Education around the basics of wealth creation and preservation is like a good, solid diet packed with healthy food staples, it can help you enjoy healthy finances for years and create a strong foundation for building your future.

Bonds are a healthy part of any portfolio or ‘diet’, and most people think they understand them. Today, we want to talk about an aspect of investing in bonds most people misunderstand or simply don’t know about – interest rate risk.

In today’s highly uncertain market, bonds remain an attractive option. Not subject to having the sudden market-related dips (or spokes) that equities do, it’s a lower risk option for preserving or growing your money in most environments.

Sounds great, right? Potentially.

Most bonds pay a fixed rate of interest over a defined period of time.

What many investors don’t understand about bonds is that the rate is set according to prevailing market interest rates at the time of issuing the bond, but the market interest rates that occur afterwards during the period of the bond may not be even remotely similar to the ‘weather conditions’ when you first took out the bond.

What this means for your money is that, should interest rates rise, your bond’s value will lessen. Should interest rates fall, the reverse will happen – your bond is now worth more. Because this is directly related to inflation (interest rates rising are usually due to CPI itself rising above what’s been predicted for it), a good way to understand this is inflation. If inflation increases, even though you have the same notes and coins in your wallet, that money is effectively worth less. If inflation decreases, slowly your money will be worth more in relation to the rest of the market (price of eggs etc.). It is not the notes or rands themselves that have changed if the inflation rises, it’s the market.

This is interest rate risk, and it’s a vital element which affects how much return you’ll get once a bond matures.

It is seldom that we truly know what is going to happen to the market in the next two to three years with absolute certainty, but in the case of interest rate risk, it seems that we do. South Africa will be hiking rates for the foreseeable future, as announced at the end of last year when the Reserve Bank’s Monetary Policy Committee (MPC) said it would raise the repurchase rate quite significantly to 6.75% per year as of November 2018.

What does this mean for our bonds? Well, if you look at the above in SA in isolation, it means that a bond’s value will lessen if interest rates rise (which they have) and will continue to do so if interest rates continue to climb (which it looks like they will).

A word of warning – any investment in any form should be underpinned by knowledge. Choosing to put money into a bond of any kind is no exception. Taking interest rate risk by investing in a certain bond without knowing every aspect inside and out is like getting onto a horse and expecting to ride it when you don’t know how a horse moves.

However, if you only ever invest in things you already understand, where will that leave you? Your money may grow, but your own horizons and understanding won’t.

Consider this a call to adventure – not to invest in bonds necessarily, but rather for us to chat about things you don’t fully understand, perhaps interest rate risk being one thing, and start an exciting new chapter in your financial awareness and confidence!

“Never look back unless you are planning to go that way,” Henry David Thoreau once said. Investing in the future is an exciting prospect, but a daunting one as well. And what could be more of a ride than investing in motor vehicles?

But the road can be a bumpy one, even if it is a fast ride, so prudence is paramount when investing in all things motor.

Here are four of the biggest draws for investing in the future of cars:

Electric

According to Allan Gray, Bloomberg forecasts that EV sales will increase from a record of 1.1 million in 2017 to 11 million in 2025 and reach 30 million by 2030. Sounds great, right?

Not so fast – electric vehicles are, like most new technologies, still prohibitively expensive to make and not available to the mass market yet. This means that even if electric cars were to go mainstream, they would be making a loss for investors for some years to come. Except perhaps for Tesla, but that is a big perhaps.

Also, in developing nations like South Africa, the infrastructure just isn’t ready – the Champs-Elysées may have plug points for electric cars, but Jan Smuts and Chapman’s Peak certainly don’t.

Hybrid

This is the other major problem with investing in all things electric – hybrid cars from mainstream motor companies like Jaguar and Mercedes mean far lower fuel emissions comparative to electric cars, yet at a fraction of electric cars’ price.

“…the consumer appeal for electric cars is based on their lower carbon emissions and lower running costs – something that hybrid cars (that are propelled by a petrol or diesel engine with an electric motor) also offer [and] traditional automakers are well placed to compete in this segment,” says Allan Gray’s investment analyst Sibabalwe Kasi.

Self-driving

The most talked-about and Asimov-like motor innovation of the moment is driverless vehicles. It’s arguably one of the more difficult trends to take seriously for those in developing nations who have only ever seen them in Sci-Fi movies, but it could be a real meal ticket for early bird investors if done right.

“The autonomous vehicle (AV) market is going to take years to mature, but a lot of progress is already being made — and investors should start taking notice of its growth now. In 2040, an estimated 33 million driverless vehicles will be sold annually, and Intel and Strategy Analytics predict that self-driving vehicles and their services will create a $7 trillion industry by 2050,” says respected US finance site The Motley Fool.

However, patience is the name of the game here. “While all of these companies have lots of potential in the AV space, it’s going to take years for them to begin seeing sizable contributions to their bottom lines. That doesn’t mean that self-driving cars aren’t coming or that they won’t be transformative when they do; it just means that investors should temper their expectations as this new market unfold,” The Motley Fool concludes.

Car sharing

Another potential avenue for investment isn’t in cars themselves at all, but in the companies behind the ongoing ride sharing revolution. Big name companies like Daimler and BMW are betting on a future in which almost no one in urban spaces will own a car soon – and it’s a compelling gamble.

In an ever more environmentally conscious world with diminishing fossil fuel resources and more strict emission laws, owning your own car may not be normal forever. This is especially true in a future where self-driving cars dominate the roads. If your car could drive itself to you to fetch you from work, why should you pay a larger sum to have that car ‘service’ only you, when you could pay a fraction of the cost and still be picked up whenever you wanted, like your own driverless Uber?

So, which choice is best? It’s up to you, you’re the driver of your own investment, er, vehicles… Just ensure you have an advisor who knows their stuff in the passenger seat.

‘It’s my life, it’s now or never. I ain’t gonna live forever…’ The famous Bon Jovi words could well be used to describe retirement – and saving for it.

Most people don’t know where to start when contemplating something as big and hectic as retiring in decades’ time, but there are ample titbits of conventional wisdom from the financial planning industry. Let’s take a look at some, and their pitfalls.

The most well-known number: 65

The age ‘65’ is the one we all see on the calculation spreadsheets and articles about retirement. Retirement annuity and pension fund products are generally designed to be withdrawn when the individual turns 65. You may well be forgiven for thinking that everyone who retires from work does so the minute they blow out the candles on that 65th cake – but you’d be wrong.

To say ‘I am going to retire at 65 no matter what’ is to overlook and discount the type of work you do, your health and the future of healthcare as we know it. A professional sportsman, for example, may need to retire at just 35, whilst an author could comfortably go on working until 80.

Once you hit 65 years old, you may be having so much fun that you may not want to retire yet, or you may contract a critical illness in your fifties which means you cannot work anymore, a full decade earlier than planned. There’s also the pesky matter of longevity. For years, science and healthcare has advanced and people are living longer and longer lives, yet that stubborn ‘65’ has stayed the same.

All these things are variables that most do not take into account when they insist they will retire at 65 – and we all know that when you fail to factor some of the variables into your calculations, things just don’t add up.

Another number: 75

No, this is not the new, older age to retire at – this, according to the financial planning industry, is the amount of your current final income which you will require at the age of retirement.

It’s hard not to see the problem with this one. A student earning ten thousand a month coming to a financial advisor, for example, may be told they’ll require 75 percent of their normal income in retirement. But that rigid number fails to factor in the fact that that same student will need triple or quadruple his current monthly salary in just 12 years’ time when he’s married, has bought a house and is paying for two kids’ schooling. At that point, the calculation of 75 percent may well be correct, but not always. Either way, it serves as a useful starting point when trying to visualise your future.

The number for right now: 15

Of the few that do save for retirement in South Africa, most save 10 percent or less of their salary towards retirement. Gross salary. If you earn fifty thousand a month, for example, and put away five grand towards retirement each month without fail, you may feel pretty good about yourself A lot of people don’t put away anything, after all. But conventional wisdom states you should save 15 percent of your monthly salary towards retirement.

What is important to note is that you are an individual, with unique life circumstances, and numbers are often just that – numbers. An abstract figure of ‘15 percent’ may not take into account your life situation at all – 15 percent isn’t going to be enough to buy a yacht and retire at 50 unless your monthly salary rivals Bill Gates’. 15 percent may just not be doable for a struggling single parent of four kids who is trying to put food on the table. It’s all relative to your personal situation.

The number for once you’ve retired: 5

Let’s assumed that you don’t want to financially cripple your children by forcing them to take you in once you retire. Let’s assume you want to live reasonably comfortable, independently, for a good twenty years in retirement. The number for you now is five – financial professionals dictate that you will draw five percent of your total amount saved for retirement every year of retirement.

What they fail to mention is that five percent of, say, Jeff Bezos’ retirement savings, will look very different to your total retirement savings.

Also, what about inflation? Inflation has been rising at a steady and relentless rate for the past few years showing no signs of slowing down, yet the average balanced fund in SA has grown just five percent or less over the last five years. If you dutifully save your 15 percent each month, then later only draw five percent of your savings a year and yet CPI has been increasing by six percent year on year, that’s not going to work out that well. Even though you did exactly what the numbers told you to.

There is no real formula

What all the above illustrates is that using abstract generalisations for individuals living real lives just doesn’t work. Numbers like 65, 15 and 75 are a helpful starting point, but are designed to be just a start before you individualise beyond that according to your personal financial needs and future.

The best way to think of the numbers above is to think of them as a minimum, not as a goal. A lot can go wrong even if you do save 15 percent of your income to live off of 75 percent from the age of 65 years.

So start here, but don’t finish with the numbers. They could never define you as a person, so don’t let them define your future.

For those who tell you not to worry so much and just invest in anything, no need to do much research, you need only say one word: Steinhoff.

Steinhoff has been called the largest corporate scandal in SA history, but what many people don’t know is it’s fall was also the largest failure ever on the JSE. The collapse promoted months of headlines, in which South Africans read, shaken, about the demise of the brand which had been every investor’s darling. It wasn’t just the death of a retail titan, it was the death of the concept of ‘too big too sink’ corporates.

In a world post-Steinhoff, all previous bets about how investment works are off. If everyone – and it was pretty much everyone, high and low – was wrong about Jooste and his African champion, couldn’t we be wrong about everything else? It’s not comfortable stuff to ponder, but actually there are valuable lessons in the Steinhoff fallout for investors willing to look.

Lesson 1 – Recommendation is no match for your own research

Many of the most knowledgeable and powerful men and women on the SA investment scene were overweight on Steinhoff. Some, like Christo Wiese and insurance champions Johan van Zyl and Len Konar, were even members of Steinhoff’s board and had decades of investor experience on their sides. This shows the importance of checking out financials for yourself, corporate governance frameworks and growth patterns and projections. If something seems too good to be true, with meteoric out-of-the-ordinary growth from nowhere, then it probably is.

Lesson 2 – Look at management, not results

The common thing to do when considering an investment option is to look at results as a predictor of future dividends, but growth can be misleading. This is especially true of a depressed economic period like the one we’ve had for a while, in which good companies can suffer in their results due to the market, while bad ones’ shortcomings can be masked. Instead, look at the corporate governance of the board and how transparent the company is for a feel. Steinhoff, for example had amazing figures on paper, but their complex two-tier management structure was, in hindsight, a sign of deliberately complicating matters to hide the truth.

Lesson 3 – Not everyone will be a Steinhoff

The reason Steinhoff made the news is that it’s the exception rather than the rule. Although there have been a few corporate governance lapses though none as severe as Steinhoff, it doesn’t mean that our corporate governances metrics themselves are broken. On the contrary, South African governance law and the JSE itself have been proven to be quite robust in the crucible that was Steinhoff. The internationally respected Frankfurt Sock Exchange (FSE) took just as hard a hit as the JSE, after all. The chances are very low that you will invest in an unsound company of the Steinhoff ilk – especially after the scandal meant corporates undergoing extra scrutiny.

And if you’re worried about existing investments of yours? Let’s chat, revisit our due diligence, and remember – Steinhoff happened once, but that doesn’t mean it’ll happen again.

It’s the best of times, it’s the worst of times, as Dickens might have said. At every conference and around every braai, South Africans are being told that everything’s going to the dogs.

Meanwhile, the same South Africans are relentlessly being told by the investment space that now is a great time, because opportunity is rife when most people are scared.

It can feel a bit like being the flag in a tug-of-war game. So, we’ve pulled together a few thoughts to help keep your sanity intact in this most, well, interesting of times.

Outlook 1 – Value isn’t a place, it’s a period

First, the good news – investors of the Warren Buffett philosophy of ‘sell when people are smiling, buy whenever everyone’s terrified’ have plenty to sink their teeth into. As Allan Gray noted recently, household name stocks like Apple and Netflix are currently overpriced, while just about everything else is really cheap to buy.

There is ample evidence to show that buying undervalued stocks at an uncertain time and holding on to them for a long time works. The current market or devaluation of certain stocks now really doesn’t matter very much.

In wealth creation, plenty of studies show that it’s not about who is currently winning the game but rather how long you’re in the game for.

Allan Gray’s Orbis Global Equity Fund, for example, has outperformed by an average of 4 percent, year on year for 29 years. However, this is an average – the fund underperformed several times in that period, sometimes by more than 10 percent. Yet those who’ve hung on since 1990 will find their stock worth triple its value when compared to investing in the benchmark for the same duration. This shows the shortfalls of following trends and changing allegiance too often in the investing game. In other words; it can be the best of times when markets seem like the worst they’ve ever been.

Outlook 2 – Investment growth tends to be non-linear

This outlook is in direct contradiction to anything you’re likely to hear around a braai. ‘My investment was worth X in January, it’s worth this much less now,’ most people fume. Or, they’ll ask for a fund’s performance figures in the past twelve months.

Most seem to think of it as a game of chess – you move forward one step or backwards one step, depending on the strength of the pieces in your arsenal, and whoever’s moving forward most is winning. This is like saying Autumn ‘wins’ over Summer come February – it fails to take into account the cyclical nature of markets and investing.

In this way, it’s safe to say that the investment game is frustrating and frightening if you don’t know the steps. Rather than chess, investment is more of a Foxtrot, and almost always works in a ‘two steps forward, two steps back, one more step backwards, one lateral shift no one quite understands and then four forwards’ pattern. It’s advancement, but not linear advancement. Look at nature. Where do you ever see organic growth being linear?

See for yourself which outlook works, but remember to always take full advantage of whatever ‘times’ you find yourself in.

(Source: www.allangray.co.za)

Trusts as vehicles of wealth preservation have had some important regulatory changes over the past few years as authorities have attempted to shift them away from tax evasion and more towards a true, family-minded way to pass on assets.

Yet despite significant changes, most people only ever read a trust deed once in their life, and not even very thoroughly that one time.

Are all beneficiaries are protected?

It might sound like something from a bad family movie, but ensure the title deed explicitly states that trustees may not vote out important beneficiaries to disinherit them, for example your children or spouse. While you’re at it, make sure beneficiaries aren’t vaguely referred to as ‘Susan’ or something similar. Instead, give their full names and ID numbers.

What happens if widespread misfortune strikes?

Most people will write a trust deed, name their significant other and any children, then leave it at that. But what they don’t understand is that if there are no beneficiaries left of that trust deed, the funds automatically go to the state. It might be a horrible thought to ponder, but in the unlikely event of your and your direct beneficiaries all passing away at the same time, for example in an accident, you should name other next-in-line beneficiaries like, say, your parents, siblings or nieces and nephews.

Does it line up with your Will?

You don’t want your nearest and dearest facing legal battles in some hard times, so ensure that your Will explicitly supports your trust deed’s contents. In terms of if misfortune strikes and there may be some confusion in your Will as to beneficiaries, ensure that your Will states that other assets and amounts are to be placed in the trust.

Are properties of the Trust clearly nominated?

‘The yellow house’ or ‘our parents’ place’ is not good wording for property in a trust deed. South Africa’s The Trust Property Control Act requires a maintained asset register for the trust which includes location, value and the description of each asset. As most people’s most valuable asset is likely to be property, make sure this is very clearly stated with documents proving ownership.

Be clear, giving exact address and as much info as you can. Also, if you have more than one property or more than one trustee (which you should) be clear about which properties are held by which trustees.

Load shedding has cost all of us over the past few weeks, but do you know exactly how much?

Neither did we, until we did a little digging.

Cost to the economy at large

According to Chris Yelland, load shedding costs SA approximately R1 billion per stage, per day. Those Stage Four blackouts… they cost about R4 billion for each 24 hour period. That’s more than the national police service receives every year from government.

Investec’s Annabel Bishop says it’s even more dire than that – she estimates that it could have cost the country R2.4 trillion by the end of 2019’s first quarter, which is half of SA’s GDP, according to The South African.

Cost to business

Load shedding this year has been nothing short of brutal for business owners, with many struggling or even failing to keep their doors open in the tidal wave of load shedding-related costs and losses.

Among the chief things plaguing businesses are cost of business interruption, operating hours and the profit with them being lost, perishable stock damaged or expired and damage to electrical outputs when power surges and dips occur. Another newer trend is the rise of ‘load shedding burglaries’, in which criminals watch the schedule and hit workplaces during hours when security measures like electric fences are likely to be offline.

This obviously creates a negative feedback loop for both economy and enterprise. The less South Africa produces across various sectors, the less money is made and the more the rand weakens. The more the rand weakens, the harder it is to turn a profit as a local business and enough local business closing affects the rand further.

The hardest hit are undoubtedly the SMEs. The last time load shedding rolled around, SMEs voted load shedding the number one risk to small businesses in the 2015 SME survey. We can see why – numerous businesses have had to close down or scale back on operations due to loadshedding. They are the least likely to have generators and adequate insurance cover and the most dependent on the customers and vital profits likely to leave when the lights go out.

Cost to you as an individual

Because it affects the rand, long term savings vehicles like your investment portfolio or retirement fund is also almost definitely affected by load shedding – and for those very near retirement that can be a bitter pill to swallow indeed.
Food and steel-related products may also become more expensive, as manufacturers and farmers are feeling the pinch just like every other industry and may be forced t ratchet their prices up accordingly.

Large companies facing crippling increases in the cost of doing business may also roll out mass retrenchment if load shedding is not put to rights.

Remember, despite any short-term problems in the market like load shedding and its effects, it is still not wise to make financial decisions which may affect your portfolio based on impulse and emotion and without the advice of a trained financial advisor.