SHOULD I BE CAUTIOUS?
The current economic, political and socio-economic environment in South Africa and the rest of the world makes investing feel quite uncertain. Should I exercise caution and invest in cash?
Jac de Wet, the head of sales at PSG Wealth, responds: By investing in cash only – be it in a fixed deposit or a money market fund or leaving the money under your mattress – you are “saving yourself poor”, because inflation will erode the value of your money over the long term. A carefully documented investment strategy can provide a far better guide to achieving success over the long term.
Keep the following in mind:
• Inflation is the enemy. Inflation is extremely destructive to your wealth in the long term. The inflation rate in South Africa was 4.6% at the end of July, and the average rate over the past 105 years was 5.6%.
• Correct level of cash. Cash has delivered a real (after-inflation) return of 0.8% a year over the past 92 years (according to the Credit Suisse Global Returns Yearbook 2017 – Summer Edition), indicating this investment will double in 90 years. Having some cash in your portfolio is wise, because this enables you to buy bargains in the equity market. But if you invest in fixed deposits, you tie up your money, forfeiting the opportunity to pounce when the market presents a good buying opportunity. Having the correct level of cash brings some stability to your portfolio and serves as a buffer against short-term downturns in the market.
• Equities are excellent. Equities (growth assets) are a much-needed component of a long-term investment portfolio, because they outperform inflation over time, despite short-term ups and downs. Equities delivered a real return of 6.2% a year over the past 11.5 years. At this rate, an investment will double in 11.5 years.
• Take your time. Sound investments usually need time to work in your favour. It is difficult to predict exactly when the market will run, or is due for a correction, and it is unlikely that you will get the timing right. Staying invested despite short-term turbulence is a simple strategy that delivers results over the long term. It is best to do nothing and wait out market turbulence – provided your portfolio is designed in line with your needs and investment strategy.
• Diversify or die. A well-diversified portfolio spreads your capital across different asset classes. This reduces the investment risk of the portfolio and effectively allows poor performance by one asset class to be offset by better performance by the others. Not all asset classes perform the same way at the same time in a market cycle, and diversification allows you to “spread your bets”. It has proved time and again to be a simple and effective strategy over the long term.
Follow a well-constructed investment strategy and plan, diversify and be cognisant of the effects of inflation. Trust the professionals and base investment decisions on principles you know will remain constant over time. This will ensure that your investments succeed.
DEFAULT PENSION INVESTMENTS
I’ve heard a lot about default retirement regulations. Do they mean that I don’t have to make any decisions on what I should invest in for my retirement?
Shreekanth Sing, the technical legal adviser at PSG Wealth, responds: Default retirement strategies do not remove your responsibility to consider appropriate investments or holistic financial planning needs. The final retirement fund default regulations prescribe a set of default strategies that retirement funds must implement in the long-term interests of their members. These are broad strategies, and they cannot cater to everyone’s unique circumstances, so it’s important to understand them without assuming they are right for you.
The default investments need to be managed within the confines of regulation 28 of the Pension Funds Act, which aims to protect investors by encouraging sound asset allocation decisions. The regulation limits exposure to certain types of assets, to ensure that investors don’t “bet” all their money on potentially volatile asset classes, which will put their ability to retire comfortably at risk.
Default options aren’t one-size-fits-all solutions. Although the default option will be selected with care, it may not be the optimal solution for you. For example, some investors have a longer investment horizon and higher risk appetite and may want to choose a more aggressive fund.
Understanding your objectives and risk profile are essential, so you should discuss your retirement planning needs with a qualified financial adviser.
WHAT SHOULD I HAVE IN MY WILL?
How important is it to have a detailed will? What are the key considerations?
Willie Fourie, a fiduciary adviser at PSG Wealth, responds: A will does not have to be complicated to be effective. A well-thought-out will of only a few pages and drafted by a knowledgeable fiduciary practitioner can simplify matters for your heirs and save them a significant amount of estate duty and other taxes.
The key factors to consider when drafting a will include:
• Is it practical? Do not create a burden for your executor or trustees – and ultimately your family – who have to implement and administer the structures you put in place. For example, trusts set up to last in perpetuity can become obsolete as a result of changes to legislation.
• If you have children, ask them what they would prefer. Consider existing trusts and other estate-planning vehicles that your children may have set up already. If they prefer to receive a benefit directly, despite the benefits that a control mechanism can offer, then consider this.
• Allow for flexibility. Do not restrict the movement of assets or the transfer of wealth that could otherwise have benefited your children and grandchildren.
• Understand freedom of testation. You can leave your assets to whomever you please, as long as your actions are legal. Apart from statutory limitations, there are three general exceptions to this rule: claims for maintenance from dependants or a surviving spouse, or claims in terms of the accrual system created by the Matrimonial Property Act.
• Think holistically. Ensure that your will is part of your financial plan and that your financial adviser and estate planners are aware of each other’s work. This can help to prevent expensive mistakes and misunderstandings.
Make sure your will is clear and that there will be no doubt about your true intentions when you are no longer there to explain them.
WHERE DO I START WITH A FINANCIAL PLAN?
I have just started working and want to get my financial plan in order. What is the best process?
Riaan Strydom, a financial adviser at PSG Wealth Mill Park in Port Elizabeth, responds: A financial plan starts with identifying your priorities. The main risk we all face is losing our income, or at least the ability to earn an income. This can occur because of death, temporary or permanent disability, contracting a severe illness, or when we retire. It is important to identify your priorities when structuring a financial plan for you and your family, because the objective is to allocate money to address the risks you may face.
Once you have identified your priorities, you need to assess the possible impact if you lost your ability to earn an income. Would there be debts to settle? How much of your income would you need to replace and for how long? You also need to determine whether you have to provide for future expenses, such as children’s education and estate duty when you die. The answers to these questions will determine how much it will cost to fix any problems or shortfalls in your plan.
Once you know how much it will cost, you need to allocate funds from your budget to address your financial needs and goals. The importance of a budget cannot be stressed enough. Many people don’t really know what they are spending their money on. A proper budget guides you through your day-to-day financial decisions and provides you with a framework for you to reach your financial goals. It might not be affordable to implement all the recommendations at once, so deal with them in order of importance.
We all hope that we will be able to afford to retire one day, and, to this end, it is crucial that we have sufficient retirement savings. Saving is what you do before you spend, not what you do with the money left over at the end of the month. Saving requires a structured and disciplined approach within the framework of your financial plan, including saving towards an emergency fund and for short-term and long-term goals, particularly retirement.
Working with a financial adviser can go a long way to formulating your financial plan and tailoring it to your specific needs.
Email your queries to [email protected]za or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.