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:
- No short-term debt.*
- An emergency fund. I work on somewhere between three and six months’ expenses.
- Dread and disability insurance, in case you lose your ability to earn an income.
- Medical aid.
- Retirement annuity.
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.
About a year ago, Simon and I had lunch. I was about to go on holiday and there may have been some wine. During the course of the conversation Simon mentioned something about Sygnia and the price-earnings ratio. I didn’t really have any idea what he was talking about, so I made a note to turn it into a Fat Wallet episode. Since that lovely encounter, we’ve had so many Fat Wallet questions that just always seemed more pressing.
I regret not getting to this sooner, because it turned out to be super interesting. The price-earnings ratio is a way to work out how many years it will take to make your money back when you buy a share. That, along with a company’s net asset value (NAV) and cash flow can help you work out whether a share is cheap or expensive.
This is one of those episodes where you can practically hear the gears grinding. Hopefully you got the “A-ha!” moment too.
My biggest frustration in learning about the financial world is the expectation that I should understand concepts that nobody ever explained to me. A part of the reason why I got into so much debt is because I didn’t fully understand how interest applied to my financial situation. The other part of the reason is stupidity.
The Fat Wallet Show is my attempt to level the playing field. Not only am I declaring, out and proud, that I don’t know everything. I’m also taking back the most important weapon against ignorance - the humble question.
Because this show started out as my personal attempt to find answers, we started with concepts that I didn’t understand. In the process, we never covered things that I did understand. A lot of the questions I have about the financial world these days don’t have much to do with my personal finances. The interbank lending rate, for example, is not something that has an impact on my ability to make choices about my finances. Interest, on the other hand, is a core concept that informs almost all of my financial choices.
There are, in my opinion, only five concepts you need to fully understand to take control of your money. In this podcast, Simon and I discuss those concepts and how they affect your finances.
If we didn’t explain some of the concepts in a way that is easy for you to understand, find someone who can. These concepts might be the catalyst that launches a journey of financial curiosity. If not, they are enough to get you to retirement in one piece.
Many have caught on to the idea that you don’t have to spend your life in servitude. Instead of lifestyle creep and keeping up with the Joneses, you can live modestly and put away the rest of your income. Once you have enough invested, you draw down just enough of your investments to maintain your already modest lifestyle and spend your free time doing what makes you happy. Early retirement: the Holy Grail of investment.
Mr Money Moustache in the US and South African Stealthy Wealth have embraced the idea of early retirement. In both excellent blogs, they explain the maths and share the types of financial maneuvering and lifestyle choices that would make early retirement possible.
Like most investment-related planning, though, both have had to make certain assumptions about what their investment returns would be over a period. No matter how much you save, cash won’t get you to early retirement. Enough money compounded over a decade or two, on the other hand, might just do the trick.
As aspiring retiree Ashleigh McLaren recently pointed out, however, the market doesn’t really care about our life plans. Over the past three years the local market has done very little, while Statistics SA recently reported a dependable and steady uptick in inflation. If I had to plan my retirement on my experience in the market, I’ll be better off buying survival packs so I can sustain myself on crackers and ammunition when I’m inevitably poor.
You might only be young once, but you'll be old for a long time and probably won't like cat food. https://t.co/71Mxdzm3w2
— Kristia van Heerden (@kristiavh) April 13, 2017
Are these calculations based on past market performance are realistic in the current market environment? We attempt to untangle that question in this episode.
P.S. We record the stinger at the beginning of the episode. I had every intention of talking about inflation-proof portfolios, but conversations tend to take on a life of their own if you let them.
Kris
For most of us, a retirement annuity is the biggest investment we’ll ever make. More than any other investment decision, your RA should be scrutinised and prodded at every opportunity. This week Alexis Whitehead wanted to know how to choose a provider. We often mention 10X, although Sygnia claims to be cheaper. etfSA.co.za, home of our bestie Nerina Visser, also offers index-tracking RAs. Which is the right choice?
Equipping yourself with the right tools to make financial decisions, I believe, is the best way to healthy finances in the long run. I believe I should have the right financial building blocks in place if I hope to be successful financially. To recap, those are:
- No debt
- An emergency fund to cover my expenses for at least three months
- Medical aid
- Dread disease and disability insurance
- Retirement savings
I also try to develop mental models that would make financial choices easier. Those include:
- Calculating cost per use: In an ideal world, I want the cost per use for everything I own to be somewhere between R1 and R10. I like to think about it in terms of renting the same object. If something costs R2800 and I use it 280 times, would I be willing to pay R10 to use it every time? What price would I be willing to pay to rent something once?
- Opportunity cost and future value: If I compound the price of an item, will the object of my desire be worth giving up that amount in the future? I lose the opportunity to invest that money when I spend the money on other things.
- Cost compound: Fees compound in the same way earnings do. If the fees apply to assets under management, I also try to remember that the assets grow constantly. 1% of R10 000 is easier to stomach than 1% of R10m.
In the end, your money should make sense to you. Who you choose isn’t as important as why you choose them. Having a plan is half the battle won.
kris
Due to Simon’s travels we recorded this episode a few short hours before news of the S&P ratings downgrade reached us. I was depressed about the state of affairs even then. I don’t know if I would have been able to get out of bed for a recording after the downgrade.
Weirdly we had a question about the downgrade on ice for this episode, so we delve into what it means. I also found this interview with our bestie Nerina Visser very helpful. So much was said and written about it in the 24 hours after it happened, I don’t think I can contribute anything meaningful to the discourse. However, I did write this blog about it when it was all just a terrible possibility. I also made a list of downgrade-proof ETFs here. Simon's JSE Direct podcast also provides helpful information on what this all means.
I’ve been thinking about the impact of currency movements on my portfolio for a while. You may remember so far my investments haven’t really been making much money. I get very excited when there’s currency movement, because my entire tax-free investment account is made up of DBXWD and CSP500. When the rand weakens, these dollar-based investments momentarily shoot my portfolio into profit. It’s a happy time until the rand strengthens again. This time around I’ve devised a plan to capitalise on it. I ask Simon to sense check me in this episode, then I did it. So far, I have no regrets.
Kris
Long-time listeners of The Fat Wallet Show might not be surprised that I find questions around credit records distressing. My dubious credit history makes me wary of debt billed as anything but an expensive and stressful parting from my money.
That said, some larger purchases are only within most of our reach through credit. A bad credit record could be the only thing standing between you and the house you shouldn’t buy. A question from a 24-year-old listener trying to prop up his credit record had me do some digging. I was happy to find there are ways to get a good credit record without exposing yourself to the trappings of the bad stuff.
I also received one of my favourite emails of all time from Shaun McQueen this week. Thanks for writing, Shaun. You did my soul good.
I'd like to give you some feedback on Just One Lap and your Fat Wallet Show.
End of last year I've came to the conclusion that I hate my job. I've been pondering on this for quite a while ..what the hell, it might also just be a midlife crisis.
Anyway, so I decided to focus on the one thing that doctors know nothing about - finances. Become a trader or something...After all, finance 101 in med school is easy. If you need more money - work more hours! Worst business model ever. This is how I stumbled across your show via the JSE podcast.
After 3 months of reading books, listening podcasts etc. I'm obviously not my own trader or investor - yet. But, I've noticed a big difference in my thinking. I suddenly realize that I don't need the expensive car, or all the gadgets etc. It's easy to think " I deserve this and that, because I work so hard". What bullsh*t. I now know that I do not hate my job, I actually love it. It is the fact that I need to work all the hours to pay for all the stuff that I do not really need, that makes me unhappy in my work.
So, today I've made a massive poster and stuck it onto my home office wall for me to see every day. I've noted down the stuff to get rid off, my step by step financial plan and my road to less working hours!( happiness). It won't happen overnight, but it is a start.
Thanks for waking me up. I'll continue down this journey of financial education. And maybe in 3 - 5 years from now I'll work because I want to, and trade because I can.
Regards
Shaun
PS Not only engineers listening to your show...
A letter from Carel Nel reminded me how utterly irrational I used to be about money. My irrationality manifested in two ways: avoidance and minimising.
In an attempt to feel more in control of my chaotic financial life, I organised all my bills into folders by month. Sometimes I would spend whole days easing my anxiety over my debt by this ritual of organisation. I didn’t read the statements, but doing the paperwork made me feel like I was dealing with my debt.
I also became the queen of debt comedy. When forced to confront my financial situation, I’d joke about the crushing weight of it. “I’m so screwed. Har! Har!” It’s a stupid defense mechanism that I still use.
These days I’m irrational about other aspects of money. For example, the crushing feeling of anxiety when I invest my emergency fund or the inability to buy something I like, want and can afford.
In this episode of The Fat Wallet Show Simon and I try to put together a rationality checklist for making financial decisions. Here’s a cheat sheet:
- Work out the true cost, especially if you’re not paying cash. The true cost is the sticker price plus account fees, interest rates, delivery charges and any other rates that may apply.
- Work out the cost per use. Every time you use something, it becomes cheaper. Work out how often you’ll realistically use the item, divide the price by your answer to get to the cost per use. If you had to pay that amount to rent the item when you needed it, would you think it’s cheap or expensive?
- Work out the opportunity cost. If you had to invest that cash amount at 7% growth after inflation for 30 years, how much money would you have? Is the utility of the object or the joy it will bring your worth sacrificing that amount in your future?
- Are you trying to buy your way into a new skill? You want to acquire a new skill. You convince yourself the first step to acquiring the skill is to buy an expensive tool used by those who already have the skill. You find yourself unskilled with an expensive tool. Get the skill. Reward yourself with the tool.
- If you like it, can afford it, want it, buy it. This one is for me.
I think the first step to making more rational choices is acknowledging that we can be irrational. Awareness is often a powerful antidote to stupidity.
I like the concept of dividends: companies that do well share the love and the profit with their investors. Because my investment portfolio is small, however, the dividends I receive are often an inconvenience. While I’d never turn down free money, a R300 dividend payment isn’t exactly changing my life. That’s why I find the concept of income-generating assets confusing. If I had to rely on dividends in my portfolio, my retirement would consist entirely of cat food.
In this episode, I make it my business to learn what I can about dividends. Dividends might be cut and dry for ordinary share investors, but how do ETF issuers handle dividends? Shouldn’t companies be turning their profit into growth instead of paying it out to investors? How do I even know which companies are paying dividends and whether they’re good companies or not? Until my portfolio is larger and earning more dividends, what should I do with my tiny dividend payments? Right at the end I show off what I know about dividends and CFDs, only to be out-shone by Simon. I almost had it.
This is our 40th episode, by the way. As far as milestones go, it’s not a major one, but I want to acknowledge that I did something fun 40 times.
Last week Simon and I discussed how much I save. We also marvelled at Conrad Loots, who manages to save 69% of his salary. Over the weekend I thought about our conversation and how far I’ve come financially. Six years ago I had ten times more debt than income. Back then I would have taken last week’s episode as further proof that a better financial situation simply wasn’t for people like me.
I would love to be able to save 69% of my salary like Conrad does, but I would have to give up things that I love. I don’t want to do that. My current lifestyle is worth more to me than the ability to save more. If I happen to receive a windfall (which is definitely not in the pipeline) I’ll invest it. Until then, what I save is what I save.
Whatever your current financial situation, you can improve it if you want to. You don’t need to be saving 69% of your salary. You don’t even have to save 6%. Start where you are and make improvements where you can. Eventually it will become easier. You’ll see.
This week we also received two questions (and stole one) about the S&P500. Simon and I discuss the different ways to invest in the S&P500. We discuss how it affects tax, the impact of currency conversion and whether or not you should be investing in dollars.
Kris
I’ve been so excited about my tax-free investments. I was going to transfer my tax-free allocation on the 28th, then got paranoid that Capitec would transfer my money on the same day and cost me 40% in tax. I decided to wait until 1 March. The wait frustrated me, but I’m an adult. I know how to delay gratification.
Naturally the first thing I did on 1 March was transfer my allocation to Easy Equities, but then I had to wait another whole day for it to clear. Of course, the first thing I did on 2 March was log into my tax-free account to finally go shopping. When I got there, however, the money wasn’t there. Many scenarios played out in my head at this point. The last thing I thought of, because in my own head I’m incapable of silly mistakes, is that I may have transferred the money into my ordinary brokerage account. Investigation confirmed I had transferred the money into my ordinary brokerage account.
Instead of going shopping, I had to withdraw the money from my taxable brokerage account, transfer it back to my bank account and start over. The world of investments is full of frustrations and I am one of them. I hope your attempts were more successful.
It seems the new tax year has many curious about the opportunities, possibilities and loopholes. In this episode of The Fat Wallet Show, we answer all the tax questions we got this week.
Kris
I recently attended an Investec event where they introduced a structured product that piqued my interest. Simon and I have discussed structured products before, so I was expecting a hugely complicated bullshit product with massive fees. I was wrong (again).
I realised in that briefing that I have a great advantage. I know what questions to ask when someone tries to sell me a financial product. I don’t get intimidated by the concept of gearing and I have a somewhat tenuous grip on the idea of hedging. I know what high fees are, because I have low fees to compare it to. I understand what the S&P 500 means in the context of a financial product.
I know all of these things because of my job. My obsessive question asking is what led to this podcast in the first place. It’s a great position to be in, but I’m fairly sure I’m one of very few people who get to be in this position.
This week is a great example of how Simon helps me understand these products. I ask the same questions until I’m satisfied that I understand the answer. You’ll note that we are talking derivatives again. Although we’ve discussed it before, I always come back to it. Even though I understand the basic premise, I struggle to wrap my head around these products. I get the feeling I’ll only ever truly understand them if I start trading them myself.
This week we do an on-the-fly checklist of things you need to ask when someone tries to sell you a financial product. We start, as always with fees. The underlying product, counter party risk, whether the product is listed and how the provider makes money are all on the list.
Kris
In general, people don’t know how to talk about money. Add feelings and relationships to the mix and you have a lot of room for awkwardness. Your future financial security will be heavily influenced by the financial behaviour of your partner. You owe it to yourself to ensure that you know exactly what you’re in for.
When I was younger I got heavily indebted. This was bad. I did, however, learn a number of important life lessons from that experience. One unexpected upside is that debt forced me to talk about money to my partner. Our openness about money is something we’ve come to take for granted.
As I’ve become more open about my own finances, my friends have been talking to me about theirs. I’m often surprised that couples who are so comfortable sharing every other aspect of their lives struggle to have basic financial conversations.
In this episode, Simon and I try to figure out the best way to start talking about money with your partner. It doesn’t take us very long to become tangled up in the complexities of love and money. It’s hard, you guys.
If you have any tips, please send them to ask@justonelap.com.
Whenever I think I have a handle on tax and investments, some fresh hell reveals itself. Our friend Ros Brodie had a fascinating question about share events and capital gains tax (CGT) this week. I was hugely impressed that she managed to sell a share she never bought. It’s exactly the kind of voodoo I can get behind. Ros had two CGT questions. Firstly, how does tax work if you take shares in lieu of dividends? Secondly, what about shares she got as a result of the unbundling of a different share?
Carel Nel wrinkled my brain in this episode. It turns out residual payments on home loans are a thing. I did not know this. What Carel found out, to his dismay and mine, is that you still pay interest on the residual amount. His email is below. Once again I’ve shortened it somewhat, but the good bits are there.
I've been trying to figure out how residual payments on a loan work, but it doesn’t make sense to me.
The way I understand that it is if you take a residual of whatever amount, this amount is payable at the end of the term, whether you pay it in a lump sum or refinance it. What makes sense to me is then that this residual should not be part of the loan calculation at all.
Let's say you take a loan of R100 000, you pay a deposit of 10% and you elect to take a residual of 25%. This means that effectively you need a loan of R65 000. So, the monthly installments should be calculated with R65 000 as the total, the term and interest rate indicated. Right?*
The interest paid each month is calculated on the total amount outstanding which includes the balloon amount. After every month's payment, the total outstanding goes down less due to the lower installment meaning you pay more interest.
What I would have hoped for was if the interest is not calculated to included this balloon amount.
*Turns out this is not right. As Simon points out in the episode, when you take the loan amount, the bank gives you the full amount, even though you are paying back a smaller principal amount.
If you listened last week you would have heard us mention the new US Treasury Bond ETF by RMB. I was piqued, so I found out more. If you are equally piqued, read it here.
Lastly, Simon did his super cool tax-free investment talk for 2017 last Thursday. It's always chockers full of information. View it here. In addition to the great presentation, I met someone who has started an investment education club, which excites me more than anything investment-related should ever excite anyone. If you don't ordinarily come to the JSE Power Hours, you're missing out.
Good news! This episode is a respectable just-over-30-minutes long. We recorded earlier than usual, which means there’s quite a bit of feedback we didn’t get to. We will get to all of that next week.
Two weeks ago I featured the NewFunds TRACI ETF and came across this sentence, “The TRACI index measures the mark to market value of the income earned from rolling a 3-month money market deposit on a monthly basis.” I don’t know about you, but there’s very little of that makes sense to me. This week I try to get to grips with the whole money market concept. Turns out I had some serious misconceptions.
The NewFunds TRACI is one of the ETFs in our portfolios. Go check them out here.
Finally, I got this email from Jo Thies. It’s too long to feature in an episode, but I really enjoyed it and thought I’d share. I’ve shortened it, but you’ll get the gist.
“I’m pretty sure saving for retirement is really bad. First let me qualify this unpopular notion with a paragraph. Possibly more than one depending on how worked up I get.
First off having cash, investments etc when you choose to retire is really nice. But so is a cup of tea. And having more cash when you retire is obviously better than having less cash. But if you really want to retire and sit around… and… while away your time before your foamy, gurgling death in hospice… you need a metric fuck tonne of cash when you die. Like literally.
Actually, wait… you want to retire? Basically this means you’ve fucked up your whole life. For realzies. They sold you the kool-aid. And you drank deep. You’re on step eight of your ten step life. Next stop… smelling like an old person and death. Some people like to imagine step nine is travel and boat cruises… but it’s not. It’s a weird musty smell and having suspicious-looking growths zapped off your wrinkly, sun damaged skin and pencilling funerals into your diary every weekend as your friends and family kick off.
Fuck me I can’t wait.
So, I have to save and invest FOR MY WHOLE ENTIRE LIFE in anticipation of this. So some motherfucker (and I don’t use this term lightly) who sold me an RA (when I was a total financial noob) gets commission for their rest of their lives. Whereafter they will hopefully burn for eternity. Let’s be honest, if somebody is going to burn I’d rather it be them….
Anyways. I don’t like to name names. I like to be Stealthy that way. But imagine someone who wants to retire when he’s 45. We have to start somewhere. So let’s start with science. Because science is awesome. And finance is just okay. We’re using out-dated models and concepts that were struck in the fifties. Expected life span. You see we all have just one lap. Let’s say it’s 400m, only halfway through the race someone has changed it to 800m.
My expected death is age 78, statistically speaking. I’ve just turned 38. It feels ancient. Some days I wonder how people who are 48 get out of bed in the morning without painkillers? Simon? Any tips?
Only, my life expectancy is probably not 78. It’s probably closer to 100. Mind you for the proletariat its still 78. But being a 1%’er I’ll probably be in a position to afford the miracles of science that are coming. The nano-machines. The new organs (with modifications). The rejuvenation clinics. The implants that tell me three days in advance that I’m going to have a heart attack (just enough time to pop down to Sandton clinic and have flawless robotic surgery and a flat white). My 10 month old daughter will likely live to be 120… maybe longer. And for her children death maybe something that only happens to the poor or unlucky people.
Imagine at 45 you’re gonna have live like… 60 years off your retirement funds. I’m making an assumption that you’re healthy. And don’t get shot in the face, which is an annoying possibility living in South Africa. Or get annihilated driving your scooter - if ever there was a life reducing way to spend your time.
That’s a long time. And investments are super fickle. I’m not even contemplating a post Trumpian dystopian future where we trade cigarettes and blowjobs for potatoes and spam.
My issue is about how we look at our lives. We get this corporate bullshit pumped down our throats as soon as we’re born. This is your life. Go to school. Get a degree. Get a job. Work 9 to 5. Buy a house you can’t afford. Buy a car you don’t need. Breed. Retire. Die. The more we educate ourselves, the more we learn, the more we realise there are other ways. (Which is why I love your show) Markets may crash. You may lose everything. But no-one can take away what's it your mind.)
Instead of retirement shouldn’t we be punting a concept of designing our lives better? At the moment the way we use our money doesn’t make sense. We kill ourself to hoard our money away for a period in our lives where we can’t really make full use of it anymore. It’s a terrible sliding scale. We can work harder, skimp more, save more, retire earlier. Or draw it out. Work longer into our lives… but then decreasing the time we have available to enjoy life.
Money (and by association our investments) should be the scaffolding we use to build our lives, not some weird fucked up end game.
To complain without offering a solution is to whine. I don’t want to whine. I’m not saying mine is the only solution. Or even a solution. But I’d love to have the conversation.
I don’t want to retire. Neither do I want work a 9 to 5 job for the rest of my life. But why are those our only two options? Fuck you social norms. Fuck owning a house. Fuck owning an expensive car (Sorry, Kristia… An Alpha? When you break it down, that’s just vanity. An Atos is totally functional.)*
Anyways. I’m trying to practice what I preach. I want income streams that can potentially last forever, and since I’ve procreated, potentially create legacy. Ideally I’d like a dividend income, a rental income and being an entrepreneur some sort of company income that doesn’t require my permanent presence, so I can do other stuff. Carpe diem. Or any other carp, really.
*Yes, Jo, but aren’t I entitled to my little pleasures?
Kris
Sometimes a lot of deliberation about money ends in an either, or situation. This week is all about those dilemmas. Firstly, we think about monetising our podcast. It seems only logical that a podcast about money should make some money. Do we find a sponsor for the podcast or rely on our listeners for donations?
Our listeners have dilemmas about who to trust with their money, whether to buy the Preftrax ETF, how much should be invested offshore and how to handle different investment horizons. We manage to get around to all of this and to pontificate a bit, which is why this is another very long episode. It might be the new normal.
Lastly we are thrilled to find a happy retiree with an awesome name. Our stomach-dropping moment comes courtesy of John Morrison. He points out buying a living annuity is a decision worth millions. Why is nobody talking about this?
Please let us know if you have any strong feelings about podcast sponsorships. Also write in if you're happily retired. Remember, The Fat Wallet Show is a show about questions. Send all of this, and all your other random thoughts to ask@justonelap.com.
Kristia
Assuming your life went well and you made good decisions, you are now ready to retire. In addition to old-fashioned retirement products, you have a personal investment portfolio, a tax-free account filled to the brim with ETFs you love and some cash. Now what?
Selling shares for income can’t be a pleasant experience - especially when earning an income is no longer an option. You are eating into wealth accumulated over a lifetime. It’s easy to forget that this is what all that wealth accumulation was all about.
In this episode of The Fat Wallet Show, Simon and I discuss the 4% rule, so beautifully explained by our friend Stealthy Wealth here. Then we try to work out how you should go about deciding which assets to chop to make up the 4% you are allowed to take every year. We deal with the somewhat more philosophical problem of dying with your entire fortune intact and wonder if anybody actually knows a successful, happy, active retiree.
This episode is slightly longer than usual, because we also try to work out how to spot a scam and how to choose between different listed companies in the same industry. Somewhere in there I confess something that I’ve successfully kept under wraps for many years.
If you know of or are a successful retiree, please tell us your story. If you have a question, even if you think it’s stupid, ask us. You can do both of those things at ask@justonelap.com.
We are, as always, grateful for your time and attention.