If an investment grows more than a savings account interest rate, is that a good investment? If it performs on par with the Top 40 index, but below inflation, is that good or bad?
It’s surprising that we got 70 episodes into this podcast without ever discussing when a share is performing well. On the face of it, it seems almost too obvious to warrant a conversation. How much do I want a share price to rise? Infinity!
In this episode we discuss some of the metrics you can use to determine how your investments are performing. Identifying an under-performing share is pivotal to making choices about which shares to sell and which to give time to recover. Kind of important, no?
Fernando Nieuwfelt dangled an intriguing hypothesis and we couldn’t resist, “I switched out a local market cap index for the STXEMG. The performance is very similar, it's less volatile and more diversified.”
We talk about the merits of selling ETFs with purely local exposure in favour of the new Satrix Emerging Markets ETF.
Speaking of things we couldn’t resist, Mike O’Donoghue issued a challenge. Let’s find the Fat Wallet listener whose tax-free account is performing best. Simon and I did a quick comparison and I was happy to take the lead with just shy of R113 000 on Thursday, 26 October. I’m feeling strong. Shots fired.
In case you missed it, we released a bet-you-didn’t-see-this-coming bonus episode last Friday. We help a listener make a difficult financial choice using our five financial building blocks. Listen here.
Thanks for listening to The Fat Wallet Show.
Getting to be great at money is like losing weight. Those who are successful at it don’t reach their goals because they perfectly stick to a plan. They are successful because they make more good decisions than bad ones over a long period.
We’ve long theorised that there are five financial concepts that underpin good financial decisions. We posit truly understanding these concepts will remove a lot of the uncertainty that often fuels financial decision-making. Taking the right variables into account, you will hopefully end up making more good choices than bad ones.
We discuss each of these concepts in this episode, but to recap, they are:
In this bonus episode, we help one of our listeners solve a property dilemma by applying these parameters to his specific situation. Follow our line of thinking and see if you agree.
Kristia
We are 70 episodes strong! What a ride!
As you may have noticed by now, The Fat Wallet Show tries to help you figure out how to think about your money. The theory is if you understand a few surprisingly simple concepts, you have the tools you need to make great financial decisions. Once you have a handle on these concepts, you need a solid financial base. Getting that in place takes about a month, if you focus.
We discussed the things you need to understand to make a good financial decision here. To recap, they are:
We discussed your financial base in a two-part series on how to structure your pay cheque. Listen to that here and here. To recap, those are:
In this episode we bring everything together by telling you how to put together a tax-free ETF portfolio. We discuss diversification by asset class, region, sectors and investment strategies. This is the process we use to put together our ETF portfolios. You can subscribe to those here. We were inspired to revisit this by this slide from an S&P Dow Jones Indices.
Check it. This is the @SPGlobal version of our ETF portfolios. Green bonds not available yet locally, but go bananas on the rest. pic.twitter.com/f0onkNKMAk
— Kristia van Heerden (@kristiavh) October 17, 2017
We have our first ever giveaway this week. I’ll be speaking at the Liberty Retire Well Masterclass on 9 November. To win one of three tickets worth R250, let us know which financial concept or term you think is well understood by everyone but you.
Thanks for listening to The Fat Wallet Show!
Simon had some family matters to attend to this week, so I did my first ever solo Fat Wallet. Turns out talking about money alone in your living room isn’t quite as entertaining as doing it with a friend. I’m sure you’ll miss him as much as I did.
Two episodes ago, Daniel Jacinto wanted to find a good alternative investment for income. He currently owns a buy-to-let property that helps him pay for his parents’ medical aid. He looked into a Finbond product that offers 11% interest on a deposit fixed for six years. It’s a solid option, but it does mean the principal investment will lose buying power over time, and the 11% payout won’t keep up with inflation. This week, Riaan Honeyborne and Johan Harman both wonder if Daniel wouldn’t be better off just investing in an ETF for income.
The problem with equities as a supplementary income source is that you have zero control over the market. In my investment lifetime (short though it is), I’ve never gotten 11% return on an investment. When you are relying on that income every month, not knowing whether you are going to hit that target is going to cause you stress.
Maxwell wants to know whether listed property instruments can out-punch buy-to-let as a second source of income. I think not. If it’s the monthly income you’re after, you can probably get there much quicker with a buy-to-let. You can also buy an investment property on credit and use one as surety to buy another, gearing your portfolio.
However, you end up with a huge amount of concentration risk, and if you pay off a bond on a buy-to-let, you end up paying more for the asset than it’s actually worth. If I’m going to be throwing a lot of money at an asset, I prefer liquid, diversified and maintenance and paperwork-free.
Links and sources
Roneil sent a link to a Mybroadband article about great value smartphones. If you’re after a device that gets the job done, there are some great alternatives here. I’ll certainly be thinking more along these lines once my current phone dies.
I also mention Ingé Lamprecht’s hilarious article about going for a cheaper cell phone contract and the subsequent chaos. It’s “penny wise, pound foolish” in action.
I also mention that fantastic Power Hour Magnus de Wet did for us on listed property vs buy-to-let.
Listener Love Index
You know things are bad when you start thinking about losing as a sliding scale...
Kristia
The Sygnia World and Satrix World exchange-traded funds (ETF) both track the MSCI World Index. ETFs are priced on their net asset value. That means the share price is calculated by adding up the prices of the shares within the ETF to arrive at a fair value. Unlike ordinary shares, ETF unit prices are not subject to the forces of supply and demand to the extent that ordinary shares are. When there is demand for ETF units, the market maker produces more units at fair value. When there is too much supply, the market maker buys back units.
How is it then that the share price movements of the SYGWD and STXWDM aren’t equal, asks listener Gerhard Jacobs this week. Simon and I discuss the impact of dividend reinvestment on price, as well as the unreliable nature of the closing auction price.
Aiden Whitaker not only inspired young listener Ernst Jordaan to start making his dreams a reality, his question also got Kenneth Collett and De Wet de Villiers thinking about tax efficiency for a side hustle. Kenneth suggested registering a small business corporation to reduce his effective tax rate from 27.4% to 24.8%. De Wet finds a way to reduce that amount even further, to 21.08%. We discuss this voodoo in this episode.
Links and sources
If you are a South African living abroad, you might want to pay attention to the proposed changes to the 185 day tax resident rule. Thank you to Kim for bringing our attention to this Moneyweb article.
Listener Love Index
It’s a tough time to be in the love business.
So much of what we discuss on The Fat Wallet has to do with investing for some future date. We never really get around to what to invest in if you need money right away. Unfortunately the first thing you need, for those of you who suddenly perked up, is capital.
Listener (and great guy) Daniel Jacinto is paying for his parents’ medical aid with income from a buy-to-let property. Since discovering The Fat Wallet, Daniel has realised there’s more than one way to skin a cat, and if that way doesn’t have to involve levies and maintenance it’s probably more fun.
This week we discuss Daniel’s options, as well as the cool new products we love and we get to peek inside a very decent investment portfolio. Since we haven’t recorded a Fat Wallet in two weeks and haven’t really had a chance to hang out since Simon’s return from holiday, this one seems to get to the one hour mark without us.
Links and sources
At the beginning of the episode I get a bit lyrical about Stash.
We also talk about a new robo advisor from OUTsurance. Find OUTvest here.
We didn’t think it was possible, but our Listener Love Index seems to be doing worse than before.
Kris
If you’re a Fat Wallet regular, you know I love thinking about bonds. Despite my fascination with the asset class, I don’t hold any outside of my retirement annuity. If all goes well, I won’t be cashing in my investments for the next 20 years. Bonds are a more conservative asset class. They reduce volatility, but they have an upside limit built in, and I’m a sky’s-the-limit kind of gal.
This week, listener Dale Towert reaches the same conclusion about bonds, “Everyone says a well-diversified portfolio should consist of stocks, bonds, property and cash. At what stage do you think it’s a good idea to start introducing bond ETFs to your portfolio?
I’ve been restructuring my portfolio, and thought it might be a good idea to have at least 10% exposure to bonds. This got me thinking: the purpose of bonds is level out the ups and downs of the rest of the market. At 10%, if things go really badly in the rest of the market, 90% of my portfolio will still go down with the market. At the same time, if things go well, 90% of my portfolio will also go well. In other words, at 10% the effect of the bonds will be fairly minimal.
To have a greater levelling effect, you’d need much more than 10% in bonds – probably closer to 40-50%. But the returns (incl. interest) on bond ETFs is pretty poor over time, so unless you are already, or about to retire, this doesn’t make sense either.
At what stage do you think it’s a good idea to start introducing bond ETFs to your portfolio, and at what percentage (if at all)?”
In this podcast, Simon and I discuss the bond dilemma. We also talk about having more than one retirement annuity, Sygnia funds, what will happen to Steinhoff shares and whether biotech is the future of money.
Links and resources
We pre-recorded this episode on 13 September, so we have no idea where the Listener Love Index is, but if past behaviour is a predictor of future behaviour, I’m not hopeful.
Investing can be overwhelming because there are so many moving parts. You need to understand what a broker is and then make a decision about which one to use. You need to familiarise yourself with investment products like index-tracking funds and then make a decision about whether to go that route or invest in individual companies. If you go for individual companies, you can easily spend the rest of your life pouring over company results and reading SENS announcements. All of this happens before you even buy your first investment.
Once invested, things get even more hairy. Fees are always a big concern, followed very closely by capital gains and dividend withholding tax. More often than not there seems to be no good reason for market movements (although there’s no shortage of experts who will dream up reasons). Political events can have a huge impact on a portfolio. Economic conditions reflect in your portfolio long after real economy has gone in a completely different direction. Add, on top of all of this, currency moves and inflation and it’s little wonder that the decision to start investing can take years.
In this episode, Simon and I discuss the impact of inflation on capital gains liability. I realise there’s something that will impact my investments that I’ve literally never thought about. The worst part is there’s nothing to be done about it.
André du Toit’s spreadsheet that takes into account inflation can be downloaded here. Thanks very much, André. CGT Local vs Offshore revisited
Links and resources
Our Fat Wallet Listener Love Index has been flirting with, but not quite committed to, being 3% in the hole. This displeases me.
We don’t advise opening a tax-free investment for a child’s education. The video below has everything you need to know about tax-free accounts.
Risk factors are a big consideration when I make investment decisions. Generally, I consider sectors, regions, currency and asset allocation when deciding between ETFs. I’m by no means claiming these are the only risk factors, but these are the ones I understand. Considering I only invest once a year, it’s kind of nuts how much time I spend thinking about this.
Last week I wrote an ETF blog about how weightings can affect the performance of ETFs that track more or less the same companies. In the local market, the Satrix 40, the CoreShares Equal Weighted 40 and the CoreShares Top 50 all track the performance of the same group of companies, with a bonus 10 in the case of the Top 50. (I’m just saying that to be thorough. Hopefully you arrived at that conclusion by yourself.)
While these ETFs track the same companies in the same market, they don’t perform in the same way because of how they’re weighted. What would happen if I had to invest in all three of them? My exposure to different risk factors wouldn’t change. I’d still be investing in the same sectors, regions, currency and asset classes. The only variable is how these indices are put together.
In this podcast, Simon and I discuss what this would mean for my portfolio. As always, cost is a huge consideration. Aside from the brokerage, I would have to pay TER on all three products. Would this make a huge difference to my performance? If I hold all three, would I end up exactly average, or is there a chance that I could slightly outperform?
Links and resources
Our friend Stealthy Wealth made a spreadsheet! This time it’s to work out how much capital gains tax you would have to pay on an offshore investment. Play around with that here. Stealthy Wealth-CGT-Local vs Offshore
If you’re interested in joining an investment club without doing any of the work, Chris de Jager shared this link to the Platinum Wealth investment club.
Since this is a show about questions, remember to send yours to ask@justonelap.com.
P.S. Our Listener Love Index is living proof that sometimes love is not enough. Check how we're doing here.
We often speak to people who want to set up investment clubs. I like to fly solo, especially when it comes to money, so I never really paid attention to it. Of course, now that I might have to set one up, they suddenly seem a lot more interesting.
We’ve been chatting to Njabulo Nsibande (who became a dad to a baby boy last month!) about his investment club for a while now. He alerted us to the possibility of a Satrix money market ETF. His club is about the start making investment decisions. This week, Simon and I discuss his investment options, as well as the structure and format of investment clubs.
We talk about a few Moneyweb articles in this episode. First, Adrian Diergaardt won the week with his whiksy. The article that inspired him to see how much his whisky is worth is on Moneyweb here.
Ros Brodie wrinkled my brain because of an article she read on Moneyweb. Here’s how I understand it.
If you invest in an offshore ETF through a local broker, you’ll experience two movements in your portfolio. Firstly, the performance of the underlying investment, the ETF, will affect your portfolio. Secondly, the rand/dollar exchange rate will move your portfolio up and down.
Offshore ETFs like the Satrix World are denominated in dollars. Your rands have to be converted to dollars before the units are bought. If the rand weakens, a single dollar can buy you more rands. Because your portfolio is in dollars, every dollar is worth more rands, pushing the value of your portfolio up in rand terms. The opposite happens when the rand strengthens against the dollar.
There is a chance that your portfolio could be profitable because the rand weakened against the dollar even if the ETF stayed flat. This has capital gains implications when you sell your ETF.
If, on the other hand, you converted your rands into dollars and bought the ETF through an offshore broker, you would only be liable for capital gains on the performance of the ETF. When you sell the ETF, you’ll convert your dollars back into rands without being taxed on any profit earned there.
I can see why some people would consider going the offshore route to avoid the capital gains implications, but this can easily be more expensive than going local. I suppose the challenge is to figure out if profits from currency movements will result in more tax than the fees of investing with an offshore broker.
When we discuss financial principles on The Fat Wallet Show, we try to make them a rule of thumb. More often than not, debt is bad and saving is good. Most of the time, retirement and tax-free should be where your money goes first.
Of course there are exceptions to these rules. There are as many unique financial situations as there are people. Sometimes a set of circumstances leads to an opportunity. Other times you do everything exactly the way you’re supposed to and it still doesn’t work out.
This week’s question from Vee M got me thinking how a “bad” rule-of-thumb decision can be a great decision in certain circumstances. Another case in point is Simon borrowing against his bond to buy shares during the 2008 financial crisis. Would I tell my best friend to do that? Hell no! Did it work for Simon? It did.
If you are honest about the risks and possible outcomes, you have your financial base in place and you are a fiscally responsible individual, odds are you’re in the best position to make a call about your finances. Ask for input and advice by all means, but never forget that the success or failure of your financial plan affects you and your family. Whether those you consult agree with you or not, you have to live with the decision.
What I loved about Vee’s question is that she had the following information:
This information enables her to:
Data is power when it comes to financial decisions. Data overrides the fear and greed of financial decisions. Vee hit the nail on the head.
Links
We built a spreadsheet to help you work out how long it will take you to make up the penalty you have to pay to move your RA. Click on the link to download it. Moving your RA
Chris de Jager sent a link to a forum discussion on estate duty. The discussion follows on the discussion we had with Candice Paine about investing abroad.
Danie de Waal sent shared an article on how index funds can affect the market. Read that here.
P.S. Our Fat Wallet Listener Love index took a beating at the time of recording. Hopefully by the time you read this things will be looking up!
Kris
Fat Wallet regulars know that index-tracking products are at the heart of our investment philosophy. Even Simon, with his individual shares and trading accounts, prefers having at least half of his portfolio invested in exchange-traded funds (ETFs). ETFs are financial products that track the performance of an index. If you struggle to understand what an index is, you’ll probably find ETFs difficult to grasp.
In the last Fat Wallet episode, we decided to create our own index to illustrate how indices are put together. Zack Bezuidenhoudt from S&P Dow Jones Indices graciously agreed to help us put together an index of Fat Wallet listeners’ favourite companies. The rules of the index were entirely made up by me. I was drunk with power.
We received 22 submissions between Monday and Wednesday morning. Since some listeners liked the same companies, we decided to give more weighting to companies that received more nominations. We are therefore happy to announce the world’s first index weighted by love. Probably.
We capped the exposure of each company at 10% to avoid over-exposure to an individual share. We also opted for a variation on an equal-weighted index. The result is an index as diverse and colourful as the Fat Wallet audience.
You can have a look at the complete working document here. And finally, below for your viewing pleasure, is the Fat Wallet Love Index, organised by weighting.
Kris
It’s our 60th show! At the time of recording we were also only a few downloads shy of the 70 000 download mark. What a time to be alive! We are so grateful for your support.
This week we received a bunch of related questions about my favourite topic - ETFs. We discuss:
We also decided on a whim to put together a Fat Wallet index. It’s a fun way to see how indices are created and to see if we’re collectively smart enough to beat the market. You can submit your favourite listed company for inclusion in the index by sending a mail to ask@justonelap.com. Maybe we can get some industry peeps to take us through the nuts and bolts in a future episode.
Last week, we spoke about the basic concepts you need to understand to make good financial choices. We recap those this week, because understanding these concepts will change the way you think about your money. To recap, they are:
We also discuss the different types of expenses that will impact how you spend your money. They are:
This week, we discuss how each of these expense categories will affect your spending in different phases of your life. We start with those who have no financial responsibilities and very few expenses. Then we talk about how to handle debt and finally we deal with family obligations.
The TL;DR version of this episode is:
Thinking about how you are going to spend your money when you haven’t yet started earning any seems like putting the cart before the horse. However, if you’ve been earning money for a while you probably have monthly expenses that are difficult to account for. Why is that we can plan every other aspect of our lives, but our financial decisions are often without direction.
In our first ever recording in front of a live audience, Simon and I discuss how to create structure around your salary. We explain, once a again, the five financial concepts that will enable you to make a good financial decision every time. To recap, they are:
We discuss the expense categories that will apply to most of our finances. First, you have unavoidable costs to keep yourself alive. Secondly, you have a bunch of costs that you can avoid in the short-term, but that will benefit you in the long-term. Next, you have costs that can improve your quality of life. These are the perks. Finally, you have costs that you can’t avoid because you are part of the formal money system. We’re talking here about banking and brokerage fees and interest.
While the first and third categories tend to capture our imagination and the fourth is mostly ignored, our future financial security depends on the second category. Keeping your costs low in category one, three and four frees up money to really help you secure your future.
We argue that your bank account should tell a story about your values. If you don’t know what you want your money to do for you, you’re going to end up spending it on things that don’t matter to you.
When you wonder about what you want from your money, there’s no such thing as a wrong answer. If you want to travel the world with your money, you should. If you want to retire in ten years, write that. If you want to spend your money on your hobby, that’s good too. Once you have taken care of your future self through long-term savings like retirement and tax-free savings, your bank account should reflect what is most important to you.
Finally, we are so grateful to Marc Ashton and the Moneyweb team for the opportunity to speak at the expo and get a chance to interact with all of you. Thanks for stopping by and making our morning a success. Congratulations to Ernst Jordaan for being our first IRL win of the week.
Kris
In the current political climate it’s not surprising that we get so many questions around moving money offshore. This week’s episode was going to be about moving pensions abroad, but offshore exposure in general ended up dominating the conversation.
First, we talk about taking your pension fund with you when you emigrate. The good news is that it can be done if you’re not already taking a pension. The bad news is there’s no way to avoid paying tax. Next, we talk about tax on foreign dividends and finally we get to how much offshore exposure you need in your portfolio.
We land, if you’re too impatient to listen, on having much more offshore exposure than local exposure. Think 80-20. The question for a returns junkie like me remains how to work out how much of my offshore exposure should go towards developed markets and how much to emerging economies. I like the idea that there’s a lot of room for upside in emerging economies. It would be naive to assume those economies can only go up, however. The higher returns come at the expense of stability. How do I know how much risk to take?
We also explain how an ETF can be a feeder fund and talk about unitising your portfolio. The spreadsheet we mention can be found here. Information around unitisation is here.
Remember that we’ll be at the Money Expo this Saturday, 29 July. Between 9:00 and 10:00, Simon and I will discuss how your paycheque should be structured. It’ll be a Fat Wallet-style conversation, with the added bonus that you can ask questions. We look forward to meeting everyone!
You’ve probably noticed that we’re aflutter about the new Satrix ETFs. International index-tracking offerings on the cheap is pretty much the reason we get out of bed in the morning.
Investors have a chance to get their hands on these ETFs before everyone else in the initial public offering (IPO). In this episode we figure out what the upside is to getting in before the products list.
Find our episode on private placements here.
When companies list, a limited amount of shares are issued and allocated during the IPO. If the share price rallies after a listing, investors who get in before everyone else have nowhere to go but up. ETF units, on the other hand, are created as people buy them and priced based on their underlying value. Aside from not paying a brokerage fee, buying ETFs on IPO is the same as buying them at any other time.
We mention Stealthy’s post on cost comparisons for the new ETFs. You can find that here.
Mike pointed us in the direction of an early retirement calculator. Find that here.
If you’ve been hiding money offshore, you have a grace window to own up to SARS. That site is here.
Kristia
I had to fight the urge to throw my laptop away and run for the hills when I read Jurie Lombard’s mail this week. This is not Jurie’s fault. I’m overly-cautious when it comes to debt - once bitten and all that.
However, I’ve also wondered about using my portfolio as collateral to borrow money. Borrowing can be a powerful way to create wealth. People who swear by property often cite the ability to use existing capital as collateral to acquire more capital as an upside of the asset class. As Simon points out in this episode, small business owners also often borrow start-up capital to create more capital. Why should our share portfolio be exempt from leveraging?
In this episode I try to push past my discomfort to figure out how to leverage a portfolio smartly. Simon did this excellent seminar on risk and leverage. In the video he’s talking about contracts for difference (CFDs), but the principles hold true for borrowing against your portfolio.
The biggest risk we could identify is some sort of market crisis. If the value of your portfolio drops overnight, you can expect a margin call in addition to watching your portfolio getting klapped. That’s not a good day at the office.
The product Jurie was asking about can be found here.
Last week Simon challenged Stealthy to create a spreadsheet. Of course, Stealthy already had the spreadsheet. Download it here. At my current savings rate, I will be financially free in just over 16 years. If the market did what I wanted it to do when I started, I’d be a bit further along by now, but we accept what we can’t control and then complain about it bitterly on our podcasts.
Medical students, interns and professionals, check out this blog. Thanks to Alexis for sending it along.
Lastly, by the time you read this I will be on holiday. That means there will be no Fat Wallet Show on 10 July.
“Is it really possible to live off my investments?” This is a question we field often. We recently did a podcast about early retirement that deals with a variation on this theme. The question concerns me, because the answer lies at the heart of all financial planning.
Firstly, if living off your investments isn’t the end goal of investing, what is? How else do you differentiate between long-term investments and short-term savings? Intentionality is a theme that keeps cropping up on the Just One Lap platform. Good financial decisions aren’t possible without understanding the purpose of investing.
Secondly, the answer affects your judgement around whether your retirement annuity or pension fund is any good. How do you decide how much to contribute to these funds? All too often companies set the retirement savings rate on behalf of employees. If you can’t answer this question, how will you know whether the company-mandated savings rate or the oft-cited 15% is enough to see you through retirement?
When I started dreaming of an early retirement, I calculated I would need around R7m to be financially free. At a 4% draw-down rate, this would earn me a monthly income of just over R23 000. At 4%, so says the theory, my capital would keep on growing if my returns beat inflation.
Imagine I never ran this calculation and decided instead to contribute 15% of my monthly salary to an RA. If I started this month and continued my 15% contributions for the next 20 years, providing I earned an annual yield of 12%, I’m still almost R700 000 shy of my early retirement goal.
In this podcast, we talk about the numbers you have to run and the assumptions you have to make to know whether you have enough money invested. I highly recommend you visit the Stealthy Wealth website for a lot more information about this. While his goal is early retirement, the principles are the same.
I’m slightly obsessed with having a solid financial foundation. I talk about it often. Here’s what I have as my foundation:
You should have this foundation regardless of your financial plan. However, you also need a road map. To get one, start by asking yourself what you want your money to do. This might seem oversimplified, but it can have a great impact on your financial choices.
For example, if you want to travel as much as you can while you’re earning an income, your money has to go towards travel. If you want your money to buy you financial independence in 10 years, your money will go towards investments. These options are equally valid. As long as you have your retirement savings sorted, none is more justifiable than the other.
Only once you have a plan and a foundation should you start worrying about discretionary investments. If your plan is any good, it will help you figure out what types of investments would serve you best. For example, if your plan is for your money to buy you a year off work to travel South America, you already have a savings goal and an investment horizon. This will affect how much money you would have to put away and help you find a risk-appropriate investment or savings vehicle.
Knowing the answer to what you want your money to do will impact every financial and lifestyle decision. If you know traveling is your financial priority, you'll also know how buying a new car will impact your ability to travel.
Your financial plan doesn’t have to be perfect. It does have to be written down. It has to be detailed enough to keep you on course, but also adaptable enough to allow for major life changes.
In this episode, Simon and I talk about putting together a financial plan. We use that foundation to answer two reader questions about investments. It’s a must listen, regardless of where you are in your finances.
*One could make allowances for a home loan here, although I don’t have one.
**I say Australian astronaut. I meant Canadian.
Kristia
Since Simon and I are both vocal fans of index trackers, we are often asked about the possibility that ETFs could break the market. The questions submitted by Jaco de Wet this week are questions we field often. The fear is that index trackers will become such a large part of the market that price discovery will be compromised and management won’t be held accountable due to a lack of shareholder engagement.
If you’re not completely new to the investment world, odds are you’ve heard the phrase, “Past performance is not an indication of future performance”. If you speak to someone who has been investing for a while, you’ve probably also heard them say that some market event is unlike anything they had ever seen.
While the market tends to trend higher over time, “unlikely” market events happen all the time. Think 2008, tech bubble and even the introduction of index trackers. Who saw it coming? Nobody. Why? Because the market is organic.
In its purest form, the stock market is made up of those with money to spare (investors), those raising money (companies) and the people and institutions that facilitate these transactions. While the players in the market remain constant, the conditions surrounding the lending and borrowing that occurs in the market change with the times.
If the market hadn’t adapted to the times, the JSE, which was founded in 1887 after the discovery of gold in the Witwatersrand, would be a market for gold. The introduction of ordinary listed companies didn’t break the market. The market adapted to the needs of its constituents.
The argument Simon and I try to formulate this week centers around the fact that the market isn’t static. Both markets and legislation change to reflect the needs of the times. If index trackers in their current form became so prevalent that they become major shareholders of companies, price discovery and accountability certainly will become an issue.
However, in the time it will take to get to that point in the market, the market will adapt. Legislation will adapt. Index trackers themselves will adapt. For as long as there is a market, there will be people in the market seeking profit from inefficiencies. While ETFs and other index trackers can certainly change the market the way listed companies changed the market, the market will adapt.
Kris
We have long been huge fans of Candice Paine. If you are one of many who asked us about offshore investing, you’re about to become one of her fans too. In this illuminating interview, Candice explains all the different ways to take your money offshore.
I was expecting a very complicated process, but basically you can move your money into different currencies and regions from the comfort of your own bank. However, if you are determined to move money into a different country altogether, we talk about that too.
By far the scariest part of this conversation has to do with estate duties. As two of our listeners pointed out, should you die when your money is offshore, you will pay estate duties in the country where you are invested. In the USA and the UK, that is 40%. Think about that for a second. Almost half of your investment gets destroyed simply because you died - as if you had a choice!
This leads to all sorts of paperwork. Since I’m willing to do just about anything to avoid paperwork, I’m very comfortable with my offshore ETFs in my tax-free savings account.
We’ve finally reached the end of our hectic recording schedule. Life returns to normal, freeing up more time for your questions. Send them to ask@justonelap.com. I swear, if you ask me about cryptocurrencies, I’ll scream. But you can listen to a JSE Direct podcast on Bitcoin here.
Kris
I can’t think of anything better than learning about something that piques my curiosity. It’s an incredibly powerful antidote to boredom.
Learning is easiest in environments where beginner’s mind is encouraged, which is why I’ve always been a fan of learning in secret. When you start expecting answers instead of questions, you create an expectation of mastery. With that, humility and curiosity are lost. An expectation of mastery leads to fear and inevitable failure. Perfect, complete knowledge is a myth. Learning is a life’s work.
True understanding isn’t always a by-product of learning. When learning doesn’t stem from genuine curiosity, when asking questions isn’t encouraged, when the teacher is impatient, understanding gets lost, curiosity wanes, passion for the subject matter gets snuffed out.
More than sharing information, it’s my hope that this one-year-old show will provide a framework for asking questions. I hope, by listening to this show, you will be less afraid to speak up next time something isn’t completely clear. I hope you will never be afraid to ask the same question twice. I hope we are creating a hunger for true understanding, whatever the field.
For the last year, this show and its listeners have been a source of great pride and joy for the Just One Lap team. Thank you for listening to The Fat Wallet Show.
Kris
Back in the bad old cabinet reshuffle days, I made some money trading my tax-free savings account. In that account, I was invested in the DBXWD and CSP500. The cabinet reshuffle led to a nauseating drop in the rand. The currency drop, in turn, resulted in an elating increase in the value of my dollar-denominated investments. It was an emotionally confusing but financially lucrative time.
I’d been down this road before. Considering how little my investments have done for me, seeing some life in my offshore investments is basically the only thing giving me hope. This time, instead of just being a spectator, I cashed in on the currency move. While nothing of great significance happened in any of the markets I was invested in, I could take profit because of the currency move. How does this work?
In this episode of The Fat Wallet Show, Simon and I discuss the impact of currency moves on offshore ETFs. There are two elements to keep in mind - the market you’re tracking and the currency in which your ETF is denominated.
Our feedback this week is all about tax. There must be something in the water. We clear up some confusion around capital gains tax from the previous episode. The penny finally drops for me. I’m going to write it down here just to be 100% sure I have it.
Each person gets a R40 000 tax-free capital gains allocation per year. 40% of any profit over R40 000 gets taxed at your marginal rate. In that way, capital gains is affected and does affect your income tax.
I had this all wrong. I thought you paid 40% on any profit over R40 000. Nope, nope, nope.
We are on an unusual recording schedule, but we will get to your questions and feedback eventually. Get in touch with Team Just One Lap at ask@justonelap.com.
P.S. The Fat Wallet turns one in the next episode!
Aside from low cost and simplicity, ETFs are appealing because diversification is built in. When you invest in the 40 biggest South African companies, you invest in different sectors and different regions. You even get a degree of asset diversification in the form of property stocks.
Last week, Stealthy Wealth asked me about my diversification strategy in this interview. Because I’m an ETF investor with a very long investment horizon, diversification is not high on my list of priorities. The question did make me wonder how I will diversify once I approach retirement.
When I think about diversification, I always consider three things: asset class, region and sector. My knee-jerk reaction to Stealthy’s question was that I want no more than 25% exposure in my portfolio to any of these things. By that logic, if the stock market crashes, I’ll have 75% of my portfolio comfortably sitting in property, bonds and cash. Hopefully those assets will see me through the crash and sustain me until my equity portfolio recovers.
There are, of course, mathematical formulas to determine the optimal degree of diversification, but because I’m nowhere near a mathematician, I couldn’t use them. I couldn’t even read them. In this episode I speak to Simon about the right degree of diversification. I look at 10X’s approach to the issue within my retirement annuity (RA). I question Simon’s 100 minus your age rule of thumb.
This week we cover the topic before we get to the feedback. Let us know how you like it.
In the podcast I mention a calculator that Stealthy Wealth developed to determine whether interest or dividends would be more tax efficient. Access that here.
Please continue to submit your money questions to ask@justonelap.com. We’ll do our best to help you find the answers.