Which investment is most important? (#169)

The Fat Wallet Show from Just One Lap

If you’re a regular listener, you already know your emergency fund is the most important thing in your financial life. It’s boring, yes, but crucial. You should protect the assets you have with insurance. For as long as you’re earning an income, you are your most important asset, so dread disease and disability cover is a big deal.

Once those two elements are in place, where you go next becomes more complicated. We think everyone should have tax-free investment account. If you’re a salary-earning tax-payer, taking advantage of the tax breaks offered in retirement products is a good idea.

In this episode, we get five versions of the same question: which investment option is better in the long run?

We come up with the following check-list of questions to help you decide:

• Where can the money stay invested the longest?
  • Time is a powerful ally in investing. The longer you can leave your money to compound, the better.
• Is the money guaranteed?
  • This ties in to how long you can afford to stay invested. If you need the money in the short term, you want to put it where the outcome is guaranteed.
• Is there a limit to the up-side?
  • Once again, this comes down to time. The market can go up forever, whereas a fixed rate or guaranteed product can only deliver what was promised, nothing more.
• Is it the most tax-efficient route?
  • When you’re talking investments and time, your risks are inflation and tax - both of which will affect you whether you are aware of it or not. The sole purpose of investing is to counteract the effects of inflation. That just leaves tax.
• What is the opportunity cost?
  • The very act of putting your money into one vehicle means choosing against all the other vehicles. What is that choice costing you?
• Are you considering all the moving parts?
  • When it comes to offshore investing, are you thinking of the currency move and the market move? When it comes to asset allocation, are you accounting for your retirement savings allocations too?
• Are you taking your money out of the country at a high rate?
  • We tend to move money offshore when the rand crashes, which means we’re taking money out at a high rate. Money should be taken offshore when the rand is strong.

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Win of the week: Candice

My “work husband” recommended the show. This was roughly around the time I found out I was pregnant. I mostly started listening out of fear, but since then we’ve paid our debt and started an emergency fund.

Is it advisable to max out our daughter’s TFSA annually and just deposit bits and pieces to our TFSA? Or should we spread our contribution equally across all three?

We will only draw from her TFSA in 20 years, if we need to for studies. If not, we’ll hand it over to her for her 21st.

I have a company ra with the green company, but we’re going to start contributing to a 10X RA as well.

We don’t want to be financial burdens on our daughter when we’re older. We want her to have enough money available to not have to take student loans etc and get a helping hand at starting life. I just want to know we are on the right track.

Herman wrote an algorithm. The results are in an article called “The ideal pre-retirement allocation mix” on justonelap.com.

Nico-Ben

It seems the market is currently going down. At the moment my Satrix 40 is at a loss. This does not bother me as this is a long term investment. In one of your podcasts, you said this should be seen as the JSE is having a sale, just like a retail store might have a sale. This makes perfect sense.

I was planning to put the rental income into the bond, and top up my TFSA balance in February. Looking at the prices dropping, it also seems like I should consistently buy the Satrix 40 in the TFIA.

Which course of action would you suggest? I get it that we cannot predict the market from now to February, and that is too short term to really expect any real profit.

Guido

After maxing out my tax free savings I'm not sure whether I should carry on saving in a global vanilla etf like Ashburton 1200 or something like the 10x high equity fund.

Should I invest in both or am I overexposed as the 10x fund invests in the satrix msci world as well. I am 40 years old and looking for long-term growth. I prefer a global etf at the moment as S.A equity is not doing much. The 10x high equity fund has 50% local equity but otherwise is nicely diversified. Which one should theoretically give the better return in the long run?

Gerhard

I currently maintain a 50/50 split between international and local investments. Every month I use the new money to try and keep it in balance. Hopefully it's 20+ years before I need to touch any of this money.

Recently I stumbled across Galileo Capital's YouTube channel. One thing Warren Ingram keeps mentioning is the "fair value" of the USD to Rand. He feels it's at about R13.90 to the dollar. One should only move money offshore when we are below this level. This includes buying the international ETFs on our local market.

Should I just ignore the USD/Rand and keep buying international every month?

Or, does one keep the money earmarked for international in cash, and wait for the Rand to strengthen back to those levels?

Andy

I now own three properties in Cape Town.

I live in one (paid off, but lets ignore this lifestyle asset) and 2 investment properties.

Paid R800k for the first flat and I’m renting it out for R7800, which covered the bond repayments and the levies and rates.

I ended up settling the bond with a lump sum. I used the bond to pay "cash" for the 3rd flat. I now have bond debt of about R600k (on the first investment property) which I’m smashing with my monthly salary savings and rental income from my 1st investment property.

The third flat hasn't got a tenant yet as I bought it off plan.

I do have market exposure and the necessities covered. Example:

• I currently have that Liberty evolve product that tracks the top 40, which I will move into simple Satrix top 40 shortly.
• I also have some individual stocks which are taking a hammering. Mainly speculations on my part. I’m slowly moving away from individual stocks but they are so ridiculously cheap now that I refuse to sell them..
• TFSA is maxed (missed one year becasue im an idiot)
• Emergency fund is adequate.

Do I start filling up my Standard Bank OST account with my favourite ETFs or do I smash the bond and then fill up on ETFs?

Albert

I stumbled across your podcast while trying to find out why the yield of the Satrix MSCI World Equity Feeder Fund Unit Trust was less (by a few hundred rands) than the yield of the Satrix MSCI World Equity Feeder ETF in my TFSA over a period of two years.

On a simple TER basis the Unit Trust version of the same product was 0.63 more expensive. At first this didn’t seem too bad, until I started running the mathematics with a few assumptions and looking at the lost return over time. Naturally this infuriated me beyond belief.

Since then, I’ve been working my way through your library while going through all of my expenses, investment activity, insurance and pension funding.

Being in my early 30’s, I have some investment groans about poor investment choices in my 20’s like:

• buying a new car in my first year of permanent employment
• transferring my previous company’s provident fund savings to a preservation fund which has a TER of 3.2%,
• investing into equities via Unit Trusts without an emergency fund and occasionally dipping into the capital to fund emergencies.

That said, I currently don’t have debt, have always contributed as much as possible to my employer’s retirement fund and am grateful to have some savings and enjoyed some treasured memories of overseas vacations.

You have both inspired the following change in my personal life:

1. I have penned a life plan and investment strategy;
2. I have set up an emergency fund which will increase over time (thanks Tyme);
3. I have reconsidered my luxurious expenditure (mostly eating out far too often as I live in JHB), and increased my monthly savings rate from 30% to 35%;
4. Launched a crusade against fees in my personal life:
   1. Short & Long-Term Insurance premiums,
   2. Moving from an Asset Manager platform to a Stockbroker (Goodbye expensive Unit Trusts),
   3. My RA’s and preservation fund (this move is still ongoing),
5. Drafted a will, and
6. Placed a mandatory review of my finances firmly in my 2020 calendar.

The Question:

Given the amount of money I ought to have saved this year thanks to your sage advise (far better than any financial advisor I’ve met), I would like to send through a bottle of Veuve Clicquot. Then I took a look at the price of those particular bubbles, and surmised that it is beyond what I am prepared to pay for quite a while. Would it be possible for you to set up a Patreon or something? I wouldn’t mind kicking a few rands your way on a monthly basis to keep the show running.

Alexander

From listening to your podcast and speaking with friends and family, I would like to avoid credit. But I am also cognisant of the fact that I’d most likely have to incur at least some debt for a house one day.

The Standard Bank consultants informed me that building up a credit score starting now would make applying for future loans easier and that I’d possibly get lower interest rates.

• Would building a positive credit history (by using credit, instead of my normal cash, and paying it off in 30 days with that exact cash that I would have used) actually allow me to negotiate for better loans in the future?
• How important is having a credit score in reality?
• Does your asset base (i.e. my investments) influence your credit score? Surely having built up an asset base would count for more than having a positive credit history, or am I wrong?

Do you have any general tips/advice for how I can start planning/structuring my life to minimise my future debt and living costs? At this stage in my life I’m very flexible regarding where I decide to work, buy a house and so on.

Chris

On the Sygnia website they claim to charge an admin feed of 0.2% on Sygnia ETFs and 0.4% on other ETFs.

Since my ETFs are all from other service providers, the 0.4% admin fee would apply + the TER of the ETF itself. (e.g. Satrix World = 0.4% admin + 0.35% TER = 0.75%).

However, on the Sygnia RA platform, there is a tool for calculating EAC fees which gives a slightly different output. It states my current EAC fees are 0.89%.

On my quarterly statement, it gives a table of each ETF, with the respective TER and management fee applied. The management fee ranges from 0.1% to 0.3%, which is quite reasonable. However this does not tie up with the EAC quoted on the online platform.

I'm a bit stumped.

The way I see it, worst case I am paying 0.89%, which is in range of the 10x fee of 0.9% so this is acceptable. The fee appears to go down to 0.61% over time which would then make it

cheaper than 10x.

I should also mention that you do occasionally have to rebalance the portfolio to remain Reg 28 compliant. Sygnia charges a 0.1% brokerage fee for these transactions

Ross

I have my money back home in a brokerage and savings account. I would like to invest my overseas earnings into something without converting back to Rands. Preferably into USD, EU or GBP. What options would you suggest? Are there any multi currency account banks that accept sign up without residency?