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Your questions answered

Published Jun 29, 2022

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PAYING OFF DEBT VERSUS SAVING

During the pandemic, my personal finances took a hug knock as I had to unfortunately rely on using my credit card to pay for basic costs such as the rental for my office space over the course of six months, which cost R10 000 a month. This debt has accrued to R60 000, and I’m wondering if I should still be focusing on saving for retirement, or rather focus on paying off the credit card debt?

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Name withheld

Marzél Swart, Wealth Adviser at PSG Wealth, Pretoria East, replies: The pandemic has really taken its toll on many people, so my sincerest sympathy with what you have had to go through. According to a report by TransUnion on consumer credit, most people have had to fall back on credit to make ends meet. The interest rate on credit cards is customised to each individual, based on their credit profile and can vary between 8% and 18% per year. Depending on your rate, you can weigh that against an average expected investment rate about 8% per year.

We often tend to think that we must do one and then the other, but in some instances you can do both. Depending on your personal preferences with regards to debt, a combination of paying off the credit card while continuing to save for retirement is still an option. You can save for retirement from as little as R500 per month. Therefore, for some people, it is possible to still do both.

In the long run you want to be debt-free as soon as possible so that the growth on compound interest can work for you instead of against you. Albert Einstein was quoted saying: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

The compound effect of the loan’s interest is much more damaging since the rate is generally much higher. With that in mind, I'd advise you to pay off the credit card as soon as possible.

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WHERE SHOULD I PARK R1 MILLION?

I have recently sold my house. After all debts are paid, I will have R1 million in hand. I intend to use it after a year as I am currently very busy with another project. Please advise me on keeping it in a low-risk investment vehicle for the short term, while still earning a reasonable return.

Name withheld

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Chrisley Botha, Wealth Adviser at PSG Wealth, Stellenbosch, replies: There are several things to consider when looking for a low-risk investment for your money, especially one that will provide short-term returns. The most important factors to consider are:

  • Inflation risk: the possibility that an investment’s value may decrease over time due to inflation.
  • Interest rate risk: the possibility that an investment’s value may decrease due to changes in interest rates.
  • Capital protection: the ability of an investment to provide some degree of “insurance” against losses.
  • Liquidity: the ease with which an asset can be converted into cash without affecting its value.

The safest investments for you are those that offer protection risks. Because these investments tend to be more conservative, they may not offer very high returns. However, given your short investment horizon this shouldn't be an issue as long as there's some sort of return on your investment and protection of capital.

With that said, I think you'll benefit from investing in a fixed-income type of fund. Fixed income is an investment approach focused on preservation of capital and income and plays a pivotal role in the investment world, especially in volatile times. Choose a fund that is an interest-bearing short-term fund which aims to beat cash or a short-term bank deposit, with full liquidity at short notice. These fixed-income funds are specifically designed for investors seeking returns higher than those offered by money market funds, with no capital loss over the short term.

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HOW DO I PROTECT MY ‘PORTABLE’ ASSETS?

My job requires me to be on the road every day and I carry a lot of expensive devices with me, including my phone, laptop and camera. Are all my belongings covered by my car insurance? Or do I need to take out a separate policy?

Name withheld

Karen Rimmer, Head: Distribution at PSG Insure, replies: In the unfortunate event that you are the victim of crime and personal belongings are stolen from your vehicle, any damage to the vehicle will be covered under a comprehensive car insurance policy. However, any items taken from the car will not. To protect valuable “portable” assets such as laptops and cameras, the best option is all risk cover. All risk cover can be added to your Personal Lines Insurance Policy.

Some homeowners and contents policies provide a basic level of all risk cover for unspecified items such as the contents of a handbag or gym bag. Depending on the Insurer, there may be a maximum value that is covered, it’s important to find out what these thresholds are. High-value assets such as wedding rings, laptops, cell phones, tablets and sunglasses need specified under the all risk section to ensure they are fully covered. The conditions to add all risk cover will differ for various insurers so it might be worth doing a comparison if this is an important element of your insurance needs. A good adviser should be able to assist you with comparing policies.

SHOULD I SWITCH OUT OF TECH STOCKS?

I've read that tech stocks have fallen dramatically. Should I be considering switching out of these in case they fall further; or is it in fact a good time to be invested, as I've heard things about buying cheap when stocks are down.

Name withheld

Schalk Louw, Wealth Manager at PSG Wealth, Old Oak, replies: This is a popular topic, but in my opinion, the better question is whether we’re currently seeing a repeat of the early 2000s “Dot.com” era. Why? For three major reasons:

1. Tech stocks (on the Nasdaq exchange) were trading at extremely high valuations;

2. The US has started to tighten its monetary policy (rates were hiked six times between June 1999 and May 2000);

3. There was an economic downturn (and later a recession).

We need to look at possible reasons why we’ve seen such a dramatic decline in tech stocks.

Firstly, the Nasdaq was still trading at valuations last seen during the so-called Dot.com era at the beginning of this year, even though economic growth had not reached expectations. In March this year, the US Federal Reserve decided to tighten its monetary policy and increased rates for the first time since 2018.

We all know what effect interest rate hikes have on both economic and earnings growth. Last week the Fed surprised the market by hiking rates for the third time, but rather than increasing the rate by 0.5% as expected, it raised rates by 0.75%. This has caused quite a few prominent economists to state that, in their view, the US will undoubtedly go into recession soon.

Even after a decline of 33% (to June 13) off its highs, the Nasdaq is still not trading at levels that can be considered very cheap, and history has shown us how share prices can drop and stay low for some time.

What we do know is that inflation is still not under control and, according to the Fed, interest rates will continue to increase this year. During the Dot.com correction, the Nasdaq was 36% off its highs of six months previously. Back then, investors asked the same questions we’re asking now, and they were answered – 18 months later. The Nasdaq was trading down a further 40%. Will this time be different?

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