital to be used for a meaningful life, whatever that means for them. In our regular reviews with clients we address all these issues. Considering this information, if you’d like a review or a conversation to see how we can help you, contact us.

<Foundation Family Wealth is an Authorised Financial Services Provider>

How do we protect our wellbeing in disruption?

By Sunél Veldtman

 How do we protect our human capital?

 ‘The first wealth is health,’ is a popular quote by Ralph Waldo Emerson. Whilst we are working, we need health in order to earn so that we can build capital. We are converting human capital into financial capital. Without health, it is difficult to build capital. But health is also important when we are no longer earning but drawing from our capital. The healthy retiree protects their capital from hefty medical bills.

Health includes all aspects – mental, physical and spiritual – necessary for wellbeing. There is an increasing body of science available to help us understand how we can protect and maintain our wellbeing from the impact of stress and anxiety. It means that we must learn what stress and anxiety involves and understand what new skills and habits are necessary to protect our wellbeing. We need to be active participants in protecting our wellbeing. 

At this year’s annual CFA Institute conference, a surprising number of speakers came from the field of neuroscience. There is a growing realisation that people, particularly those in stressful industries like the financial industry, need help in understanding and dealing with stress. I highlight the best advice from these speakers:

Dr. Laurie Santos, a professor of psychology and cognitive science at Yale University, offers the most popular class in the history of the establishment.  She developed the class after research showed they had a mental health crisis on their campus. Her advice is simple:

  1. Your mind lies to you about what will make you happy. More money does not necessarily lead to happiness. There is a negative correlation between seeking material goods and happiness.
  2. We need to spend time with people we love.
  3. Make time for gratitude every day: it has real and quick benefits to wellbeing. Brené Brown says that gratitude separates privilege from entitlement.
  4. Helping others makes us happier than we expect.  For example, spending money on others makes us happier than spending money on ourselves.
  5. Being in the present moment is the happiest way to be. Mindfulness has real benefits for happiness. Meditation or prayer and paying attention to your senses all increase wellbeing.
  6. Healthy practices equal happy people. We all know that we need to exercise, sleep and eat well but we don’t practice it. One of the main contributors to mental health issues in young people is the lack of sleep.
  7. Become wealthy in time, not money. Time affluence is the new wealth. There is evidence that the more you link your time to money, the unhappier you become.

You can watch the full presentation and/or an interview with Dr Santos here.

Acclaimed British scientist, Dr Susan Greenfield, explained how our addiction to screens has a profound impact on our brains. Screen addiction is real. The feel-good injection we receive from social media is as addictive as drugs and alcohol. It changes how we connect to people, our identities, and can eventually impact our focus and functioning. Screen overdose can reduce the functionality of adults to the level of a child – we can literally regress to childlike behavior such as having a lack of critical and creative thinking or understanding risk. Her suggestions for combatting screen addiction surprises with its simplicity:

  1. Exercise.  It helps to restore neural pathways and create new pathways.
  2. Do activities that include sequencing like baking, playing music, gardening and reading stories.  They enhance our attention span, creativity and provide meaning.
  3. Interact with nature.  It restores our brains.
  4. Engage in authentic social interactions.  It helps reduce anxiety.

Dr Greenfield’s work is available on www.susangreenfield.com.

More helpful advice about combatting the deluge of data came from Professor Daniel Leviton.  In his talk, based on his book The Organised Mind, Leviton pointed out that the we are overwhelmed by the amount of data we consume, how and when we digest the data and how much more we are expected to work through and do. For example, think about travelling. Years ago, we contacted a travel agent to book a trip and we then went on the trip. Now we book the flights, do the research on Air B&B and TripAdvisor and design the trip of our choice. We do it. Ourselves. This kind of shadow work increases our brain load significantly.

We try to multi-task, but the brain cannot multi-task. Task switching comes at a cost. It wears us out, shuts down rational thinking, increases stress hormones and can eventually lead to burnout.

Professor Levitin, a professor in psychology and behavioral neuroscience offers the following advice:

  1. Block out hours for productive work like reading, writing or research.
  2. Limit reading e-mails and social e-mails to pre-determined periods.
  3. Take frequent breaks and allow your mind to wander a few minutes every few hours.
  4. Partition your sources of communication e.g. separate your personal and private e-mails.
  5. Write down what’s on your mind so that your brain is not busy with it. It frees the brain to think.
  6. Do the small tasks quickly – if it takes less than 2 minutes, just do it.
  7. Exercise (there it is again), preferably in nature.

You can watch an interview with Professor Levitin here.

Scientists agree: protecting our human capital or health is relatively simple. It just requires awareness and healthy habits.

<Foundation Family Wealth is an Authorised Financial Services Provider>

Thoughts create reality

Where I grew up in the Karoo everything was scarce. Water was always scarce. If the wind didn’t blow, we couldn’t even get water from the boreholes. I learnt to bath in a few centimetres of water only when the water tank was full. I learnt to keep the dishwater standing just in case you wanted to rinse something later. When the rains came, the meat prices dropped. It is a place, of which the Afrikaners say, “Die ellende blom altyd daar.” (Tragedy flowers there.)

I developed a scarcity mentality – a filter through which I viewed the world. That filter coloured all money related information in the colour of worry. It didn’t serve me well. It really held me back when I started my own business. It was at this point that I realised I needed a better, more realistic lens. A lens that would help me grow the business with a long-term vision.  A lens that would help me make the necessary investments in my business without fear of sudden disaster.

My mentality was like a seed that had grown into a tree and borne fruit in my life. Yet, it was a fruit that was shrivelled up, pathetic, grown from drought and despair. It had no relation to my reality – a successful career and flourishing start-up. It had to go. I had to chop the tree down.

It was just recently that I started paying attention to research about the impact of thought patterns on our brains. Recurring thought patterns grow tree-like structures in our brains. The longer these patterns continue, the stronger and bigger the trees become. However, they are not permanent structures. When we change our thought patterns, the old structures dwindle as they are starved, and new structures are then formed. It’s called neuroplasticity.  

We all have patterns of thinking, paths our thoughts easily dwell on. We also all have a choice about those patterns – we can make a conscious decision to examine them, bring them to light, see how they serve us and change them if they don’t. If we allow ourselves to dwell on negative and unhelpful thoughts, we literally create that reality in our lives. It can show up in our health, our relationships, work and social lives. However, if we stop destructive thoughts, we create a positive environment in both our internal and external environment. Clearly not all bad stuff happens because of negative thoughts, but we may just miss out on a lot of good stuff because of our negative thinking.

We can change our reality by changing our thinking.



Kind regards,

Sunél

//16 August 2019.









Measure it

In my first blog I mentioned that the contact point between money and life typically carries a lot of emotion.  Often fear-based, the most abiding of which is anxiety.  

Anxiety is that feeling of nervousness or unease about something with an uncertain outcome; or a strong desire to do something or for something to happen, according to the dictionary. It is also defined as a mental illness of which 1 in 4 people suffer worldwide (WHO World Health Report).  I see anxiety frequently across the table in my workshops or my meeting rooms. It is a familiar feeling for most people regarding their money. It raises its head everywhere, regardless of social status or financial means. It is pervasive. An ever-growing monster.

I had been pondering writing about anxiety when a blog from James Clear hit my inbox.  He writes about habits. I’ve been following him for a while and have found his writing useful.

In this particular blog, The Evolution of Anxiety: Why We Worry and What to Do About It he unpacks the source of anxiety in modern society. In short, he explains that our anxiety can be linked to our brain development, which lags our evolution. Said another way, our brains are still functioning like cave-men brains. This means that we perceive all threats to our existence as imminent, whether or not they actually are.  We are simply not able to distinguish between imminent and distant threats. So, a lion lurking in the grass is as much of an imminent threat as the risk of running out of money for retirement in 20 years’ time.  The result is a vague, yet very real feeling of unease. All. The. Time.

That is, unless we choose to do something about it. Clear recommends breaking your issues down into small measurable steps. For example, if your retirement causes you anxiety, you can break it down into how much you need to save every month to ensure a comfortable retirement. When anxiety raises its head, you can tell it that you have it under control. Instead of focusing on a distant threat, which creates continuous nervous energy because your brain processes it as imminent, you can focus on your monthly retirement contribution.

I can confirm that this works. I have repeatedly seen how the angst literally dissolves away from clients when we show them the concrete steps they can take to make a comfortable retirement a possibility or better yet, that their retirement capital is already enough. By focusing on what they can control, instead of a distant disaster, they can control their anxiety.

In my own life, it has worked. When I broke my monthly budget down into a weekly spending limit, it reduced my own anxiety over our monthly budget. When I signed that debit order for my retirement fund deduction, I started to feel safer about our money.

Breaking down and tracking your goals into small, measurable units which are under your control, will help you too.

Regards,

Sunél

//08 August 2019

<Foundation Family Wealth is an Authorised Financial Services Provider>

The world is a good place right now

Last year when I mentioned in a speech that the world has never had it so good, people asked me afterwards whether I was trying to be funny. I don’t do funny well. My family are forever telling me that I should lighten up.

The thing is, compared to the rest of history – the average human being is better off than ever before. A recent article in the FT reminded me of this. We also recently wrote a similar story in our newsletter, Why so blue?’

However, a quick scan on Twitter or social media does not present this view.  Instead our current story of civilisation and humanity looks bleak. It feels like we’re living in difficult times.

So, what then are the actual facts? The FT article highlights a few:

Only 1 in 10 lived in extreme poverty in 2015.  This is down from more than 1 in 3 in 1990 according to the World Bank.

Fewer than 90 000 people died worldwide in organised conflicts in 2017, according to Uppsala Data Group. That’s down from a peak in 2014 and significantly lower than the 1946-1950 period (as a percentage of the population).

The world is a freer place – especially for previously disadvantaged groups like women, people of colour, LGBTQI and disabled people.

In South Africa we face daily reminders of our unique problems and the need for progress.  Mix those reminders in with our current political climate and it’s easy to feel overwhelmed by negativity.  Yet most South Africans have never had it better.  We have made huge progress in tackling poverty and the marginalisation of previously excluded groups under the Apartheid era.

Yes, the needs that are being met are often very simple, basic needs, but they are also life-changing.  For example, over 80% of the population now have access to clean water.  They didn’t before.  Basic, but life-changing.

The point is that we consume horrific news through social media and global news networks in real time. New Zealand’s mosque shootings is one of many examples.  But as Steven Pinkerton from The Guardian points out: ‘Bad things can happen quickly, but good things aren’t built in a day, and as they unfold, they will be out of sync with the news cycle’. He goes on to say that: ‘Whether or not the world really is getting worse, the nature of news will interact with the nature of cognition to make us think that it is’. This from a man in the business of reporting news.

The world faces many threats. Climate change, nuclear war and global pandemics are just a few that the WHO and World Economic Forum name. And I am not denying that we have major challenges. However, it is very possible that we may look back on this time and think how good we had it.  Perhaps if we change our perspective to a historic one, we will have a better chance of having a positive outlook on our current situation.

Hans Rosling’s book, Factfulness, enlivens the stats and facts that point to why the world is a better place today.  So if you want to challenge the pessimist stance and become what is termed a ‘serious possibilist’ click on the link to read more. 


Kind regards,
Sunél

//02 August 2019.