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Monthly Archives: March 2017

Is gold a good investment in the short term?

As with many similar questions that I have been asked over the years, it is vital that you meet with a financial planner. A full understanding of your financial situation is required. It is not wise to give recommendations based on only a portion of your investment information.

However, that said, let’s assume that I have understood your risk profile accurately, and that a ‘couple of years’ refers to two years. I would consider the following to be wise counsel:

It is unlikely that allocating the full amount to gold would be appropriate as the price of gold can be volatile over short-term periods. I would also assume that the lump sum of R500 000 is unlikely to be a small portion (i.e. less than 5%) of your overall portfolio, and this makes it even less appropriate to allocate the full amount to gold.

In addition, you specifically ask about physical gold, which in most cases is Krugerrands. When investing in Krugerrands there are fees of about R3 000 per ounce (you can buy for R21 000 versus selling for R18 000 as per the Cape Gold Coin Exchange), which need to be taken into account. Over a short-term horizon, these costs could be really punitive.

The gold price would therefore have to increase substantially over your two year period to beat the 6.4% per annum offered by your money market option. Remember you will also have to take into account the storage and insurance costs of holding physical gold. Therefore, taking all things into consideration, I would consider gold to be a relatively high risk investment for you.

The money market is probably one of your safest options. However, I am interested that you quote an interest rate of 6.4%, as I know other options that offer up to 8.0% per annum. Make sure that you do your homework well, in conjunction with your financial planner. You may even look at the possibility of a 24 month fixed deposit, where the interest offered is currently about 8.8%.

Depending on your marginal tax rate and your age, a more efficient investment may well be through a dividend income-type of portfolio. Ask your financial planner about this because you should be able to achieve an improved growth rate after tax compared to a money market. All in all, this will still be the relatively low risk that you require in a two year, short-term investment.

Three key investment mistakes to avoid

The current environment is an extremely testing one for fund managers. There is so much uncertainty on so many levels, that selecting appropriate investments takes both a lot of analysis and a lot of courage.

However, Paul Bosman, the co-manager of the PSG Balanced Fund, says that even in times like this it is possible to build robust portfolios that allow both the fund managers and investors to sleep well at night.

“Regardless of whether times are rosy or stormy, the three key mistakes to avoid remain the same,” Bosman says. “Don’t pay significantly more for something than it’s worth; don’t buy something just because it looks cheap; and don’t build highly correlated portfolios.”

To do this, however, you have to be able to look past the short term noise and appreciate the longer term fundamentals of what you are buying.

Understand the risks

Bosman points out that it is possible to manage risk by trying to work out what is already in the price of an asset. And when quality assets sell off, that doesn’t make them more risky, but less so.

“Even the worst of news can be priced into a stock,” says Bosman. “And if it’s already in the price, then it’s not such a risky investment.”

For example, South African banking stocks collapsed at the time of Nenegate last year and have largely remained depressed. Nedbank is basically trading flat over the last three years.

“There is a lot of bad news in the share price,” says Bosman, “but this is a quality business with good intrinsic growth, paying a 5% dividend yield.

“There can be further political challenges in the short run, but over the long term an investment is about competitive forces in the market,” he says. “Banking is not an easy industry to come into, and with all the noise in South Africa there aren’t a lot of people who want to try. So if you can buy this kind of business with inherent quality that the market is not pricing correctly, that is actually a low risk strategy.”

Be circumspect

However, Bosman does caution that just because there is strong negative sentiment in the market, doesn’t mean that everything that has sold off is now worth buying.

“Just because something is down, doesn’t mean that it’s cheap,” he says. “You still need to look for inherent quality that’s worth paying for.”

When adding assets into a portfolio, you also have to be aware of how they are likely to move in relation to each other. Especially when building bottom up portfolios, there is the risk of ending up with assets that are highly correlated as it is likely that the stocks that are currently attractively-priced, may have all sold off for similar reasons.

“You have to try to balance this,” Bosman explains. “At PSG we follow a bottom-up process, but are very aware of having too much unintended correlation because you don’t want the whole portfolio to perform strongly only in one kind of environment and poorly in another.”

In the same vein, it is very important not to construct a portfolio around a single outcome.

“You can draw parallels between building a portfolio and going to the supermarket,” Bosman says. “If you only go to the supermarket to buy things that you will need in a world war three scenario you are going to be pretty well stocked up on canned food. Whereas if go and you do your regular shopping, but also buy food for the kind of circumstances that might stop you from going to the supermarket in the future, such as a world war, you will have that canned food in the pantry, but you haven’t built your lifestyle around it. So when you need it it’s there, but you aren’t only eating baked beans.”

For instance, he points out that nobody can know with 100% certainty that South Africa’s credit rating will be downgraded. So it would be irrational to build 100% of a portfolio around this outcome.

“But if you think there is a 30% that we will be downgraded and you can build 30% of your portfolio accordingly, that’s rational,” he says.

PSG therefore does hold a lot of cash at the moment as security against a worst-case scenario, but it is also willing to use that cash when opportunities present themselves.

“That cash can become very powerful when quality assets are selling off,” Bosman says. “We only allocate money when we find an opportunity that is compelling. At the moment across our portfolios we are very happy to sit in cash, and so we don’t mind when the market sells off because that creates opportunities we can enjoy.”

Are you paying too much in bank charges?

In South Africa’s somewhat peculiar banking system, monthly charges for transactional accounts are a given. But is the few hundred rand you’re paying per month (if you’re lucky!) the best possible deal?

The first question you need to answer is whether you value having a ‘platinum’ or ‘private clients’ account with all the “value-adds” these offer?

Things like lounge access, bundled credit cards and a ‘personal’ banker are must-haves for some in the upper middle market. On the other end of the scale are basic, no-frills bank accounts (like Capitec’s Global One (and the clones from the other major banks)), but the truth is that most people need something a little more comprehensive than that. There’s likely a home loan, almost certainly vehicle finance and definitely a credit card.

So, do you need a ‘platinum’ (Premier/Prestige/Savvy Bundle)-type account? Do you actually use or need those value-adds? Or, do you enjoy the ‘status’ of having a platinum or black credit card? (Here, emotion – and ego – comes into the equation….)

This is an important question to answer, because the difference in bank charges between a more vanilla bundle account and ‘platinum’ is easily 50%!

While banks try to shoehorn you into product categories based on your salary or profession, there’s nothing stopping you from moving to another product (or refusing those ‘upgrades’). From a personal perspective, the only reason I have an FNB Premier (i.e. platinum) account (not gold) is because I do actually make use of the ‘free’, albeit diminishing, Slow Lounge access. And, the eBucks rewards I earn on this account are the most lucrative of the lot, based on the products I use, my transaction habits and spending patterns. (‘Upgrading’ to Private Clients is a mugs game because the thresholds for ‘earning’ rewards are significantly higher, to match one’s status and earnings, of course!)

Once you’ve answered this question – which is more important than most people realise – the next step is to figure out whether a bundled account or pay-as-you-transact one makes the most sense. Most of us enjoy not having to ‘worry’, so we readily sign up for the all-in-one package without actually understanding the differences in pricing.

For the purposes of this exercise, FNB pricing will be used (as its most relevant to me). But, the overall price structures (bundled vs unbundled) are roughly the same for the four full-service banks, and links to the most recent pricing for the various banks are available here:

Now, figure out what an average month of transactions on your cheque account looks like. For most, this won’t change meaningfully month-to-month. There’ll be some debit orders (internal and external), electronic account payments, inter-account transfers (e.g. settling your credit card or moving money to a savings account), and perhaps some withdrawals from an ATM. It isn’t too useful to look at one month in isolation as there may be atypical transactions that distort the picture.

In this example (loosely based on my transaction history), the bundled option makes the most sense. But, you’ll find that this is not always the answer. It is worth dissecting what does and what doesn’t form part of the bundled options from your bank. In all cases (at the higher end, i.e. platinum), debit orders and electronic transactions are ‘free’ and some transactions like cash withdrawals are free up to a certain number per month. But there are some variances that will attract fees over and above the flat monthly rate.

Once you’ve done this exercise – which you need only do once a year (June for FNB customers and December for Absa/Nedbank/Standard Bank ones), you’ll know exactly which account type suits you best. If you’re on pay-as-you-transact and you’re spending more than ±R200 a month consistently, you should change to bundled. If you’re on bundled and do a handful of transactions a month (and don’t have too many (any) external debit orders), then pay-as-you-transact will save you money. You’re not looking at hundreds of rands a month year, but across a year your savings would easily add up to over R1000.

Tips for parents to save for their kids’ school fees

With the start of 2017 looming, many parents may have started to consider the cost of their children’s school and tuition fees for the next school year. While families have a number of financial commitments to attend to every month, this is the time of year where school funds are often moved to the top priority to ensure that the family is financially prepared for the expenses that accompany a new school year.

Saving for a child’s education requires careful consideration and proper planning.

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Include education funding in the financial plan

It is important that parents include education funding in their overall financial plan. These expenses have to be accounted for as part of the monthly household expenses to determine how it will affect the family’s overall financial position. When it comes to developing financial plans, it is usually a good idea to consult a reputable financial planner who will be able to develop a solution for the client to ensure that they have provided sufficiently for their children’s tuition fees and related education expenses.

With the cost of education increasing every year, parents are faced with increased expenses for the privilege of sending their children to school. School fees are a big financial commitment, but with the right advice, families do not have to see this expense as a financial burden.