Sometimes we say you should move your investments, sometimes we tell you to stay invested no matter what. This week, we receive two questions about moving investments. We use them as examples to discuss when it’s a good idea to cut your losses and move on and when you should hold tight and wait for the market to recover.

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Tamryn

I have RAs two with Old Mutual.

I contribute R1,500 a month to one, increasing by 10% a year.

I transferred the RA from my previous job to the other one, so it was just one payment.

I tried to work out the growth using Stealthy's formula. If I did my calculations correctly, they are not doing well, unless I don't understand the results.

The lump sum one grew by 7.7% pa. The other one was even worse, over 177 months, only returned 3.9%.

Are they doing terribly? I know they would have been affected by the stock markets not growing a lot the last few years.  I have been thinking about moving, but there will be a huge penalty.

Follow-up:

I just received the EAC for my two policies, the once-off one is 4.1% p/a. The one I pay in monthly, the 1st year, the EAC was 17.5%! Year 2 was 7.9%, from now until I retire  its 4% pa.

I'm just waiting for them to let me know the penalty for moving.

I can't believe it! 17.5% and this was an advisor my gran used and trusted so my mom and I used him too.

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Zee

Recently I started taking control of my own investments. After being invested in unit trust at major brokers for years, the growth and dividends were not satisfying.

I now invested funds in smaller amounts in units trusts, more in a TFSA and the rest in ETF. After listening to a few of your podcasts and studying a few blogs, I have diversified accordingly.

Can you advise if my current portfolio of ETFs are the right choices or if I’m duplicating any:

- STX40

- STXWDM

- STXNDQ

- STX500

- PREFTX

- PTXTEN

- Standard Bank Rhodium ETF

- Standard Bank Palladium ETF

I also bought equity shares via EasyEquities in Discovery and Shoprite.

Lastly you spoke about Bond ETFs. Any recommendation to which one will be suitable with a portfolio like mine?

Lavinia

And if I haven't said it to you and the team recently, a HUGE big thank you for this blog. I have learnt so much since signing up.

Truthfully, for the first time in, like, FOREVER, I feel as if I am on top of my finances and finally working towards getting down debt and building wealth.

I read your blog whenever it comes out, I try attend the Power Hours when I can, they are gold to meet and hear the experts in person, and dare I say it, but the dream of financial freedom is attainable. Which is saying something, as I seriously inherited some bat shit crazy, nonsensical, hysterical money mythology from my poor parents.

So thank you for all the effort to host the Power Hours, the effort to write and research and to share all the info with me. Li'l old me is making sense of this money stuff, finally!

Rudolph

How are some defensive stocks, 'defensive', if they are also sensitive to interest rates, for example, banks, utilities, and real estate? And also possibly stock market volatility?

Cait has a relative who gets an irregular income from running a preschool. They’re trying to work out how to calculate the 27.5% they should put towards her RA. She pays the expenses of the school and uses what is left over for her expenses.

Antoine

1. I have no obligation to save for my kids’ retirement. As far as I am concerned, it is their life, which means it's theirs to mess up or succeed with.

I’d much rather give them the education they need to succeed and make sure they never have to look after my wife and I financially. If these priorities are ticked and I have some cash left, I'll pay for them and their spouses and children to go on family holidays with us. What's left when I drop dead, will go to my grandkids' education.

Give your children the best shield and sword and send them off to slay their own dragons. I think you take a big risk on future interest rates, to rely on a possible student loan while saving for their retirement. The only place I see use for a TFS account for kids, is for saving birthday money they get from uncles and aunts.

2. Say you borrow money at 10% per year, and you invest it and get a super 13% return. If your income tax is 30% you will be left with zero minus any costs involved including vat. What am I missing? Can you deduct the 10% interest on the mortgage loan from tax? I don't think SARS will fall for :" I use this mortgage loan to earn an income on the stock-market." This will only work if you are making money by renting out the bonded property.
3. If the people have R100 and government have R100 and the GDP increases, government prints more money. So if the inflation is 4% it means government will print R8, which is 4% of the total R200.

So the end result is government has R108 and the people have R100 but the R100 can buy 4% less than the year before.

This is why government bonds can always keep track with inflation.

Do I understand this correctly?

Ronald

I am a bit surprised that no mention has been made of the EURO STOXX 50 Index listed as the SYGNIA ITRIX EUROSTOXX50 here in South Africa. This index fund was recommended to me by a German stockbroker friend who has had 40-years experience at the Dusseldorf Stock Exchange. In his portfolio the Euro Stoxx 50 comprises of 85% of his portfolio the rest DAX and DOW JONES and cash.

Lorin wants to know if we can recommend a wealth mentor.

At what point did South Africans become so obsessed with having money offshore? For a while everyone was obsessed with gold, then something about Jacob Zuma and suddenly Magnus Heystek was a thing, like a bad dream.

Our friend Edwin has this ability to ask a question in a way that stretches my brain more than any answer ever could. This week, his question was simple, “What’s the point of taking money out of the country?” What, indeed!

P.S. If you wanted to catch a movie with us at the JSE, you can register here.

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Edwin

I have little money offshore from a previous company share scheme. It is in an account managed by the company scheme and doesn’t cost me anything or grow. It just sits there.

It’s in pounds, so every time the Rand drops I feel richer. I also like the thought of having an emergency stash offshore should I need it one day.

I have thought of repatriating this money and it raised a whole lot of other questions. What is the point of sending money to another country when you can

1) Buy global shares and ETFs with Rands from SA

2) Buy currency if you need it quite easily through a number of platforms e.g. Standard Bank Shyft, Easy Equities.

Unless someone is buying a villa off the south coast of France, or planning to spend time overseas why do people bother “sending money offshore” when you can just as easily buy the Rand hedge in Rand in a locally sold ETF or in currency itself?

What am I missing? Is there an advantage to having your physical currency in another country or should I bring my pounds back home and just buy a low cost ETF?

Pierre

I’ve been contributing fairly regular lump sums to an offshore USD denominated Allan Gray unit trust since about 2016. According to Allan Gray the costs of this investment are as follows:

1. Annual investment management fee = 1.16%
2. Annual platform administration fee = 0.56%
3. Annual financial advisor fee = 1.15%

I’m not sure if this total of 2.87% includes fees that the company who does to actual exchange from ZAR to USD charges every time I add to the investment.

Should I just stop contributing to this unit trust, hope for the best and continue contributing to my EasyEquities USD Vanguard S&P500 ETF? Should I try to close this investment, have the funds exchanged to ZAR and reinvest it into EasyEquities USD. I am not aware of a way to have the investment directly transferred from Allan Gray US to EasEquities USD, are you?

Mzwa

For all the noise that comes with it, BBBEE schemes in my opinion are not radical at all, and barely benefit the average black retail investor. Instead they largely benefit high net worth and these BBBEE connected folks and well-poised trusts and institutions.

I say this because mainly because of the complexity that it comes with. At times you don’t even get access to main shares. The company offering the BBBEE deal is basically just providing the loan, and and any dividends must first pay up the debt.

The discounted share price is countered by the debt that needs to be paid back, and missing out on dividends. Does not seem very worthwhile on paper for small time investors who likely do not have a tax free account, and are nowhere close to maxing their RA yet, and perhaps only trying to learn about the financial markets.

What’s different about the BarloWorld deal is that it’s a sale and lease back agreement, and with guaranteed cash flows, the debt might be paid up quicker and value realised perhaps around 5 to 10 years.

I just would like to hear you weigh-in, especially for people like me who could still put in money into Tax Free savings and/or RA. I am still young and not yet high earning, but I don’t have any debt. As much as my financial principles say first look at ETFs in Tax Free, the urge of not letting such an opportunity go is peeking my interest.

We reference Craig Gradidge's excellent BBBEE Power Hour in this discussion.

Moya

This will sound clichéd, but you guys have totally altered the way I view money and financial advisors (sneaky little shits).

I’m a medic, recently qualified specialist at age 33. With all this education I was schooled in finance by my junior/minion at work. With the hierarchy in the medical fraternity you can imagine how this felt.

He introduced me to ETFs,TFSAs and the Fat Wallet podcast.

My mom recently retired when I came across all this new info. She was a professional nurse and her retirement fund was the government “dinosaur” pension fund. Her fund has paid out the ⅓ (she still refuses to disclose how much it is regardless of how much I flaunt this new knowledge) and the remaining 2/3 into a living annuity that pays her monthly.

She wants to invest a big bulk of that ⅓. She anticipates being around for more than 20 years, my gran died at 102, so it’s understandable. What products would you suggest for that money?

Gregg

Base – Emergency Fund – 40%

Next tier – ETFs and Bonds – 35%

Top tier – Equities – 25%

Do I need to sell some of my equities to free up cash to do the rebalancing – I could take some profits from some equities and also sell some of the losers? What would you advise?

How do I invest directly into Inflation-linked Government Bonds where the maturity period of that bond is in line with when I want to retire - for example a Govt Bond that matures in 20 years time?

Is this a wise investment as part of diversification?

Is it better to invest into a bond ETF as opposed to directly into the bond – what is the difference?

Darren

I want to plan for certain savings goals, like yearly veterinary council fees, car maintenance, local holiday trips and overseas holidays.

Let’s say I would like to save R1000/month in total for all of the above savings goals together. Do I buy different ETFs for each different goals or do I take the R1000 and split it between different ETFs. I feel it is quite overwhelming choosing them?

Boitomelo

I will most likely continue with the Ashburton 1200 only or maybe add a local one as well and have only 2 ETFs. In my current EE normal account, I have the Ashburton 1200 and the Satrix Divi Plus. What do you guys think of that ETF? I have been wondering if I should swap it for the Satrix Top 40 or just leave the Ashburton and sell out the DIVI.

Pierre

Over the last year I’ve closed unnecessary bank accounts, halved my monthly contribution to a managed collective investment scheme, run by my financial advisor, and I am now investing it myself in an ETF portfolio via Easy Equities.

I’ve also moved my TFSA from my financial advisor’s product to Easy Equities. I manage my tax better and I have a hands-on approach when it comes to my personal and business affairs, instead of just leaving it to “the professionals”.

I’ve been thinking about moving my RA from Discovery to 10X to decrease fees. I raised the issue with my advisor and received a response that I couldn’t make head or tail of, except that I shouldn’t move. Armed with the knowledge from the Fat Wallet Show, I scrutinised my policy documents and came up with the following:

I actually have 2 RAs! (never knew that)

The first is called the Discovery Retirement Optimiser RA. I started contributing in March 2017 when I was 34 (please don’t freak out, I built up a sizeable GEPF pension while I was doing in-service training).

Discovery reports that the Internal rate of return with their built-in benefits since I started contributing has been 5.21%. Without their benefits has been 4.08%.

The TER on this investment is 1.92% and transaction costs are 0.18%, so total investment charge is 2.1%. I suspect my financial advisor must also take a fee, but he’s been beating around the bush to tell me.

The gimmicks: if I match my monthly RA contribution to my monthly Discovery Life insurance policy premium, then Discovery say they’ll pay me back an Accrued Life Plan Optimiser which is equal to my insurance premiums paid up to 65. This will be paid back in 10 annual payments over 10 years after retirement. So far, I stand to get just under R50 000 back over 10 years after 65 (if I purchase a Discovery Retirement Income Plan at retirement). Discovery reports that an early exit fee will be just under R15 000, and of course you lose the Accrued Life Plan Optimiser.

The second RA is called the Discovery Core RA. I invested a lump sum of R100,000 in Feb 2017. The policy is now worth just under R110,000. The Discovery reported internal rates of return with and without benefits are similar to the first RA, as are the fees.

The bells and whistles: Discovery “gives” you a Boost Accelerator of 20% of your investment to use to pay your administration fees. This Boost Accelerator diminishes by R2 for every R1 admin fees paid. When the policy reaches 10 years, Discovery will pay you what’s left. I have just over R14 000 at the moment left after 3 years of admin fees — by my reckoning Discovery and I will be “quits” in 10 years, so I won’t see a cent of the Boost Accelerator, but I would have scored on fees. Again, I’m sure my financial advisor is claiming some kind of fee, but I don’t know what.

Kristia will understand my feeling of "Is die kool die sous werd?" If I take the knock and move the Discovery Retirement Optimiser RA to 10X, I’ll be able to catch up the losses in fees before retirement and don’t have to worry about matching my life insurance premium, blah blah.

I’ll keep the Discovery Core RA, because I don’t pay fees, and threaten my financial advisor to take my business elsewhere if he doesn’t tell me exactly what his fee for this policy is. Would you agree?

Brecht

Would it maybe be better to make the policy paid up and just leave it and then open up a new one or is it still worth moving it?

"Shareholder fee is calculated as 10% of gross investment growth (before management fee and tax).

Although it is called a shareholder fee, these days we refer to it as a growth fee, calculated on the growth of the portfolio.

Below are the ongoing fees on the policy:

Policy Fee = R26.82 pm

Allocation charge = 10.25% of each premium"  

The world is changing so quickly that talking about the pace of change is starting to feel a bit clichéd. We measure optimisation and innovation by software updates, not generations. This allows us to customise our lives to a great degree.

From time to time we need to check whether rules of thumb of previous generations still apply to the world as it looks at the moment. Most of the time, large systems and institutions struggle to keep up with how quickly the world changes. One improvement often allows for improvements in other fields.

In this episode we continue to discuss how we can think differently about retirement. We talk about why it’s important to shift our focus from retirement age to financial independence. We also dream about different ways to think about tax.

If you’re new, this episode might feel a bit too hardcore for you. Feel free to start with one that’s more relatable. We just couldn’t help ourselves.

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Win of the week: Slade

Imagine SARS offered a scheme whereby a taxpayer could invest as much money as they wanted into the markets and enjoy all the profits and dividends tax free, but upon death all remaining assets would be left to SARS?    

Of course there would be finer details to work out like:

Does it all go to the remaining spouse until their death then to SARS?

Or 50% to SARS and 50% to remaining spouse?

For those without children or suitable heirs, it would be a great option to unlock the value in the assets that we inevitably can’t take with us.  

Stephen

I want to minimise the drawdown on equities during a recession. My question is, how best could this be tackled? Would I need two Living Annuities or are there products out there that would do this for me? I know I could opt for the ABSA Volatility ETFs but I want the pure offshore exposure.

John

When you invest in an RA, you are really buying a pension.

I know you can take up to one third in cash BUT with the other two thirds, you still have to buy a pension! At what point over the age of 55 do you take your pension.

I suggest when your payout equates to R195,850 p.a (before tax) or R16,320 per month (before tax). After tax is becomes R13,385 per month. One (under 65 years) can earn up to R75,750 and not pay tax, but above this amount one pays tax at the rate of 18% up to R195,750.

Above this amount the next tax bracket is 26% (way too high).

If you are under 55, monitor the tax tables to find the revised numbers for when you reach 55. If you own a pension you will pay tax so keep the tax as low as possible.

Have enough cash to give you R23,800 interest per year, because that's the amount of tax-free interest you can earn.

At this point you have a virtually certain monthly salary of R15,365 after tax. ( R13,385+R1,980)

If your dividend yield is 2.4% after tax you earn R2,000 per month for every R1m invested.

For CGT - If like Simon you are not going to leave anything behind, cash in R40,000 p.a or another R3,330 per month.  Hey! now if you need even more money your CGT is around 11%.

TFSA - the last place to fleece money and it's tax free.

It is as important to have a budget and know and control your spending as it is to invest. When amounts from points 1-5 exceed expenses, financial independence happens. ( If you are cautious add an extra 25%)

Lastly, when you reach FI you don't have to RE but you do have the choice on what to do.

Santosh

I finally scheduled a meeting with 10X, following your show's continual compliments on their products, fees and market approach.

I had expected a "hard sell", but was pleasantly surprised when the consensus was "stick with what you're doing, no need to move".

This shows true integrity from both the advisor and 10X. While we are not doing business currently, it has given me the confidence to keep 10X as one of my top two choices if ever the need to appoint a product and service provider in the future.

Bonolo

I live with my parents and I am a field worker. They live in the townships of Pretoria north and I work in Pretoria East, Centurion and Mpumalanga (once a month).

1. I had an original plan of saving up the money I have left and the incentives I get quarterly in a money market fund until I am 30 years old. I’ve estimated that I'll be able to buy a townhouse cash or at least have 70%-80% deposit. I work in a very high stress job and unstable in terms of employment, so that's why don't see myself paying for a house longer than five years.
2. I could rent but I am also a firm follower of retiring early so I MUST have a home when the time to retire (early) comes and renting doesn't satisfy that part of the plan.
3. I also wanna chuck the money I have left over in index funds and figure my shit out when I am 30, but I don't want to feel like I am watching paint dry. I know there will be a time I'll certainly break because it would feel like I am doing nothing with my life. Also, I don't think I want to live with my folks (they are really cool roomies) that long.

Do you think I can retire on just my provident and tfsa at age 45? Should I focus the money I have left over on getting shelter and invest the extra money after sorting out a fully paid shelter?

Diversification is an important part of risk management in a portfolio. Unfortunately, as with all things finance, there’s no simple diversification solution. This week, we address two diversification concerns: being too diversified and not being diversified enough.

In my own portfolio, I pay attention to three diversification criteria, namely assets, regions and sectors. Since I want my portfolio to grow as much as possible, I prefer equities as an asset class. I don’t diversify this much, since I understand the risks involved and I have enough time to recover from market events.

To diversify across regions, I choose equity-only investment products that invest in multiple regions. ETFs with world-wide exposure are excellent vehicles for regional diversification.

In terms of sectoral diversification, I prefer investment products that invest in sectors relative to their importance in the overall market at the moment. I do this by avoiding sector-specific investments.

My single ETF strategy also takes care of my diversification needs. When I can no longer afford single asset class exposure, I’ll have to start including assets that are less risky. For now, one ETF rules them all.

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Bhiri

Can it be wrong to be too diversified?

My portfolio is probably made up of 75/25 between ETFs and pure direct shares. The 25% shares I am not worried about as, as I get older this percentage will only get smaller and most of my investments will be in ETFs. I'm 37 now. I have the ASHT40, GIVRES, STXIND, S&P500, STXNDQ, SYGWD ETFs and also the STXPRO and SYGLB in my TFSA.

Stefan

I was doing some housekeeping on my two ETF portfolios. I ran a report on all dividends received in the 2018 calendar year.

Even though my PTXTEN from a capital appreciation perspective is deep in the red, I was really happy with the total div received compared to all the other ETFs in my portfolio.

My other property ETFs are not performing as well. For example CoreShares S&P Global Prop did about 50% of what my ptx 10 did.

Which other ETFs have a similar yield? I would like to diversify and buy more etfs but with yield in mind for this particular portfolio. I’d also prefer etfs that are more geared towards global exposure.  It doesn’t have to be property.

Matthew

I have taken a more active approach to my TFSA and am now sorting out my TFSA with EasyEquites.

Now that I have gained the confidence to self manage my TFSA, I am wondering if I should do the same with my RAs?

Between a Retirement Annuity (RA) and a Tax Free Savings Account (TFSA), which should be prioritised?

Is managing your own Retirement Annuity through a site like EasyEquities a viable option?

I noticed the RAs have fact sheets and it feels similar to TFSA. The fees are also under one percent which is way cheaper than with my current provider.

Do I have to take into account Reg 28 when I am investing on the platform? I currently assume all available options are all Reg 28 compliant and I can just invest where I desire.

Are there any investment strategies with regards to a RA? I am only away of appropriate risk e.g. high risk early and move to low risk near retirement.

Could a RA be seen as an alternative to life insurance (assuming living annuity)?

E.g. Take life insurance for the first 5 years of your working life and after that, cancel the life insurance as the RA will pay out to beneficiaries to an equivalent life insurance?

RAs will pay out on serious ill-health / Disability. Is this not an income protector or are there scenarios where an income protector would still be needed as the RA will not cover? Also, would you even recommend an income protector?

Jonathan

My mother, who moved overseas, sold her primary residence.

She has around R1.4m sitting in cash. She is 55 years old, has just enough money to live off from alternative income. Listening to your show, buying another property to rent out seems like a bad idea.

She has a place to stay and enough money to live off. She would like to know what is the best thing to do with the money as she grew up thinking buying property is the only good thing to do with large sums of cash.

Karabo

10x is relatively new and my friend asked what would happen to the monies invested with the fund manager should they go bust.

Is there a way we can "insure" our investments against funds managers going down.

Cliff

I have a few debit orders with EE and I want to be sure that when buying on those predetermined monthly dates I am not penalised by buying at inflated prices (when market maker is offline). How would you suggest I go about this?

Nerina pointed out the cost of debit orders.

Steve

‪If we ask our financial adviser to drop his fees - and rather pay for his/her time - what rate is reasonable? And how much time per year ?

I have only a basic RA and basic cover (disability / income protection) - under the financial advisor’s care. I doubt it’s more than 2-3 hours per year? ‬

For my actual meetings with my adviser I am paying close to 20k per year - last five years are hardly beating cash - with a pricey platform (AG).   

Don’t want to be insulting but short of cancelling and moving to 10x I thought I would offer to pay per  hour and see if anything changes?

Doug

My wife and I max out our TFSAs and have been for the last two years.

I have a pension fund through my work which is relatively fixed. My wife works for herself so, based on advice at the time, opened up an Allan Gray (bleh, fees) Unit Trust. We have ceased contributing to the fund but are unsure of what to do with the amount sitting there (approximately R120k). We have a home loan and are well ahead of curve there - likely to be paid off in about 10 years or so.

What do we do with the R120K?

One option was plowing it all into the home loan to reduce our debt. That would sure feel great but then our only retirement savings would be our TFSAs and my pension fund from work. This feels a bit light and the R120k was initially set aside as part of a retirement investment plan.

The second option we considered was putting this amount into some low cost ETFs on easy equities as a discretionary investment.

The third option was some sort of a split (80/20) between ETFs and the home loan.

Is there something else I am missing?

With the potential of kids in the future we are unsure of our ability to push as aggressively into investing or the loan.