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The Fat Wallet Show from Just One Lap

The Fat Wallet Show is a show about questions. It’s about admitting that we don’t know everything, but that we’re willing to learn. Most of all, it’s about understanding as much as we can to make us all better investors. Phrases like, “I’m not sure” or, “Let me look that up and get back to you” or, “I don’t know” don’t exist in the financial services industry. If you ever had a financial question you were too embarrassed to ask, you know what we’re talking about. In this business, appearances matter, and nobody wants to seem like they don’t know how things work or what the outlook is for the buchu industry. It’s easy to excuse that little vanity, except that people in the investment industry are meant to service investors - people like you and me who need to figure out what to do with our money. There’s no such thing as a stupid question in this show. If you have unanswered financial questions, this is your opportunity to have them answered in a way that even I can understand. Pop them to us at ask@justonelap.com. Hosted by Kristia van Heerden and Simon Brown
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Now displaying: November, 2018
Nov 18, 2018

Kristia is on holiday, so we're rebroadcasting this very important show from May 2017 - the five concepts to make you rich.

No show next week.

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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.

Kris

Nov 11, 2018

Sorting out money between partners can be fraught, but it's a walk in the park compared to parents and siblings. We spend our formative years trying to secure the love and acceptance of the very people who we now have to say "no" to, which is why we are Money Enemy Number One.

Your best chance at success is substituting emotions for numbers. If you are the person your family looks to for financial support (and you have no moral objections to helping out), the first number you should care about is what you can afford. This doesn't mean how much you have left over, but how much you are willing to give. You also have the option of paying directly for fixed expenses and letting them figure out the rest. Alternatively you can offer a cash amount, walk away and fight every urge in your body to give more if they run out.

You don't have to say no to your family if you don't want to, but you are allowed to have boundaries. If all else fails, ask yourself what you would do if your kid made the same request.

Devon’s mom told him he’ll have to take care of her his whole life. After paying off her debts, renovating her home and countless budget discussions, he's losing hope.

I have had endless budget sit downs and fiscal meetings with my mother to try reign in her expenses, but after a few months the old habits come back.

She’s very good at convincing herself whatever she buys is absolutely necessary.

I listened to your podcast about talking to your partner, but I find having a talk with my mother far more difficult and emotional.

Her house is paid off (just levy, water, electricity, medical aid and living expenses are needed) but she spends over R10,000 on groceries on just her and my sister at home plus clothes and other non-essentials, plus having a domestic worker twice a week and a gardener for a small garden and a pack of 5 dogs which obviously need to be fed (I tried everything to stop her at just having 3 max).

How would you suggest approaching this firmly enough that it actually does stick with her and leads her to actually taking action to cut expenses?

In essence how do you get this message across to someone doing their utmost to stay dependent on others to avoid the responsibility of their own financial position.

I feel like I have tried absolutely everything and have spent so much energy and effort that I am at my breaking point.

Emile

Market commentators will say they would only buy a stock at a particular price level. For example, stock A is expensive at R100 but fair value at R80. Is this merely a reflection of the rand value of the P/E at different levels i.e. R100=P/E of 20 and R80=P/E of 16?


 


Wim

Taxpayers get a R23k interest deduction. Wouldn't it be better to first max out this benefit, before going to TFSAs, because it’s already tax free!

What is TFSAs offer the best returns? Can I expect more than e.g. a 32 day notice deposit or a 24 month fixed deposit somewhere? As far as I remember, the TFSAs have a lot of red-tape w.r.t. what to invest in and how much risk these funds may take on. Will this not mean lower returns?


 


Marina’s twin sister introduced her to the show. She has a question about ETFs.

Stealthy mentioned that the smart beta indices try to outperform the market and rarely do so, and that is why he sticks with vanilla indices.

She also read a Moneyweb article about the SPIVA report.

Some are of the opinion that active funds rarely outperform the market but passive trackers can? What is your opinion on the matter? If active funds with competitive fees were to become available in the future, would you buy them?

Lars Kroijer Investing Demystified series: https://www.youtube.com/playlist?list=PLXy71rkGuCjXLg9N8zowwUpXCYfBcMJFK


Frank sent a link to a podcast called How It Began, where they discuss the stock market after episode 123. https://itunes.apple.com/za/podcast/how-it-began-a-history-of-the-modern-world/id1221558103?mt=2&i=1000389611474


Mpilo wants to know what listed property is. They also want to know what a mutual property fund is.


Psychedelic Nerd wants to double-check that they understand CGT:

If I invested R5,000,000 into the market, and now it is worth R10,000,000 . I decide to withdraw R400,000 (i.e. a 4% drawdown rate) to live on for the year. Half of this (R200,000) is capital gains. So, after the R40,000 CGT allowance, I am due to pay CGT on 40% of R160,000, which is R64,000. I have the 2018 income tax free allowance of R75,750, which leaves me with no taxable income! So I keep the full R400,000.

In this scenario, the CGT mentioned here is the only income for the year.

Does this scenario sound right to you or am I getting some steps wrong?

(If this is correct, over time I guess it will change as the percentage of the annual drawdown that is capital gains will probably become higher.)

They also want to know what I mean by “cash” savings and if it’s a good idea to have an emergency fund in a money market account.


Ivan made Kay a spreadsheet to calculate her tax liability in a year.

Download the tax calculator here


Kiril has a hella fancy car. He wants to know if he should speed up his repayments.

I currently have an emergency fund, maxed out my TFSA for the year, contribute to a provident fund through work, and have zero debt except my fancy car.

Whether owning a fancy car is a good idea is not part of this question. My designated installment is R7600, which I've upped to R8000. Should I increase this to R8600, and put in some sizeable lumps sums, eg. My tax refund?

My interest rate is 10.5%, but Tito's jitters indicate this might rise in the coming year. Please, I'd really appreciate your advice.


Promise wants to know who we prefer for TFSAs.


Pierre

If I sell out of a fund and incur a 360k capital gain which I will be taxed on, can I invest 360k straight into an RA and thus pay no CGT?

No - but you can contribute 27.5% of your profit to your RA for the tax break.

First point RISK = REWARD, pretty basic if you take more risk your return can be higher (or lower), take a small risk and you make a small return.

Bonds have a very little risk so you get a small return BUT you are very sure you don't lose your investment. This is called the investment risk pyramid.

Cash (no risk)

Money on deposit in a bank which as a guarantee if a bank goes bust

Bonds (low risk)

1)US treasury bonds

2)Developed markets

3)Emerging Markets

Within each of these 3 sectors you get municipal and corporate debt too

ETFs / Unit trust (medium risk)

The more diversified the ETF/fund lower your risk should be, ie if you buy an ETF with only 30 shares and they are all banks it is less risky than buying one bank share but riskier than buying an ETF with 1200 shares in it across many sectors.

Shares

Within the share universe you get more and less "volatile" shares. Volatility means how a share price moves day to day around its average price over time in laymen terms. So a stock that is speculative like saying your Blue Label group moves in massive swings, something like a property stock which is run by a well managed reputable outfit which owns shopping centres and hard assets and receives their rental income from these properties every month will have a stable income and below volatility. Worst comes to worst the assets (buildings) are sold on their own and the shareholders in the stock can get their cash back. The assets are easy to value.

Stocks are theoretically priced by their earnings, how much we are willing to pay for those earnings is called the price-earnings ratio, higher PE the more willing people are to pay for its earnings. Sometimes stock prices make very little sense. Example - Tesla, we all love Elon Musk, he is trying to change the world, he has very big ideas, he has shown potential BUT his company is not making that much money yet. People believe his dream and keep buying Tesla shares thus it has a very high PE. Very low earnings and high PE. Every sector has its own go to PE. Banks in SA generally below 12.

Leverage / Speculative Funds/Small business/Bitcoin

Risky stuff, could lose everything or double your money, need a lot of research and gut feel to know what's what. Not for the amateurs, no matter how good the tip was your buddy gave you or you ever heard at the gym.

Ok so that how risk is priced in instruments next layer of risk is the country risk, it is generally expected that:

  • US least risky (now)
  • Developed markets (UK, Japan, Germany etc)
  • Emerging markets (South Africa, Turkey, Russia etc)
  • Junk Markets (Zim, Venezuela etc)

Each of these countries has their own risk profile and within each you can buy a bond (least risky for that country) or you can buy a share (risky for that country) .

If you buy a bond in say South Africa you might expect the same return as a medium risky share in a big developed market. Theoretically speaking, my idea to get the concept across. The risk is everything, the risk is priced in return, for a stock that return is measured in its earnings for a bond/cash in its return.

So back to your story, why did my ETFs in SA do nothing but when the market fell I still fell along with it, should I have been hedged through my diversification?

There are 2 parts to the answer.

1) Naspers makes up roughly a quarter of our Top40, Naspers is basically a company holding a share called Tencent, Tencent is basically the google plus facebook of China. It's gone up in a straight line for last 5 years. Dragging our TOP40 with it. If you take out Naspers/Tencent our markets has done sub9% maybe less... Why is that you might ask, unemployment, bad ANC policies, international investment firms selling South Africa as a brand, the land appropriation bill is a massive massive issue, firstly our banks are being sold off more intensely than I have ever seen in my 15 year career, you can get a big 4 bank stock now at a PE of 8 (side note at this rate it will be more tax efficient to buy a bank stock and get a better dividend yield on your money than the bank can offer you on the interest rate and the div yield is tax free!!). Banks own the bonds on the properties the ANC want to appropriate thus banks go to zero, the market has decided to rerate the risk on banks and the price went down, more risk bigger move in this case down.  

Tech stocks have rerated after an incredible run the last few years, Tencent halved and with that the price of Naspers and thus the TOP40 or JSE and your ETFs. Buying the Top40 or DTOP is not a good diversification. I'll say that again, buying the TOP40 is not a good diversification.

2) The second part to the answer is more interesting, think of all the capital in the world flowing around like water freely. When there is a lot of capital it sloshes around the world, builds up at the riskiest places and even forms bubbles, think bitcoin.

When is capital cheap? When interest rates are low, because anyone can borrow a lot and do with all that money what they want to. When was capital cheap, since the 08 crash, the Fed and other central banks took interest rates to ZERO percent, all that cash has been sloshing around the world and found new homes in the riskier assets and countries like you know who SOUTH AFRICA. For the last year or so the Fed has been slowly increasing its lending rate to try and normalize markets (or their market among things). The effect is like a giant sponge in America sucking up all the excess money they were out there in riskier assets. Starting at the riskiest and going down the pyramid to the least risky. So in our case, we are an emerging market check, we have are buyers of an ETF that's listed over equity check, we have bad economic policies check, there is talk of taking away peoples assets which banks have bonds overcheck. And there you are, your ETFs have rerated in risk to the new reality.

I don't want to make you feel worse but that return you lose you have is in Rands, as we discussed above, a South African Rand bank account is riskier than a USA bank account, thus the rand is also being sold and more people are buying dollars. (if you can earn 3% risk-free in the US why buy an SA bank account and only make say 6% with all our inherent risk too).

I have been a holder of 4 "hedge" funds over around 10 years. Over a decade plus they have been the standouts and I managed to get in quite early and trusted each of those outfits as I work in the industry and am well aware of what they do. That being said, you pay through your ears for this good return these guys get, there are also down times.

I decided at the beginning of the year to start liquidating investments in these funds down to 25% and buying ETFs listed on the JSE but in foreign exchange and international markets. I like and have moved into Ashburton world bond index in USD, NASDAQ listed by Satrx, GLODIV dividend aristocrats international, SYG500 SP 500. All of these ETFs hedge me against any South African and Rand risk.

My thinking is, I live in South Africa, I own my house in South Africa, I earn Rands in South Africa. South Africa is a tiny country on the tip of Africa, do you think if you approached someone in Japan or America and tell them you think it is a good diversification to buy TOP40 index ETF in a tiny country on the South tip of Africa. No ways! Buying SA listed ETFs like TOP40 ect is not being diversified, you are actually taking on a lot of risks, we now have the freedom and products to buy cheap, international ETFs on the JSE which gets you out of local currency, buy them and buy as many as you can.


I wrote about how I plan to approach the maintenance to my new house in last week’s newsletter. I said I’ll probably under-budget. Dave had a great point about that.

Your new project/s made me think of one of my favourite Project Management lecture points - don't stress the accuracy, stress the completeness.  If you budget R100 and it runs to R110 you are 10% out, but if you don't even put the item in the budget then you are in trouble.


Quinton wants to run his ETF strategy past us. These are ETFs he’s buying in addition to his RA and TFSA.

I don’t want to be to active as an investor, I’d like to select shares, then contribute monthly from now until retirement.

He’s looking at Satrix Top 40, Satrix S&P500 and the Ashburton Global 1200

My idea is to buy each monthly.

I am a minimalist and like keeping things simple, but also don't want to invest in the wrong portfolios, or be too diversified.

If you think this is a good strategy, would you invest equal amounts into each or spread it more offshore (E.g. Satrix S&P500 and Ashburton 1200 = say 80%) and Satrix top 40 = 20%?

I have received dividends in my TFSA account now, and was thinking on using those dividends to apply the same logic.

What are your thoughts on the Satrix Emerging Markets, Nasdaq 100, or MSCI World index. Should one be considering any of these?

Nov 4, 2018

I had barely landed my first job when I bought a car. I had no deposit, no idea how interest worked and did whatever it took to get wheels. Thankfully my mother had recently bought a car exactly like mine. I assumed that I couldn’t afford anything bigger. In retrospect I probably could have gotten away with a much fancier car. Thank goodness for my own stupidity.

I agreed to pay a fixed interest rate of 16.01%, paid the bare minimum instalment the entire time and ended up paying R138,527.46 for a car with a sticker price of R66,578.95. I also realised early on that I couldn’t really afford services and tyres.

Thankfully I’ve learned a thing or two about money in the eleven years since I bought the car, which is why I still drive it.

Terence almost fell into a car trap, but then came to his senses.

Last year my double cab bakkie was stolen and after a few months, I replaced with a shiny new Ford Ranger.

The insurance payout was only ¼ of the price of a new car. I got caught up in the hype, bells and whistles of a new car and proceeded to buy one of the high-end models.

After a year, the first license renewal came and I went off to the Post Office to renew it. When they gave me the amount, I had to leave and draw more money, because the license was R1200.

I was mortified and went home a different person.

I calculated how much EXTRA this car is costing per month than if I bought a small second-hand car for R120,000

Interest Lost: R1,700 (R300k in a 32 notice account at 6.7% interest)

Extra on Insurance R800

Extra on Fuel R400

Extra on Licensing R 40

That’s R 2940 p/m or R 35 280 p/a.

95% of the time I was in the car alone, so it made no sense at all to drive a car with 4-5 seats.

I must’ve used the bells, whistles and ‘Voice commands’ 3 or 4 times, after that it was just a car.

That was when I made the decision to sell the car. I’ve taken a hell of a financial knock.

I’m now looking for a second hand two-seater bakkie to do my DIY projects. It would do the job just fine at a fraction of the cost.

Having this BIG expensive bakkie wasn’t practical anymore because of the pressure experienced from three directions :

  1. Maintaining an expensive car. I think parts are priced at the “balancing point” where it’s extremely expensive but not enough to justify replacing the car.
  2. The government will charge more for fees, tax and fuels costs get you too.
  3. Thieves are out there to steal the expensive cars (mostly), because of the high resale value of the parts.

A friend also decided to trade his car for a double cab because they went on a road trip and the car was a bit small for all the holiday goodies. That only makes sense if you go on holiday for 6 weeks or more a year.

If I hired a car for 10 days with Thrifty car hire it would cost between R4,900 and R7,700 depending on the car I got.

The most expensive option is about 22% of the savings per annum and the R27 580 saved for the year could then be Invested.

I think hiring would be more fun, because I can choose a different car every time. This is only for self-drive holidays, because when you’re flying somewhere, you have to hire a car anyway.

What would be the approximate financial gain in 10 years compared to the devaluation of the a car?

I've made the mistake and taken a knock for it, so if anyone could benefit from this by thinking it through, running the numbers and making the right decision. Then my financial stupidity (loss) will not be in vain.



Matome is our winner. He took two years to sort out his finances, mailed an accountant for an answer (which he didn’t get), took two days to draft an email to us, found the answer and then sent us another email. Even though he found his answer and he’s now on the right track, I thought we could discuss his original question. He wanted to use his tax rebate to fund his TFSA, like I do.

Are there different benefits (tax refunds) for the different savings vehicles like a pension fund VS a retirement annuity.

He later discovered that his tax return doesn’t reflect his current pension contributions, because I enjoy the tax relief on a monthly basis. I’d recommend he finds out what that tax relief impact is and save that amount.


Ben 

I wanted to know what you think about Easy Equities' EasyFX facility? Is it worth using based on fees and is it worth it to convert some of my hard-earned randelas into dollars?

Also, after the misleading campaign of ABSA's 13% interest product left a bad taste in my mouth I am considering government bonds even though I am fairly new to that. Is there a recommended platform where I can pick those up?


Get Down Adam figured out insurance premiums aren’t as objective as he thought.

In the spirit of decreasing my costs, I figured I would give OUTsurance a call. My car insurance was R900pm, which felt like too much. I got the insurance when I lived in the crime-infested city, so I figured now that I was being a rural doctor my costs should drop.

I called them up and spoke to a lovely lady who registered my change of address and ran the magic computer. As it turns out, I now had to pay more. Crime isn’t a problem in the sticks, but potholes are. Needless to say I was quite sad.

The agent transferred me to her supervisor. I explained to him I was a bit shook. I told him Momentum short term insurance had offered me a better deal. Suddenly the game changed.

I was thanked for my brand loyalty, for being claim free and for being a happy person on the phone. Suddenly, the computer system had also had a change of heart. The supervisor told me he wouldn’t increase my premium. So that was nice. But then... he reduced my premium to R550pm (from R900) and asked me to continue being the good Outsurance customer I was. On top of that, he backdated the new premium by three months.

Lesson is these companies make us pay made up amounts. There is money to be saved.


Petrus has two very expensive pugs.

I have two highly spoilt pugs, Oreo & Lili. We love them to bits and we don’t have kids so they are like our kids.

However, a couple of things to consider:

  • Pets are expensive (obvious one that I am sure you already considered)
  • If you ever move to another country be prepared to spend a fortune to move them (cost me around R40k) unless you are willing to give them up or even worse (and people do this) have them put down.
  • Having guests over is quite challenging as some people don’t like animals (makes me like them less).
  • Biggest thing for us is how limiting pets are, you can’t just pack up and go somewhere. You have to always think about your pets. Shall you take them along (AirBnB should be pet friendly then), you cannot travel by air, you have to leave your pet with someone else or pay a premium for a decent kennel (in SA I highly recommend: http://www.skyviewkennels.co.za/)

Don’t get me wrong, we absolutely love having Oreo & Lili in our lives, but the money is only a very small consideration for owning a pet. But if you get one, you’d better call him “ETF”… 😊


Wesley has a recommendation for independent financial advisors.

I had some success with Roxburgh Trust. They allowed me to hire them for a review plus looking at some tax consequences on an hourly basis.


Sabrina would like us to explain how timeshare works and whether it’s better than just going through an agent.


Special shout-out to Coenraad and Christiaan for answering Darryn’s question about tax-free investing in the UK. The answer was ISA, in case someone else wanted to know.


Also to Fried for sending some excellent advice to Wilhelm regarding medical insurance and pension funds for medical interns. Any other medical interns who are interested are welcome to hit me up for the mailer.

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