This feature is sponsored by PSG Wealth. Email your queries to martin.hesse@inl.co.za
A BETTER ASSET THAN RENTED PROPERTY?
Could there be better long-term assets than my home, which I earn rental income from, through sharing with a tenant? Is it better to stay put or invest elsewhere?
Alexi Coutsoudis, a financial adviser from PSG Wealth Umhlanga Ridge responds:
Two questions can help address your situation.
1. What does your personal balance sheet look like – are your assets sufficiently diversified?
What percentage of your overall net asset value (your assets less liabilities) does your primary residence (property) equate to and what other asset classes are you invested in (e.g. cash, shares)? Are you over-exposed to any one asset class and do you understand the risks? Does your overall level of debt make sense given your total assets and income?
As a rule of thumb, by 35 you should have an amount equal to one year’s gross income in your retirement fund, by 45 at least three times your annual income and so on. Losing sight of this, it’s easy to overcommit financially on a primary residence with the hope that it increases in value over time. The last decade has shown the risk of the local residential property market, which on average, has grown poorly after inflation, and we have seen related costs like insurance, municipal rates and maintenance increase dramatically.
2. What does your financial plan say – are your short- and long-term goals on track?
It’s best to frame this type of big decision – selling a property - in terms of your personal context. By way of example, if you are on track with your retirement savings, have enough in an emergency fund, no short-term high interest debt like overdue credit cards, you have enough discretionary income to reach your monthly obligations and you are staying in an area and home you like, why change things?
Invest the money from your rental income into a diversified asset class like offshore shares and keep an eye on the risk and diversification of your personal balance sheet. There is no one-size-fits-all approach. A financial adviser can make it much easier to answer these questions and help you get – and stay – on track.
MEDIUM-TERM vs LONG-TERM SAVINGS
What is the difference between medium and long-term savings, and what is the minimum term and best investment for the medium-term?
Pierre Puren, a financial adviser from PSG Wealth Jeffrey’s Bay responds:
A medium-term investment is generally between three and six years, while a long-term investment is seven years+. Although these parameters are considered a guideline, rather assess your personal needs and savings goals, starting with the end in mind. Once a goal has been identified, an appropriate investment plan can be recommended and implemented, aligned to time horizons.
The saying goes that diversification is the only free lunch when it comes to investing, so ensure that your ‘eggs’ are not all allocated to one basket. Golfers tend to carry 14 clubs in their golf bag. This is to ensure they have the best possible ‘tools’ at their disposal as they play. Investment managers like to diversify their ‘golf bag’ and a mix of growth assets like securities or property, bonds and/or money market instruments are often used in combination to achieve a desired outcome.
Look out for reputable asset managers’ funds labelled stable or balanced as potential medium-term investments (as these include an equity component that can help your investment grow as well as cash and bonds to provide stability). However, it is best to speak to a qualified financial adviser to address your unique needs properly for the best result and in line with your risk profile.
INVESTMENT GROWTH FOR MY CHILDREN
I want to grow a sizeable investment for my children. They are still young, giving me 10-20 years to invest. What are my best options?
Johan Borcherds, a financial adviser from PSG Wealth Pretoria East and PSG’s Wealth Manager of the Year responds:
The main purpose of this investment would be to ensure that you achieve the consistent investment returns necessary for long-term growth in the most tax effective way. Therefore, we would recommend a tax-free investment plan.
This product aims to enable investors to save without exposing their savings to taxation – meaning interest, dividends and capital gains won’t be taxed. This product offers tax-free growth, flexibility, and a choice of underlying investments.
Contributions may not exceed R36 000 in a single tax year and are also subject to a lifetime limit of R500 000. We would recommend that the underlying investments consist mainly of growth assets like share-based global unit trusts that will most probably give the best return over this specific period rather than interest-bearing assets where only tax will be saved on the interest.
INSURANCE FOR MY SMALL BUSINESS
I’ve just started a business that I partly run from home and from a shared office (another company uses the other half of the office throughout the work week – in a small office park near my home). Do I need insurance or can I wait a few months?
Markus Fourie, PSG’s Insure Adviser of the Year from PSG Insure Olympus Midas Avenue Short-Term, responds:
It’s always advisable to get insurance as soon as possible because risks can arise at any time. Disclosing your current situation to an insurer is important to get the right cover you need, and some cover may be in place or required through your rental agreement. Working with a financial adviser can help address what you have and still need, as there could be specific conditions to consider. Overtime, you can add to your cover but you should certainly not delay getting at least the basics in place as a loss (imagine a fire or flood) could be a huge financial setback without it.
WHY ARE MANAGERS AVOIDING CRYPTO?
Asset managers in SA seem hesitant to get on board with cryptocurrencies, despite the promise they hold for the future. Are investors ultimately going to miss out?
Anet Ahern, CEO at PSG Asset Management, responds:
It is often argued that the biggest enemy of investors is making decisions based on fear and greed. FOMO (fear of missing out) is a powerful force in investing, and nowhere is this fear more tangible than when it comes to cryptocurrencies. Blockchain is a revolutionary technology, but while a technology may revolutionise the world, not all instances of that technology, or every company that produces it, will survive. Betamax and Kodak have shown that even big companies can get it wrong.
While technologies move fast, societies adapt and change more slowly, and many technologies fail because people do not adopt them quickly enough. Despite all the hype, it is sobering to note that the number of transactions concluded in Bitcoin hasn’t changed much since 2017. Investors need to ask themselves if they are pursuing cryptocurrencies solely out of FOMO, or because they are offering a robust long-term investment proposition. It is far better to start with what you can realistically expect from an investment portfolio, work out how much risk you want to take, how much you can commit and for how long, and work from there. Cryptocurrencies may well form part of that for some investors, but fear of missing out is not a strategy.
PERSONAL FINANCE