Your questions answered
PROS AND CONS OF PROPERTY INVESTING
I want to invest in the current buyers’ market so that property rental income can form part of my retirement plan. What should I consider?
Richus Nel, a financial adviser from PSG Wealth Old Oak, responds: Conversations about investing in physical property have re-emerged as confidence has been shaken in the global and local financial markets, due to Covid-19. Although this may provide some security for some investors, there are downsides to weigh up.
Landlords face extra costs, from gardens and swimming pools neglected by tenants, to garage-door issues, kitchen and bathroom maintenance, carpet and geyser replacements, leaking roofs and sinking foundations, which can quickly dilute an investment’s profitability, and come with the risk of non-payment or legal issues with tenants.
Your tenants may pay on time, but, according to FNB Commercial Property Finance Team’s Property Insights (May 2020), only 54% of tenants “paid on time” during the 2008 global financial crisis. There seems to be a close correlation between economic cycles and property investing. You might not receive rent just when financial markets are struggling. Diversifying a financial market investment with physical property is therefore not an optimal retirement diversification strategy.
You also need to keep liquidity in mind. Physical property can be challenging during a crisis, from both a resale perspective and a rental income perspective. There are also holding costs and taxes to consider.
Landowners are often squeezed between rising ownership costs and stagnant national inflation-adjusted rental increases.
The reduction in interest rates was a welcome interim relief, which you should make use of, but consider the long-term implications with the help of a qualified financial adviser before making any final moves.
If you are financing your property purchase, it might be a great time to enter the market over the next 12 months. For investors with capital in hand, there seem to be better retirement strategies.
INVESTING R1 500 MONTHLY FOR TERTIARY STUDIES
I’m expecting my first child and want to build up savings for his tertiary studies. What is my best option with R1 500 a month?
Alexi Coutsoudis, a financial adviser from PSG Wealth Umhlanga Ridge, responds: Planning early for tertiary education makes all the difference in affording the best education, with costs that increase on average by 9% annually. You should target long-term capital growth at inflation plus 5% to 7% a year, in local or offshore shares. As you will be investing monthly, rand-cost averaging will smooth your return over time. You could consider:
- A tax-free savings account (TFSA): Save up to R36 000 a tax year (capped at R500 000 over your lifetime) without any taxation on the investment growth (no tax on interest, dividends or capital gains). This should be in your name and not your child’s, as you could be removing his or her right to have his or her own TFSA later in life due to the contribution maximums.
- Discretionary unit trust or exchange traded fund (ETF): Similar to a TFSA but without the tax benefits, these should be considered if you are already using a TFSA. An ETF is an alternative to a unit trust fund and usually tracks an index.
- Endowment/sinking fund policy: Your marginal tax rate should be above 30% to consider these, if you don’t already have a TFSA.
Working with a Certified Financial Planner professional will help you to make the right decision.
IS THIS THE RIGHT TIME FOR EQUITIES?
I have not touched my equity portfolio this year, because I know that “noise” is not a good reason to sell shares. Global uncertainty and deep pessimism are concerning me, though. Is it still a good time to be invested in equities?
Anet Ahern, the chief executive of PSG Asset Management, responds: First, well done for staying put in your portfolio. We believe that investor behaviour poses the largest risk to investors at the moment. You will have noticed that the general equity market has already rebounded by 20% over the past three months to the end of June. Although longer-term historic numbers do not make for good reading at the moment, this rebound just shows the risks attached to selling out when there is panic in the markets, as we saw earlier this year.
Recent statistics from the Association for Savings and Investment South Africa show that many investors have opted to abandon equities and multi-asset portfolios in favour of money market and other fixed-income investments. This is a pity, because selling at these low levels not only crystallises what have largely been paper losses, but investors are also likely to be sitting in cash when the market rebounds.
It is impossible to predict market moves, but we do know that the best time to buy (and grow your wealth in the long run) remains when markets are low, however uncomfortable this may feel. Many investors sell out; the market proves them right for a little while, and then they miss the chance to reinvest, which negates any gains they may have achieved with the move to cash as the market continued falling.
It is far better to have a long-term portfolio structure and to use market movements to rebalance to your long-term percentages than to make large moves in and out of the market.
Uncertainty and volatility will come and go, and investors will experience many ups and downs in the future. With the benefit of hindsight, however, we may all despair that we did not act more decisively when quality was to be found abundantly at these low levels. Investors wanting to grow their wealth in real terms may be reminded that the best advice is to be greedy when others are fearful.
It is worth pointing out that while the overall market level has recovered, large parts of the South African and global equity market still show prices well off their previous highs, and valuations at very attractive long-term levels.
For the astute stock selector there are very attractive picks out there at the moment. The investment environment is tough, and we face many headwinds as a country, but prices are reflecting much of this, and therefore we continue to harvest the opportunities that uncertainty brings when one is building a portfolio for the long term.
HOME-WORKING AND INSURANCE COVER
I am an administration worker in a large company and have been able to work from home during the Covid-19 lockdown, using my own desktop computer. Once the lockdown is over, my company will let me work from home three days a week on a permanent basis. How will this affect my household contents and building cover?
Luzanne Wait, an Insure adviser from PSG Jeffrey’s Bay, responds: The computer will still be covered under household contents. This will not influence your household goods and building insurance.
Please note that the personal liability section of your policy excludes any work-related incidents, if, for instance, a client visits you at home. It is, however, best to check with your insurer, as not all policies are the same, and the cover may differ.
You must also be aware that there might be a higher risk of cyber-crime at home, so make sure your device’s security is up to date.
Email your queries to [email protected] or fax them to 021 488 4119