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No matter what happens, or how good or bad the situation, the first piece of advice financial planners generally give is that investing is a long-term game and investors should not let themselves be affected by “emotion”. Rather stick firmly to the long-term investment plan, they say.
In the current no-growth, junk-rating, politically charged environment, they continue to say this. “We have seen it all before,” they say. “Markets are cyclical,” or “You need to see through the ‘noise’.”
But surely something has to change? Very few investors would have seen any meaningful improvement in their investments over the past few years and the prognosis for the next few doesn’t look that brilliant either.
We may be in a cyclical dip, but it is hard to ignore some substantial – and possibly structural – changes in our environment. Fund managers, for example, indicate the bulk of their wealthy clients are moving investments offshore – a large chunk of their portfolios, not just a small percentage for the sake of geographic diversification.
A fair number of investors have also been moving out of investments in the retail sector and in government bonds. These may also be a reaction to cyclical blips, but are more than likely an acknowledgement that these investment options may not be worthwhile in the long term.
Globally, investment options in tech companies – and other new and innovative firms – are driving increases in wealth. Few of these stocks are available locally to equity investors.
Surely, the current environment, characterised by junk status, political instability and recessionary conditions, which show little sign of changing in the near future, calls for investors to change their plans?
Wouter Fourie, a director of Ascor Independent Wealth Managers, says the first thing to do under such conditions is to pay off your debt. “The interest on your debt is quite possibly higher than any growth on a traditional savings plan in a recessionary environment, so paying off your debt and saving that interest is the best thing you can do,” Fourie says.
List your debts from the highest to the lowest interest rates (also considering administrative and service charges) and channel any additional income into the most expensive debt first, he says.
Fourie recommends that you invest as much as possible into retirement funds – “the best investment you can make” because you can invest with pre-tax money, so you save the money you would have paid on tax, effectively guaranteeing a better growth rate. You can invest up to 27.5% of your pre-tax income up to R350 000 in retirement funds and benefit from a tax “payback”, he says.
Look at tax-free savings accounts, where you can invest up to R33 000 a year in a tax-free account, up to a lifetime maximum of R500 000.
“This will offer you the same pre-tax multiplier benefit as retirement funds,” says Fourie.
He adds that you should watch out for pyramid schemes and get-rich-quick scams because “parasitic and outright criminal money-making schemes proliferate in low-growth environments”. When people are desperate, unfortunately they tend to make stupid decisions.
You should also hold onto your job as your salary remains your most important wealth-building tool. “You don’t want to be hitting for the fences,” says Craig Gradidge, director at Gradidge-Mahura Investments. “While there is still significant uncertainty around, you should have a more cautious stance until, perhaps, after the ANC’s elective conference [in December], because a lot of the risk is still political risk.
“But this is not the environment to be hiding in cash either,” says Gradidge. “Being too aggressive and too cautious are both not good for you.”
He advises investors to examine their balance sheets and make sure they are diversified, and check how much of their investments are externalised. He suggests a 30% minimum offshore exposure. “Because we are in a low-return environment, it will help to pay attention to fees and taxes,” he says. “Leakage” through unnecessary fees or taxation can reduce your returns.
Absolut Wealth Management financial planner Karen van Rooyen advises investors not to panic. “When markets move down there is a buying opportunity,” she says. “There are still opportunities to invest in some good quality companies in SA and the rest of the world that, despite the environment, are doing well and those are what you should be investing in.”
Right now, she says, investors should make sure they are invested in rand hedge stocks “if they can’t afford to go true offshore”. She suggests investors stay away from the retail sector at the moment as it is under huge pressure and there is no consumer spending power. While resources have recovered, she says investors should not expect a “super-cycle boost” anytime soon.
This article originally appeared in the 22 June edition of finweek. Buy and download the magazine here.
