Markets don’t make you money; your habits… make you money.

As creatures of habit, we ultimately become our own best friend, or our own worst enemy. This is why it’s important to be mindful of how our emotions affect our choices and influence our behaviour.

We can remind ourselves of this time and time again, but still we might find ourselves slipping into old habits and allowing emotional decisions to vilify our investment strategies.

This is largely due to the fact that if we step back and take a broader look at the market performance of the past three to five years, most local markets have underperformed. Many will say that only offshore has been showing growth, but even that is another way of saying that the ‘grass is greener on the other side of the fence.’

We all know that the grass is greener where it’s watered!

But here’s why this concept throws us so easily: performance doesn’t follow calendar years.

We do. We follow calendar (or financial) years. The reality is that three bad years doesn’t necessarily mean that your investment strategy is wrong. There will ALWAYS be a better performing asset class, share or fund. There will always be that temptation to jump ship when we see another vessel moving ahead a little quicker than ours.

And this is typically where we lose our money. This behaviour assumes that the markets will make us rich, and forgets that it’s our habits that make us wealthy. Markets yield the best returns over time, and not at a specific time, which speaks to the importance of following the ‘buy and hold’ strategy rather than the ‘buy and sell’ strategy.

Emotional awareness and diligent behaviour have the biggest impact on our portfolio. Managing these two key elements to our future wealth are not easy as both can be easily swayed under the right conditions – and poor market performance (especially after a Black Swan) creates these exact conditions!

Don’t try to go it alone when you’re feeling like this.

Having an objective partner on your side to help you process the emotional turmoil that rides the wave of a crashing market is invaluable to building your wealth. People who work with an adviser typically enjoy 1-2% better returns; over 25 years that can be almost double the return of someone who invests without an adviser.

They will also be able to remind you that maintaining your premiums during volatility allows you to purchase shares or allocations at cheaper prices (effectively acquiring more stock) and benefit your portfolio even more in the future.

Remember, it’s not the markets that will make you wealthy; it’s your habits.

In a 2018 article, Tim Davis (President of The UPS Store) said this of small businesses:

“Small business is the backbone of the economy. … It’s these businesses that are driving local economies, providing jobs for local residents and impacting key community organizations, through charity and service.”

Whilst small businesses are crucial to the infrastructure of a robust economy, they are equally affected by the health of that very same economy that they drive.

If we think about our own bodies – everything is connected. Having good posture is not just about sitting up straight!

“To maintain proper posture, you need to have adequate muscle flexibility and strength, normal joint motion in the spine and other body regions, as well as efficient postural muscles that are balanced on both sides of the spine.” livelifebetter.ca

When we think about our spine, or back bone, we tend to initially focus on the bones. We may think of a skeleton that we once saw in a book or classroom. But a healthy functioning body is more than just a skeleton – it’s everything in between and around it! Even the foods we eat and drink can have a serious impact on our health. Any change in one area of our bodies can affect everything else.

In the economy, financial distress caused by the effects of black swan events will cause the majority of small, medium and micro-sized enterprises (SMMEs) to come under severe strain, and possibly even leave their future survival uncertain.

During the COVID-19 pandemic, many countries are finding that as many as nine in ten small businesses are struggling or temporarily closed as a result of the impact of the virus (a black swan event) on the economy. A fraction are able to operate as normal and almost none would ever say that they are thriving. Decreased revenues and lack of financial resources mean that the backbone of the economy is heavily strained during these times and needs serious recovery and therapy time.

Cash flows dry up and small businesses are unable to operate for much more than three months without conditions changing. This affects their ability to pay rent (hitting landlords hard), salaries (hitting staff hard) and other service provider contracts (hitting other SMME’s hard).

Despite all of this, we find that the spirit and determination of small business owners to be far more resilient than the economy! It’s for this reason that the economy can indeed recover, and new opportunities can be found – but we all have to work together.

If you’re not a small business owner, try and find out from your immediate network how you can support local businesses. This may mean buying veggies from a local supplier, or using smaller retail outlets for your purchases rather than going through bigger branded chain stores. If you already use the services of SMMEs, try to pay their bills on time and encourage your friends to use them too.

This is how we boost the strength and resilience of our economy when major events occur. This is how we keep our friends and family employed and how we pull the very best of ourselves through the toughest of times.

One thing we can always know for certain is the past; but with far less certainty, the future, and even ‘later today’… eludes us. Despite knowing this, we often fall into the trap of thinking that we should have done certain things better, because we can see (looking back…) what a difference it would have made in our lives today.

Some of the lingo we repeatedly hear says: “Do something today that your future self will thank you for.”

Market updates are full of articles telling us that if we’d invested $1000 in Amazon, Tesla or Google etc, it would be worth tens of thousands now. But a good financial adviser or wealth manager will tell you that this information only tells us one thing: we can learn from the past, but we can’t predict the future.

When it comes to personal financial planning, we need to be aware of what’s going on around us, but we can’t put that first. What’s going on in the world (past and present) should colour our decisions, but not form the heart of our personal financial plan; your personal financial plan needs to be about YOU!

Even when we look at our own personal financial situations, we can fall into the trap of looking back and wishing we’d played a few of our cards differently. Sometimes, this pertains to habits we’ve formed from our very first paycheck.

We can’t change what we’ve done with the last 12, 36 or even 120 paychecks, but we can decide what we will do with the next one.

1. Get into the habit of saving

When we receive our paycheck (or a few bulk client payments for those who are self-employed) it can feel so well-deserved and the urge to spend is overwhelming. We need a plan to avoid spending it all, thinking to ourselves all the time that we’ll save next month.

Warren Buffet says: “Do not save what is left after spending, but spend what is left after saving.”

Saving is about paying your future self a bonus. It’s a habit that will only benefit you – if you haven’t been able to form this habit from your first paycheck – try and start it this month.

2. Personal finance is personal

It’s really hard to see the things that our family and friends are buying and not feel tempted to make similar purchases, simply because they have done it first. If their money decisions make sense with your personal plan (like buying a practical car or investing in a course to upskill) – then learn from their homework and outcomes. But, if it’s outside of your dreams, your goals AND your income… don’t do it.

Many people look like they are doing really well, but they’re actually drowning in debt. Try not to be one of those people. If you are, remember that your finances are personal – they’re yours; you’re in control. We can work together to manage your debt, we can also work together to help you make personal financial decisions that make sense for you. Use your next paycheck to make decisions that are unique to your personal financial situation.

3. Avoid bad debt

Spinning off that last thought; avoid bad debt!

Not all debt is bad, but it makes no sense to pay the high interest rates attached to credit cards when a bit of planning and patience will allow you to buy the things you really need. Especially when times are tough, it’s easy to take out extra credit rather than reign in our expenses. This is the advantage that you have in a financial adviser – together we can help you make objective, positive choices for your next paycheck.

In a recent article on Allan Gray’s website, Phiko Peter wrote the following:

“You are at your most powerful today to take care of the “future you”.”

You can’t change what you did with your first paycheck – but you can change what you will do with your next one.

Here’s the thing about the lighthouse – it’s focus is always offshore. At the time of writing this article, the world is still flailing under the storm of the Coronavirus and the conditions have caused us all to rethink many of the foundations in our lives that we once thought secure.

Just like the view from the lighthouse, the seas can go from calm to savage in a matter of hours, the visibility can decrease from clear to cloudy in minutes and the boats in the bay may find themselves in sudden peril.

Do they stay – or do they sail off for calmer seas?

Whilst the lighthouse is always looking out for ships, it’s purpose is to warn them that there are rocks nearby. It’s not actually there to locate ships (even though it’s a helpful vantage point), it’s up to the ships to decide whether to risk the onshore conditions, wait it out, or find a different port.

Depending on the skill of the captain and the crew, the size of the boat and the value of the cargo, they can choose how they react to the prevailing conditions. Likewise, when it comes to investing and your portfolio – you too can decide how to react to the prevailing conditions.

For some, the option is clear: go offshore.

For others – they would prefer to handle the risk of the rocks that they know are there and try to navigate them safely into harbour.

It’s not a straightforward decision. Right now, there are enormous differences in the crests and dips of the current and forecasted waves as economists look at the short, medium and long term. The IMF (International Monetary Fund) forecasts global GDP to decline nearly 5% in 2020 and rebound 5.4% in 2021.

The lighthouse is warning us that there is a lot of forecast risk here and a lot depends on political, medical and economical stability and strength returning. Some feel that the global economy will only return to 2019 levels, in 2023, but possibly later.

The speculations are that our best operational capacity for the economy will be around 90% for the next three to five years. This means that we will have to consider our investment opportunities far more prudently, and consider other avenues of generating, stimulating and sustaining income.

Offshore investment products will be a good solution for most investors during the next few years and may very well accrue a heavier weighting in their portfolio. Before you make big decisions about your investment portfolio, ensure that you’ve consulted with us and that your choices are in line with your personal financial plan.

In light of the difficult times recently, Southern Africa has been awash in low interest rates. When South Africa significantly cut its base interest rate from an already-low 6.25% down to 4.25%, it officially became the lowest interest rate the country has ever had. In late 2019, the Bank of Namibia’s Monetary Policy Committee reduced the rate to 6.5% from 6.75%, then lending rates at Bank Windhoek were slashed further come 2020.

Interest rates, particularly interest rate cuts, typically have complex and far-reaching effects on the market, but what does it mean for you?

From you as a consumer to you as an investor, we’ve rounded up the most significant ways the low interest rate affects you – and how to best capitalise on it.

Cash is not king (when investing…)

In the wake of the devastation of the markets, economy and the enormous volatility in recent history, the interest rate cuts came as a boon to consumers to keep their heads above water. But what is a help to the consumer is a hindrance to the investor. Yes, money not appreciating in value means that goods and services won’t cost more and a household’s day-to-day dollars will stretch further, but any money set away in savings won’t appreciate in value.

Now is not the time to be overweight in cash investments. “If you’ve got money in a bank deposit account, money market account or other “cash-type” vehicle, your interest rate earned will fall by a full 2%,” said Prudential earlier this year. “According to Prudential’s calculations, cash-related investments are now only likely to return around 0.2% p.a. more than inflation over the next three to five years. With its potential returns so much lower, the cash holdings in your portfolio could now be too high if you have a medium- to longer-term investment timeframe, acting as a drag on future returns.”

Risky business

Fortune favours the bold, especially in this kind of market. As we have mentioned above, simply leaving your cash to sit in an account as a means of saving will not get you any richer (in fact, it’s now worth 2% less!) and so higher risk, with higher yield, options need to be considered. For example, things like equities, investing offshore and gold have all found favour recently. 

A debt to pay

A recent communication from insurer Liberty outlined another useful aspect of the low interest rate. “This is the lowest interest rate cycle we’ve seen in a long time – cut off your debt and do not get into new commitments right now,” said Liberty economist Tendani Mantshimuli.

In addition to this, your home loan costs are lower, because the value amount in your bond is worth less than it used to be when interest rates were higher. It’s a great time to repay your debts faster, but try not to extend debt as it will be more affordable now, but will become expensive when the interest rate increases again and markets strengthen.

Now is the time to save

Compound interest is one of the most wonderful roads to wealth creation – it’s why financial advisers urge people to start saving younger. Unfortunately, it is hamstrung by low interest rates. In our current environment, any savings will take longer than it would have in the past to be worth as much and then to appreciate as much as when rates were higher.

For that reason, it’s even more important than ever to set aside as much for savings as you can, as early as you can, because more than ever you can’t afford to lose out on valuable time that will make you compound interest later. 

Ultimately, like every move of the market, low interest rates have their good sides and bad, opportunities and dangers. That’s why it always helps to stay in touch with your financial adviser who can help you make the most of exactly where you are.

Most of us are chronic under-savers even in the best of times. Yet with the current economic environment, lots of previously hypothetical concepts like ‘what if I’m retrenched or have my salary cut?’ are far more concrete – and, unfortunately, more likely to happen.

There’s never been a time when saving is more important, but there’s also likely never been a time when it’s more difficult.

Do you want to put something away for a rainy day (or retirement) but don’t know how to stretch your money far enough to do so? Here are some ideas.

Change it up

Most of us want to budget, but the truth is that it’s tough and can be really… really boring. We want the benefits, but not to cut our creature comforts out of the picture. One of the most effective ways to have your cake and save it, too, is to put away all spare, leftover change. Got a cheeseburger for R53? Put away R7 to make it an even R60. These tiny amounts are not only indiscernible to the average person, even on a budget; they also add up fast.

There are apps and platforms that can help you do this – micro-saving on a daily basis makes it much easier than trying to commit to a large some at the start or end of every month. If you practice a cash-diet – you can even use a jar for these savings. Old-school can be cool.

Vegetate

We don’t have to eat so much meat. In fact, we don’t have to eat meat at all! Tally up your grocery bill, and you’ll often find that by far your most expensive items are from the meat, dairy and egg isles. Find some good recipes online and try to go vegetarian for dinner two nights a week. Calculate how much you would have spent on meat for those meals and put the money in a savings kitty instead.

Hard cash

It’s so easy not to stick to a tight budget these days, when money is nothing more than a few numbers on a screen. To help you save on day-to-day smaller expenses like weekly groceries, toiletries and your daily work cappuccino, try withdrawing the amount of money you’ve budgeted for those items, for that week. Seeing the physical money in your hands and being able to note how much or little is left is a powerful savings tool that can help with splurging only on what really matters to you.

Journalling

Another way to be mindful about not only cutting expenses, but actively saving, is to write down all the money you spend and all the money you put away. Patterns might suddenly become obvious to you that weren’t before: ‘wow, I always spend too much money on groceries when I shop on an empty stomach!’ Knowledge is power in this case, and this mindfulness can help with saving cents and getting competitive with yourself about putting more and more away each month for the future. There are plenty of handy apps for it, or you could buy a hip notebook to jot them down in.

(Don’t) take the credit

If you have them, get rid of clothing accounts, cellphone contracts and credit cards as soon as you can. The interest in repayments on these is excessive – you’re often paying more than double what the item actually costs! Repayments like these also eat up your monthly budget without you even realising. Buy only what you can afford, don’t spend unnecessarily. Try keeping your same phone a little longer (or springing for a reputable second-hand option) and pay off credit card debt as fast and as often as you can.ups

Go pro

When saving and scrimping rands and cents, it might sound like madness to spend money on a financial adviser.

At the end of the day, these are just ideas – no one can grow your savings for you but you, and no one will have the best idea of what method works for you individually except yourself. Still, as a starting point, give these a try. With these tips, some planning and some determination, you’ll reach your savings goals in no time.

Most Sub-Saharan African countries are chronic ‘dis-savers’. But, you don’t have to be. Before we look at the options, let’s take a snapshot of recent events.

Last July, the South African Savings Institute gave the country a wakeup call when it said that the average household rate had fallen from 0.5% per month in 2018 to 0.4% in 2019. 

While 2020 figures are not out yet (at the time of this blog) anywhere in the continent, there’s a likelihood of more challenging times – unemployment is rife, little to no growth pervades most asset classes and economies around the world are suffering mightily.

Another look at South Africa’s Household Saving Rate shows that it decreased to 0.20% in the fourth quarter of 2019. That means, of every R1000 coming into every household, R2 or less was being saved. (according to Trading Economics)

Desperate times

In the current economic climate, we are finding that very few people have an umbrella to help them weather the storm.

Last year, even before the current lockdown impact, over 80% of people did not have sufficient savings to last just three months if they lost their job.

Or, when faced with an unforeseen emergency of around R10 000, many people would have to ask family and friends for help, or take out a loan or cover the emergency costs with credit.

Numerous studies, including the well-known True South one a few years ago, show that many of us don’t have sufficient income protection cover or any other form of insurance, leaving us completely vulnerable when (not if) disaster strikes.

Are you one of the many or one of the few?

You are part of the greater statistic, and aren’t financially protected and prepared enough, if one or more of the following is true of you:

• You do not have an emergency savings fund
• Of every R10 000 you earn, R200 or less is saved
• You do not have life insurance or income protection insurance
• You do not have a financial plan worked out with a professional financial adviser

The good news about saving is that it’s never too late to start and more is always better. So, if any of the above sounds familiar, let’s have a virtual coffee and help you secure a sturdy financial future.

Current investors have seen more ‘interesting times’, more black swans and market freefalls, than any other generation gone before.

From the 2008 global financial crisis, followed by the longest bull run in history, to Brexit, several downgrades for South Africa and then the COVID-19 pandemic, today’s investors have run the gamut. Their emotions have run the gamut too, whether they realise it or not.

Our brains on investing

Like being chased by a lion or falling in love, our management of money produces very specific chemical reactions in the brain that are as primal as they are underappreciated. Take a look at how CNBC describes it:

“In his book, “Your Money & Your Brain,” journalist Jason Zweig explains that financial losses are processed in the same part of the brain that responds to mortal danger. As investors see their investment portfolios plunge, our amygdala kicks into high gear. The amygdala plays a crucial role in processing and steering our emotions, such as fear and anger, allowing us to respond quickly to dangerous situations. The ongoing communication between the amygdala and rational input given by the prefrontal cortex can be stunted in times of emotional threat, such as a financial loss. This communication disruption is also known as the amygdala hijack, and, essentially, the prefrontal cortex is disabled, preventing us from making sound, rational decisions.”

First, become aware of the problem

What’s interesting about investment is that, unlike a lion attack or falling in love, almost everyone thinks that they’re not being emotional. Not understanding the basic ‘trading psychology’ as it’s known behind the amygdala hijack lends it power.

We all know the age-old adage of ‘buy low and sell high.’ Never is that more applicable than in market carnage such as that caused by COVID-19 and the 2008 financial crisis. To sell during a bad time, could be to take the biggest loss and miss the biggest opportunity in modern investment history. And we know this, logically, we do. So why do so many people sell anyway?

Because to sell is, for the amygdala, to escape the ‘lion’. It just wants to get out – it doesn’t care that such an emotional move could cost us our retirement.

But if one is aware of the problem, of the trading psychology behind our amygdala screaming at us to sell, it becomes a little easier to emotionally distance ourselves from the decisions.

Emotionally distance

One of the challenges that we all face is overcoming the powerful impulses to escape the lion.

We need to remind ourselves firmly that our emotional urges are not us.

And they are not sacrosanct, we can choose to obey them or ignore them.

Language helps a lot. Instead of thinking ‘I am freaking out’, think rather ‘my brain is freaking out.’ An investor who knows trading psychology thinks: ‘my brain is short-circuiting because of what it perceives as a dire situation’. An investor doesn’t think: ‘I need to get out.’

Also, look for inspiration. Keep a quote by Warren Buffett next to your desk when you do your day-trading, or whatever it might be. Thinking with the wisdom of others, even if it is by proxy, distances yourself from the tunnel vision which is so easy in a moment of panic, which tricks us into thinking that the way a problem appears to us is the only way to look at it. For example, to look at COVID-19 or Brexit stock market crashes as a disaster rather than an opportunity.

Don’t aim for being a robot

The aim here is not to suppress all emotions until you have none as an investor. Completely emotionless investing, as most experts will tell you, is a myth. Feel the fear, but don’t let it master you. Emotions are important, but we need to be able to deal with them in a positive manner.

Get help

Good, solid financial advice is invaluable – especially in tough times when emotional reactions are likely. Seek out a financial advisor who understands volatility and let their experiences work for you.

Ensuring that you don’t make any investment decisions or portfolio changes without your adviser’s input is also a handy way to not act in the spur of the moment. You may wake up at four in the morning worrying about your retirement, convinced that you need to dump all your equities immediately, but in the cold light of day such kneejerk reactions might look very, very different.

Ultimately, it’s you and not your emotions that are in charge when it comes to managing your money. Keep that in mind and you’ll be able to weather the storm ahead.

The last few years have seen more market volatility than anyone could have predicted, with the icing on the cake being the COVID-19 pandemic. But the best and worst thing about markets is their cyclical nature. All markets recover, eventually.

We know what to do when there’s a downturn and experience has taught many investors some hard lessons with recent stock market crashes. But what about an upswing? What do you do when the markets recover – and what should you avoid?

Don’t.. let it get to your head

Sometimes, it’s helpful to think of the stock market as a wild animal: make no sudden movements. Just as good financial advisers tell people not to panic and sell low in the nadir of a stock market crash, people should also not get overly excited when markets start recovering and buy everything in sight.

An economic downturn is not the time to cash in your retirement and an upswing is… also not the right time to do it. So, when is?

Do… keep to a big picture plan

The best time to do something like cash in your retirement savings, add something new to your portfolio or dump certain stocks is when it works in line with your long-term goals, specific to your goals and your risk appetite as carefully thought out by you and your financial adviser.

If you watch only the market, you will be tempted to buy and sell everything you own several times a day. If markets are nose diving but you are thirty years away from retirement, that nosedive has absolutely nothing to do with you. Keep to a long-term plan as worked out by your financial plan to avoid going crazy and not being blown about by every single headwind.

Do… stick to the classics

Tried-and-true brands and names that have stood the test of time are likely to survive your long-term plan. Go for “Think of your Warren Buffett-type companies: the Visas, the Microsofts, the Coca Colas of this world… the biggest companies that you are 100 per cent sure can get through recessions, coronaviruses, or any other panics that may come along,” advises David Coombs on This is Money.

If the markets are just beginning to recover, you can likely acquire stocks at a lower price than usual. Just make sure you get it before they get too expensive again.

Don’t… go it alone

There is a reason why financial advisers, wealth managers and stockbrokers have full time jobs. Not only is being able to deeply understand the stock market a very hard-won skill honed over years, it’s a very risky one that can turn on you at any moment.

The value of expert financial advice is irreplaceable when it comes to anything on the stock market, even seemingly simple scenarios like a market recovery.

Oh, the ironies of life… 

One of South Africa’s most contentious laws regarding annuities states that a retirement fund may not be completely withdrawn in a lump sum, but a minimum of two thirds must be invested into a compulsory living annuity in an attempt to aid preservation of retirement money. Even those who are well informed about their retirement money sometimes forget this element of their annuities.

Then along came the Coronavirus pandemic with global lockdowns.

On 23 April, Treasury announced new living annuity drawdown relief measures for COVID-19 that effectively neutralise their living annuity laws.

The new proposed measures are to be disseminated under the Disaster Management Tax Relief legislation, and will be rolled out between 1 May and 31 August 2020.

So, what do we need to know?

Living annuity drawdown changes

Under the existing annuity regulations – the owner of a living annuity is currently restricted to an annual drawdown (which is usually paid monthly) of between a maximum of the investment value of 17,5 percent and a minimum of 2,5 percent, paid out monthly. These were designed to help us avoid spending too much too soon – some agree, some don’t.

This will be effectively side-swiped by two relief measures which once again unlock your annuity – but is that for better or worse?

Changing drawdown amounts

The first COVID-19 concession, obviously thought up for people experiencing cash flow issues in the wake of the pandemic, is that annuitants can increase or decrease their drawdowns (the amount of cash they receive at any one time from their annuity) as soon as they need to. Ordinarily, annuitants can only make such changes once a year at the annuity’s anniversary date and there are a whole lot of rules governing it, so that people can’t ill-advisedly just elect to get higher and higher drawdown amounts and run the risk of their retirement money running out too quickly.

This is a useful concession for one of the worst-hit segments of the population in terms of COVID-19’s financial impact: the elderly. However, the danger is that less financially astute retirees will see this as a nice payday and draw down a large amount and spend it, not taking into account the many years of economic hardship still likely to come from the pandemic. Of course, the other option to decrease drawdown amounts is also there, but realistically, it will be an unlikely choice for many.

Drawdown limit changes

Just as with the above meaning that people can change their drawdown amounts now, the second rule allows for the amount to change as well. The existing regulations attempted to encourage preservation by limiting drawdowns to a maximum of 17,5 percent – now annuitants will be able to withdraw 20 percent. While this number may seem small, it adds up quite a lot when dealing with the large sums in annuities. Think, for instance, of the difference between R175 000 and R200 000 in a modest living annuity. That is R25 000 less for the unknown amount of years still to go which this annuity needs to last for.

Conversely, the minimum amount has also been changed, from 2,5 percent minimum to 0,5 percent, in a bid to encourage people to save more and not less.

The danger, as with almost all things retirement, is that annuitants’ money will run out too soon. And retirement during the fallout of the Coronavirus pandemic promises to be no picnic: we have no idea what the value of the rand, inflation and various asset class values will do in the many years it will take for the world and country to economically recover. Treasury runs a serious risk of annuitants joyfully giving in to instant gratification and viewing the relief measures as a windfall or unexpected extra payday, with an eye on spending rather than keeping a watchful eye on their dwindling retirement savings.

If you have a living annuity or know of someone with one, good financial education is key to understanding the temporary regulation changes and the inherent flexibilities as well as dangers that they hold. Here, as always, sound financial advice is worth its weight in annuities.