You can find the Satrix webinar we mention at the top of the show here.

Isn’t it odd how few money conversations centre around mundane financial choices? Surely our net worth is a reflection of the small financial decisions we make every day. A rather typical experience with a contractor has me questioning my decision-making this week. Do I need to think differently about the intersection between price and quality? I asked your help and got some really excellent ideas. Simon and I think through many of them in this week’s episode of The Fat Wallet Show. 

I loved all the feedback we got. Unfortunately my favourite new way of thinking came in after we recorded the show, but here it is:

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Your feedback:

Figure out the average price and look 10-20% above that and compare features/requirements. I usually end up with something on the upper end of mid range, with the reliability of the higher end, but none of the "its the best" tax. Cost per use is the other dominant factor.

— z3llin (@z3llin) June 25, 2020

Oscar: If the price difference is marginal, I'd go for convenience, or for good service, or both. If the price difference is sizable, there is bound to be third party published material where this difference is explained [in detail].

Tamara: Depends on the thing. Some things are worth paying more for because they yield a better experience or last longer than cheap alternatives (e.g. decent tools, leather boots). Other things, I take the best price I can get (e.g. refill on my gas bottle, cat scratching block)...

There's also an element of risk that gets factored in to value equations on some stuff. I'm not going to go hunting for cut-rate medical specialists or the cheapest backyard mechanic. I'll willingly pay more if I believe it translates to better care.

Duke of Prunes: Generally the cheapest thing with the most favourable reviews possible.

Manus: My problem is to figure out if I really do need the thing, if I do need the thing I have to figure out how important the quality is. If quality is important I will overpay if need be.

Overpaying because it is pretty isn’t reason enough to overpay.

Daniel: How much I will be using it will also determine how much Im willing to spend. The more I will use something the more Im willing to pay for better quality versions.

Rudi: If it separates you from the ground, go for quality (shoes, bed, tyres)

Facebook:

Sheila: Depends .. may buy cheapest item, find it is inefficient, and revert to an expensive product. For instance - dishwashing tablets.

Wilhelm: Some brands offer amazing quality products but also at a increased price. If I know the product will last a lifetime, I don’t mind paying extra (Stanley Flasks, LED lenser headlamps).

Greg: I generally go for quality, my big exception is cell phones, in my mind they do the same job, so I just buy the cheaper Chinese brands for cash; I just can't justify shelling out 15k plus for a cellphone.

Wynand: Here I actually differ. I feel I interact with this device for HOURS everyday so I soend money to make that experience a pleasant one.

Shane: in the kitchen i can tell the difference between a R1000 pan and R90 pan. the latter is so wobbly it barely touches the stove. no more skimping on kitchenware for me , no matter what the cost 😉 i skimp on phones (R200 nokia), cars (none)

Andrew: Cost per Use is my go to metric to guide those decisions

When I was poor was the king of cheap for a long time and it didn't work.

But then I started looking at the Cost per use.

Now I am well off- by no means ready to retire. But comfortable- now I try to look for high quality stuff but usually second hand - like GPS watches, Baby stuff - prams, cots etc.

Sometimes on certain products I buy new. 

Down jackets for winter - super expensive when I got them (I have two). But I wear them just about everyday in winter for the last 6 years and they are going to last at least another 6 years or so. My wife will be sick of them - but much better investments than the R300 fleeces and jackets I was buying before almost every year or so.

So a R900 down jacket (price 7 or 8 years ago) over 10 years works out to about R1 a use (90 days a year). If I had bought my regular jackets I would have spent R4000 over the same time period (with inflation) and not been as warm.

Same goes with a good cast iron pan. Knives, I buy good quality and I sharpen them regularly and have a magnetic knife rack.

My grandkids will probably use my knives and cast iron pan.

Max: Certain important items I spend on especially if I know it will last based on experience ie. shoes, tyres, laptop. Other things I'll buy the cheapest I can get. I hate buying the same thing twice 🙈

Win of the week: Jaco and Hester

Been bingeing the Fat Wallet Show for over a year, and it's been a major force in how I think about my money. 

I've even started doing a tiny bit of financial education myself - just around my own sphere of influence :-) Something which struck me hard when starting to take control of my money is exactly this concept: nobody is coming to save me. 

For example, I used to play the lotto and dream fantastical dreams of what I will do with the money. But your podcast and Sam's book (where she makes you add up all your future paychecks) made me realize I'm in this by myself. 

What I can't achieve on my salary alone can not be achieved. And it's made a massive difference to how I spend (or don't spend) my money. I did a small money workshop with my friends last year, and I had to confront them with this concept early on, and see how something shattered behind their eyes - something they didn't even know was there: the deeply rooted belief that "one day I'm gonna be rich - by some magic". I also saw what you've been espousing for a while: when someone is not ready to hear it, nothing I say matters.

Anyway, thanks for a great show, and a great job you guys are doing. You've got a Fattie in me!

A while back my smart and handsome co-host Simon Brown did a presentation about the perfect trade. Even though I don’t trade myself, I found the presentation inspiring. As we often advocate, when it comes to this money business it’s best to focus only on what you can control.

A conversation with Cash Club writer Njabulo Nsibande made me realise we can apply the idea of a perfect trade to our investments too. As Simon and I flesh out that idea in this podcast, we realise you can aim for a perfect month in your own finances, regardless of what you’re currently focusing on. 

Here’s the template for the perfect money month we came up with:

1. The first money that leaves your account after every pay cheque goes towards your future.
2. Look at your money: A broad overview of your whole portfolio, as well as your individual expenses every month. 
3. Don’t use the money you set aside.

Every month you do all three of these things is a perfect month. Your challenge is to see how many months you can get in a row. Who’s game?

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Win of the week: Linka

I found "Just one lap podcasts" via Stealthy's blog where I ended up after not agreeing with a financial adviser about an investment strategy and deciding if other people can understand this stuff, I can too. 

Vigorous amounts of googling and reading showed that as I guessed, none of this stuff is rocket science, its just the way that the information is presented that precludes the general public from accessing it. Thanks for all you and Simon's contribution to unraveling the unnecessary verbose complexity the industry uses. In short, just want to say, I really enjoy the podcasts. Have started to listen to the JSE direct one as well and surprisingly, I can understand most of it!

I recently started working for myself and registered a company. Mainly to enable future tax deductions and to keep company and personal equity separate. 

I opened a business account with FNB. At the time it made sense to me since I was already with them. I wanted a 7 days fixed deposit account to stash the incoming payments to keep this money from being lazy money.

However - After looking at the bank fees for the gold account (personal) + business account I am starting to dislike the numbers. Also the extra charges I missed somewhere in the fine print is really starting to annoy me.

If I don’t need to have a business account, I can open two accounts at Capitec, which would probably be much cheaper. If this is not contrary to SARS' requirements - Capitec does not do business accounts yet.

While being employed I was able to cover my bank charges with Ebucks, but with an irregular income, I doubt whether I will be able to maintain that level.

Brendon

My wife and I purchase the Ashburton World Government Bond ETF.

The initial thinking was simply to get exposure to bonds. But I've been trying to figure out if we should rather purchase SA retail bonds instead of a bond ETF.

Could you go through some differences and pros and cons of SA retail bonds versus bond ETFs.

I understand that retail bonds provide you with a fixed interest rate (coupon), but I'm interested to know in what situations you would purchase one over the other.

Marina

We recently had a baby and decided to start saving for her immediately. The purpose of saving is mainly for her tertiary education. 

We decided to go 50/50 into Discretionary and her TFSA. She can choose where to draw the money from when she starts University. It will be a good learning opportunity for her. 

For the discretionary investment we want to do cash. FNB has a “my first savings” product at 5.75% interest and no monthly or transactional fees. However, our broker also pays interest on money not invested at a rate of around 6%, but Simons says it is illegal to do this. Why is it illegal?

Can I invest the money into a cash ETF with similar returns? The main concern is whether she will be paying tax (in any form) as a minor. If the money was invested into a money market she would only need to pay tax on interest received when she starts earning and declaring an income. Would she be paying tax on interest received as a minor inside a cash ETF without a means to claim it back? And if she sells off the ETF would she be paying capital gains (even if it is a cash ETF)?

Gregg 

When you draw up your will, include a clause that if your children or spouse are to receive your inheritance, it cannot be taken by their respective spouses (in your children’s case) and your wife’s new spouse should she remarry. 

You spoke of a separate will to manage your offshore assets. I have a US Equities Portfolio through EasyEquities. Would this qualify as offshore assets and require a separate will?

You spoke of a life policy paid directly to my estate and/or directly to my beneficiaries. And that one should have a policy that takes care of the debt, duties, taxes and executor/legal fees in your estate.

If I owe 500 000 on my house when I die, and my wife (not the estate) receives a life policy for 700 000. Is the estate going to sell/liquidate my assets in order to pay the 500 000 on the bond, or can my wife pay the 500 000 into the estate to settle the bond? 

I’m trying to figure out if I need a separate life policy made out to the estate as beneficiary to cater for the debt in the estate? I don’t want the estate to sell the assets to pay off the estate debt if I have left my wife sufficient funds to settle any debts.

If I don’t pay estate duties etc. on an estate less than R3M, does it mean if my estate is worth R3,1M, will I pay estate duty on the full R3,1M or only on the portion over and above the R3M limit, in this example 100k?

If I own a second property, can I specify in my will that said property is not to be part of my estate but is ceded directly to my beneficiaries? If I wanted it not to form part of my estate, what would I need to do?

When you buy a locally-listed ETF based in another currency, two transactions happen in the background. First, your rands are converted to the other currency. The new currency is then used to buy the ETF units. Buying an ETF based in a different currency is therefore an easy way to introduce currency diversification into your portfolio. 

In this episode we help you understand the impact of these two transactions on your portfolio when there’s currency movement. If, for example, you bought a dollar-based ETF and the rand weakens against the dollar, do you have more money or less money?

We explore hedging and why this strategy might be seen as a currency hedge. If you’re looking at offshore ETFs for your portfolio, you don’t want to miss this episode.

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Tony 

If you invest in an ETF like the SP500, does this give you protection against the value of the rand? Does the value of the ETF adjust along with the value of the rand?

If yes, how does this process work? Are there any dollar based ETFs in SA that can be used in a tax free account?

Win of the week: Boitomelo

Thank you so much for your good content that has allowed most of us to make life-changing financial decisions. I cannot thank you enough. 

Are you guys not able to have a Patreon account where those who wish to contribute to your content can do so? 

Carel 

I guess it goes without saying that any negative credit events would be tied to each of our names. If we get the bond in our own names, we (and not the business) would own the property.

If we try to have the business receive the rent as income on a property we own in our own names (if such a thing is in any way even possible), SARS could see this as some kind of attempt at tax evasion? As I mentioned before - only completely above-board practices would suffice. 

If we purchase the property in our own names, we could each be held fully liable for the full amount, then it would be up to the person held liable to take the other to court to recoup the balance.

Brendan

If I were to start now, with mayhem in the market, are ETFs cheaper / a great price right now, or is there anticipation of an even bigger dip, creating even better buying power?

I’m specifically looking at Satrix MSCI / Top 40, Asburton Global 1200 and Sygnia MSCI World.

To confuse the question even more, is there some kind of daily / weekly 'tracking number’ - to gauge if ETFs are getting more affordable?

Gerhard

I discovered dividends aren’t taxed at all when shares are held in a company. However, capital gains tax is 28% on 80% of your capital gains, which is quite high. 

I have a small company from which I pay myself a salary. From time to time I have a bit of extra money in this company.

I’ve been buying ETFs in the company: 40% local equity (Coreshares top 50), 40% world equity (MSCI World); 10% Global property and 10% local property.

This was before I knew about the free dividends. Now I’m thinking I should buy whatever pays the highest possible dividend - without undue capital risk and definitely not property because the distributions are taxed as income.

In my mind, I should probably be buying the: PREFTRAX

Do you think I should sell the above ETFs and move it all over to PrefTrax or whatever else might be better? 

Jarrett

I am 31 and based in Kuwait, which offers great earning and saving potential. 

How do I best use this money? My first investment was in property back in South Africa, which is paying for itself. I was looking to invest in a second property this year. However, some friends in the finance game suggested this was not such a great idea. They recommended I diversify investments and look into ETFs specifically.

1. Would you suggest trying to open up an account with an international broker, such as interactive brokers, or rather stay with a South African-based company? I have bank accounts in both SA and Kuwait, does that have any impact? 
2. I have a fair amount of money saved up, just sitting there (I know, not great). Honestly, I don't really have the knowledge to know what to do with it. Apart from ETFs, what other options should I be looking at? 

Ben

Like you, I’ve been investing in the Ashburton 1200. With the rand weakening quite a bit in the last while, and the S&P not really weakening that much, I was wondering if there might be other investment opportunities that are more opportunistic? 

If my thinking is correct, a stronger rand or weakening economy is good for buying (with potentially more growth), but it feels like buying 1200 now is a bit meh because the rand should strengthen and the 1200’s price will go up, which would leave me not really winning. 

Hans

The fund tracks the S&P South Africa Composite Property Capped index, which is described as tracking all funds in the S&P South Africa Composite index that are classed as property.  This means that if one REIT in this fund goes bust, there’s nothing replacing it.

What happens to the fund?  Does the NAV drop and the fund price drop accordingly?  Do the investors just eat the loss?

Jonathan

I have an under-performing unit trust which has only gained 3.7% after fees with momentum since 2012 before the crash. It's now -12%. It's not my RA, but it's invested into a lot of RA-like products ie. only 30% international equity.

Conversely, I have an EE account with SYG500. Before the crash it was returning 7-8%, including currency movement. Its maximum before the crash was 12% but it's currently -10%. (This was on 24 March. 23 March was the bottom for the SP500).

I'm currently 36 so I can deal with the volatility. I would like to increase my offshore exposure. I already have a fairly-sized RA to give me more than enough local or EM exposure.

During this downturn, should one consider accepting losses in loss-making accounts, sell and transfer them to another account that has future growth prospects far healthier? In other words, move from balanced funds to ETFs? From expensive 2.4% to cheaper 0.2%?

I’ll take a heavy hit at -12% on momentum, but the pros are that I buy SYG500 at -10% and pay less CGT on selling the momentum as well. Plus of course, I pay less ongoing fees (2.5% versus 0.9%).

Stiaan

I’ve been investing in a tax free savings account the past three years at Investec (managed by Anchor Capital). The growth was extremely low! After listening to your show I wanted to move that TFSA to ETFs. 

I made the move in January, but struggled a lot with moving the money. It transferred in the beginning of March just before the crash. I see this as a great opportunity to buy. I moved the money to the Satrix platform and I am curious what would be the best ETFs to buy at this time?

My other investments include:

* A retirement annuity with Alan Gray

* A property I rent out (financed with a home loan)

Jessica wants to know how Patrick managed to invest in the Vanguard World ETF.

Tafadzwa

I finally started investing in US ETFs on the 9th of March 2020, just as the bottom was falling out of global markets. I was tempted to wait for a further drop but later decided that it's a fool's game. 

Like you guys said, the moment when you place your first buy order was scary. Having a couple of demo accounts in the past few months helped a lot. 

I plan on investing in:

• Vanguard Dividend Appreciation ETF VIG 20%, 
• Vanguard Growth ETF VUG 30%, 
• Vanguard Information Technology ETF VGT 30%, 
• Prime Mobile Payments ETF IPAY 8%, 
• VanEck Vectors Semiconductors ETF SMH 8%, and 
• iShares MSCI Real Estate Index ETF FREL 4%. 

I started with VIG 20%, VUG 30%,VGT 40%, and IPAY 10%. 

I am aware of the overlap and concentration risk between some of the ETFs and can live with that. It's great investing with TD Ameritrade because ETF trades have zero commission!

I’ve been thinking about complexity vs simplicity vs chasing returns. Is this portfolio too complex? Is it still truly a passive strategy or am I making active decisions in a passive space? 

I have also been considering having this core of ETFs complemented by single stocks capped at 20% of total portfolio value. I have about 10 single stocks in my watch list which I really like but am hesitant to take the plunge. I have the stocks already in my ETFs in small percentages but would like more exposure to them. This would make my portfolio a strange mix of passive and active, which would require me to rewrite my initial financial plan. 

What do you guys think? Is investing in single stocks evil? I am considering breaking the rules and trying to beat the market, but from a foundation of ETFs. 

Under normal circumstances we would strongly caution against withdrawing from your pension fund. The reason is quite simple: the tax will make your eyes water. One decision can slash your hard-earned net worth by hundreds of thousands of rands. That’s not even factoring for opportunity cost.

However, since we’re currently living through the apocalypse, we might have to soften our stance on this. Some members of the financial services industry are lobbying for access to pension funds during this crisis. If you’re no longer able to earn an income, you might have to make a smart decision about this. 

In this week’s episode, we give you a sense of the different factors you have to consider before withdrawing from your pension fund. Naturally, we start with tax. We also consider the opportunity cost of the withdrawal, as well as the opportunity cost of taking on debt instead of withdrawing. 

We also spend some time making sense of the benefits of share incentive schemes.

At the beginning of the episode, we mention emergency loans. These are the conditions you have to meet to qualify, and these are credit providers registered with the National Credit Regulator.

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Clara

I am currently in my notice month. I’ve worked in local government for 13 years. I'm quite in a spin as to whether I should cash out my pension before 55, leave it or move to a provident fund. 

After long deliberation and getting some financial advice, I have decided to take the plunge and withdraw the cash, pay the tax, cut my losses and move on.  

Firstly I wanted to ensure that my pension will not be used to fund our government-owned companies, the possibility of junk status, the weakening rand after junk status and the management /administration fees that will be due to my portfolio manager for my provident fund if I choose to go that route. 

I wanted to "do the right thing" - to give my 30days notice as required by employment act, but this honorable decision has bitten me in the back and I have lost R200,000 in my pension fund in the last 30 days. 

I don't want to make hasty decisions in ‘’panic mode’’ and withdraw as quickly as possible. The withdrawal will only happen in 2 -3 weeks, so I’ll lose much more, pay taxes on the little I have left after our market dropped. 

At this stage I am thinking of not withdrawing the funds, moving it to a provident fund, letting it recover as much as it can for a year or so, monitor the Rand/CAD$ exchange rate and take it from there.

But I’m afraid all the current negative elements such as junk status etc will have a much more negative impact. 

If I pay my pension fund into a provident fund it will still be affected by the markets, but maybe it will recover a bit before withdrawing the funds.

I don’t need the funds and thought to put it in a pension fund in Canada.

Although I am aware that all markets are affected, growth will probably not be better in Canada.

Win of the week: Kerry

Also Serena

You can do a transfer of the units held in your Allan Gray fund to an Allan Gray fund held on the  Sygnia platform. Sygnia offers a number of Allan Gray Funds on their alchemy platform. 

I did a section 14 transfer in September 2019 of the units held in my Allan Gray Balanced fund. Allan Gray need to convert it from a Class A to a Class C first before transfer. 

I did this for two reasons . I held this balanced fund in Allan Gray for over 15 years and did not want to lock in lack of performance of the last five years. I was also concerned about the volatility of the market during the time of the transfer process.

Over the following 7 months, I’ve switched out of the Allan Gray Balanced fund on the Sygnia platform when the price was appropriate. I switched into a combination of ETFs and the Skeleton 70 fund, according to my Long term Asset allocation strategy. Now everything has gone to hell in a basket, but at least I am in the passive ETFs and a fund I want to be in for the next at least 10 years at a fraction of the cost .

With regard to interest earned on cash kept in overseas brokerage accounts: I have a Degiro brokerage account and they don't hold the cash themselves. Euros are held in a Morgan Stanley money market fund and the interest rate is -0.54%. 

Gary 

I'm in my early 40s. Until two years ago I was a financial newbie. I made all the classic big mistakes. High fees, head in the ground investing.

Between your podcast and Sam Beckbessinger's book I'm busy with a big turn-around. I moved everything to broad low fee ETFs, maxing RA and TFSA, I am aiming for a 50% save/investing rate.

My question is on a potential TFSA hack : Putting the full R500K lifetime limit into your TFSA in one go, and accepting the 40% tax hit from SARS.

I have a medical condition that will only allow me to work for another 10 years. I was thinking this would be a great way to max out my TFSA and give it the longest amount of time to grow. 

Jon

From 1966 for 25 years, the SP500 was ultimately flat. 

From 1954 for 28 years, the SP500 was also flat.

From 1969 for just over 10 years, the SP500 lost almost 2rds of its value.

From 1929, over about 20 years, the SP500 lost about 2/3rds of its value.

These are long enough periods that it brings into question how risky a long term equity investment actually is.

I am diversified across regions, but it would be really interesting to hear you guys really engage with this on the pod. The black and white rules about average gains over long periods aren't really bulletproof.