In partnership with Morningstar: This document has been created to highlight the most important issues facing investors, share insights from our current research, and help you make better investment decisions as we enter 2022. It has been compiled by our investment leaders and draws on the work of our global team.
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Last month we talked about setting long-term goals. This month we focus on the next step: Focus on building assets. This is a topic I am very passionate about, and I have helped many clients do this. The accounting definition of an asset is this: Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in Rands. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles. I prefer Robert Kiyosaki's definition of an asset: An asset is something that puts money in your pocket. Examples are buy-to-let property, cash-generating businesses, shares, unit trusts, investments that pay you interest, gold, silver. You should spend your lifetime accumulating assets that put money in your pocket. Understanding assets and investing in good assets are a lifetime journey. Let’s unpack in some detail the type of assets that put money in your pocket. Bank deposits: This is an asset that is familiar to most people. The common types of bank deposits are call deposit, notice deposit, fixed deposit and money market account. Bank deposits quote an interest rate and pay you a monthly interest, as your money stays invested. The interest rate is linked to the Reserve Bank’s Repo rate. When the Repo rate goes up, the interest you receive increases. When the Repo rate goes down, the interest you receive decreases. Click here to watch the episode on bank savings and investment products RSA Retail Savings Bond: This is a type of government bond offered to the general public, the term is 2-, 3-, 5- and 10 years. The interest rate is between 7.25% and 9.5%. Participation bond: Fedgroup is famous for offering this type of investment. A participation bond is a regulated collective investment scheme, it offers you an attractive fixed interest rate in a five-year term investment. Click here to watch the episode on Fedgroup Participation Bond Unit trusts: This is popular among retail investors and institutional investors alike. Unit trusts are also known as collective investment schemes in South Africa. They are registered, approved and regulated by the financial conduct regulatory FSCA. There are over 2,000 unit trusts in South Africa and over 120,000 funds in the world. In North America and other parts of the world, unit trusts are known as mutual funds. Unit trusts are a convenient way to invest, offering investors many choices, ranging from local equities, offshore equities, property, bonds, income, money market, regions, industries such as technology, single country. Exchanged traded funds (ETFs): It has gained huge popularity and attracted a lot of money around the world over the last twenty years. It is also growing fast in South Africa. Exchanged traded funds are like unit trusts, the main differences are they are listed on a stock exchange, so it is freely traded throughout the day, its price fluctuates during the day, and it generally follows some type of benchmark. These funds are rules based, or passively managed, and they have lower fund management fees compared to actively managed unit trust funds. Shares: You can buy shares using a stockbroking account. When you buy shares in a company, you become a shareholder of that company, even if you only own one share. You are entitled to receive dividends declared and paid by the company. If the company does well and it share price rises, you benefit from the capital gain. Pension fund/provident fund: If your company or business has a pension/provident fund, your contributions and your employer’s contributions are invested in Regulation 28 compliant funds, to grow your retirement savings. Preservation fund: When you leave an employer, it is advisable to preserve your pension/provident fund money in a preservation fund, to preserve tax benefits and continue to invest your money, instead of cashing money out. Most product providers now require a minimum sum of R50,000. You can transfer your money from your pension/provident fund to a preservation fund. Tax-free investment: This is an investment vehicle that allows you to invest tax-free. You may invest up to R36,000 in a tax-free investment account in a tax year, all your growth within the account is tax free for life. This is what I recommend to most clients as their first investment building blocks. Click here to watch the episode on tax-free investment Retirement annuity: Retirement annuity allows you to contribute to a fund pre-retirement and enjoys tax deductions, to build up your retirement capital. All your investment growth before retirement age is tax free. Your contributions are invested in Regulation 28 compliant funds. Cick here to watch the episode on retirement annuity Endowment: This is an investment product with an initial five-year term. You take out an endowment with a life insurance company. Your investment growth is taxed within the product, the life insurance company will calculate the tax applicable and deduct the tax from your growth. When you withdraw or surrender your policy, you will receive the money tax free. Endowments have certain tax advantages for high-income individuals. It also offers protection against creditors. Click here to watch the episode on endowment Living annuity: When a member's pension fund, provident fund or retirement annuity fund reaches retirement age, he is obliged to use part of the proceeds (a minimum of two thirds) to invest in an annuity, to receive a monthly income. In a living annuity, an investor essentially has a retirement investment account. He can invest in a portfolio of unit trusts, and he can determine the level of drawdown to provide him with an income. The annual drawdown rate can be between 2.5% and 17.5%. Life annuity: With life annuity, a person enters into a contract with a life insurance company. In return for a lump sum paid to the life insurance company, the life insurance company pays the person (life assured) a monthly income. The life insurance company guarantees that income until the life assured's death. Certain options can be effected at the outset, to prolong the payment period to the beneficiary. Alternative investment: An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Hedge funds: A hedge fund is an investment vehicle that caters to high-net-worth individuals, institutional investors, and other accredited investors. The term “hedge” is used because these funds historically focused on hedging risk by simultaneously buying and shorting assets in a long-short equity strategy. Section 12J investment: Section 12J of the Income Tax Act was introduced in 2009 by the South African Government to encourage South African taxpayers to invest in local companies and receive a 100% tax deduction of the value of their investment. The investor receives a share certificate and a tax certificate, allowing the invested amount to be deducted from the investor’s taxable income, in the year the investment is made. Gold and silver: Precious metals have been the store of value since the ancient of days. While it does not give you interest or pay you dividends, it protects you against inflation, or central banks unlimited money printing. You can buy gold and silver coins from reputable precious metals dealers online. Cash-generating business: Starting your own business can be scary, but also exciting. Businesses have proven a sure way for many people to generate wealth, for some generational wealth. By having your own business, working on it with your sweat, tears and grit, you benefit from the fruit of your Labour. There is no guarantee for success. In fact, statistics show that 95% of businesses fail within the first five years. With the right mindset, goal setting, planning, the right mentors and advisors, you can greatly improve your chance of success. REITS: REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. Buy-to-let property: Buy-to-let refers to the purchase of a property specifically to let out, that is to rent it out. A buy-to-let mortgage is a mortgage loan specifically designed for this purpose. Buy-to-let properties are usually residential but the term also encompasses student property investments and hotel room investments. Cryptocurrency: In this day and age, we have to consider cryptocurrency as a viable asset. While it is highly speculative, it is backed by a very useful Techonology called Blockchain. Given people’s suspicion of governments and central banks, there has been a move to decentralize currencies and financial transactions. There are thousands of crypto currencies in the world, while many of them are just scams, the main ones like Bitcoin, Etherium, Binance Coin, Ripple and USD Coin look like they are here to stay. As you can see, there are a plethora of asset choices and investment options. Take time to do you research to properly understand an asset class. Work with a qualified financial advisor as your financial coach, to decide on which assets may be best for you to accumulate. It is not one size fits all. it is not one asset class fits all. For all clients, I advise them to diversify across a few asset classes. Last month we talked about Set Up Short-term Goals. This month we focus on Step 9 - Set Up Long-term Goals. I define long-term goals as something you would like to achieve in the long term, generally in more than 10 years' time, but can also be anything in more than two years. Have your notebook and pen ready at your desk. Think about the things your plan for after the next two years, in five years, ten year or longer. It can be related to your age, for example age 45, 60, 65, important anniversaries, for example 20th wedding anniversary, or milestones for your children, for example age 7 going to primary school, age 18 going to university. Jot them down in your notebook. Speak to your spouse, partner, children, families and friends that you would like to plan things together with, jot down the additional things that are going to happen after the next two years. Be specific in your goals. Visualise what you would like to happen, write down the details of your goals. The more specific your goals are, the more you will be driven to achieve them. So instead of saying "living in a retirement home at the coast", make it more specific by saying "living in a two-bedroom retirement home in a secure estate in Hermanus, Western Cape by age 65". Make your goals more specific by applying the 5W2H method, asking these questions: What? Why? Where? When? Who? How? How much? Examples or ideas are:
You can now develop the list of long-term goals into a spreadsheet in your notebook, or use a spreadsheet such as Excel or Google Sheets, with the following columns: Column 1: Description of the goal Column 2: With whom (you will be doing this with) Column 3: Date (and age) Column 4: Amount required (this is the amount of money required for that goal) Column 5: Bank/investment account for this purpose Column 6: Notes/Comment (this is where you expand, to explain who will contribute, whether you will contribute for someone else, someone else will contribute for you, how you are going to build up the fund, monthly or an ad-hoc lump sum) Column 7: People/skills/resources required Column 8: Status - Not started, in progress, completed For some of these goals, in particular investment or business goals, you should develop a business plan with the necessary details. Access the required skills, such as business, financial, bankers, legal, engineering, investment professionals, to help you develop a proper business plan. Write your goals on colour stickers or magnets, stick them on your wall so they are visible, acting as reminders to you. Work out your monthly and annual plans to attain these goals. Revisit your long-term goals spreadsheet quarterly, or at least annually, to check whether you are on track, or anything you still need to do. Certified Financial Planners are trained to help people develop a holistic financial plan, focused on your long-term financial wellbeing. It is advisable to use the services of a qualified financial planner to develop your financial plan, to identify areas you may have not considered. In partnership with Morningstar, Let’s kick off the comparison with a quote by Ryan Holmes – “You can run a sprint or you can run a marathon but you can’t sprint a marathon.” The same principle can be applied to saving for retirement. Training to run a marathon is very similar to saving for retirement. As we celebrate Women's Month, in partnership with Morningstar, we share with our female readers five key steps for women to improve their retirement readiness. Studies show that 85% of women manage everyday expenses, yet only 23% take the lead when it comes to long-term financial planning. It is our mission to help women to retire successfully. In partnership with Morningstar: The Bucket Approach” for post-retirement-portfolio planning has gained a lot of traction over the past several years, and for good reason. It is an easy to understand and easy to follow method and it provides cushioning in volatile periods. To learn more about the bucket approach: www.morningstar.com/articles/330323/the-bucket-approach-for-retirement-income
If you as a retiree or someone approaching retirement would like to review your investment strategy, email service@daberistic.com, or schedule a meeting with Kevin the Financial Advisor here https://calendly.com/daberistic In partnership with Morningstar: Fight or flight refers to the instinctive physiological response to a threatening situation, which readies one either to resist forcibly or to run away. When markets are turbulent, we often see investors struggle with the same physiological response. They are left to choose between staying invested amid the volatility (i.e. fight) or fleeing (i.e. flight) to safe-haven assets and cashing out their investments. More often than not, the latter path is taken. If you would like a Financial Advisor to review your investments, please email to service@daberistic.com.
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