Four things to keep in mind
What a year…so far.
We’re four months into 2017, and it seems like a good time to point out to our loyal readers some truths in the matter of personal finance that have showed themselves over these last four months.
In no particular order they are:
Shocks to the political climate should not be affecting your long-term investing goals
This is not to say that big shocks to your investing/political/economic climate should not mean that you don’t take appropriate action as to what your investing strategy should look like. We’re just saying that your strategy should have been in place already by the time these things happen.
If you think that the framework for your financial future rests on a few pillars of status quo, then you’re planning to fail. Risks abound, which is precisely why we use words like “diversification”. It might be hard for you to understand, but “risk” should not be avoided. In the absence of “risk” there would be no return. ‘No return’ means the destruction of the purchasing power of your hard-earned savings.
Risk and Return go together like ‘adorable children’ and ‘screaming’. Like how cats look and how cats act. Like a big tub of chocolate icing with raisins on it (or disgusting topping of your own choice).
Diversification is not an insurance policy against all loss. It is however a strategy that can guard against needlessly large losses. Even if you’re comfortable with risk, we at WellSpent recommend you diversify your investments, spread the risk, and get rich slowly.
Remember – a retirement plan is supposed to be boring! If you don’t have one, then make one.
Taking a short-term view on currencies is misplaced
When then Finance Minister Gordhan was replaced, the Rand was trading at about R12.40 to the US dollar. Ten days later, the exchange rate was just short of R14.00. This was a loss of about 13% in the USD purchasing power of your Rands. For a ten day period, this is pretty rare for a currency as liquid and well-traded as the Rand.
Understandably, watching this all unfold might have seemed hairy. Perhaps you made a panicked call to your financial advisor and asked as to your options for getting money offshore. If, after watching the Rand touch R14.00 to the USD, you switched unit trust funds, or bought actual USD through your bank, you would now be sitting with 7% less in Rand terms.
From 11 April to the date of this article, the Rand has appreciated about 7% against the USD. Not quite back to where it was, but certainly not going the way of the Zim Dollar.
Fund managers and economists will say that this is due to USD weakness and better than expected bla bla bla, all of which is irrelevant when you’ve just seen 7% of your investment portfolio in Rand terms, disappear into the void.
Taking a view on which way the currency is going to go in the short-term is treacherous at best; this is nothing more than speculation. You’re an investor – leave the speculating to someone else.
Just how much of your investing portfolio you have exposed to offshore assets should be part of a wider, calculated investment strategy, not something that requires you to scan the news and make quick trades when you get into the office.
Remember the difference between an investor and a speculator?
Tax rates do change, and will change.
After-tax returns matter for so long as taxes exist.
The recent increase in the rate of Dividend Tax from 15% to 20%, is not a 5% increase, rather it’s a 33% increase.
It is unlikely that a dividend yield alone would form the foundation on which your retirement plan is built, however it should not be forgotten that we spend after-tax money on everything we need to survive. Except for a few retirement funding opportunities, there are very few options to spend money on anything without paying tax on that income first.
How tax affects the money you have left over at the end of every month when you’re in retirement, deserves almost as much consideration as where to invest your money in the first place. Be thankful that you don’t live in France; at one stage their highest marginal rate of tax was at 75%
Every year you get robbed of around 6% of your money. Make a plan to get it back
Year-on-year inflation in SA (from March 2016 to March 2017) was 6.1%. If you don’t know what inflation is or how it works, unfortunately this isn’t some kind of sweepstakes where you just won money. Rather, this is Life taking a piece of your previous efforts, slaving away 9 to 5 to make ends meet.
Say you had amassed a tidy retirement sum of R1 million after many years of contributing to an investment strategy, absent any kind of investment return, your money would now only be able to buy goods and services for the value of R939, 000.
The hope is that you earned an investment return over that period that at least compensated you for this lost money. The better outcome would be where you earned a real return.
Inflation has always been, and will always be. As we have said before, is that absent putting your money to work, inflation is guaranteed to erode your wealth as sure as time passes by.
Apply an inflation-adjusted mindset to all your investment decisions. Consider all your assets and investments. Are you being compensated for the eroding effects of inflation?