You have to think laterally
In a low growth and volatile environment like we have right now (and frankly have had in RSA for a good 5 years) you need to think laterally about building wealth for the long term. If you break it down to its absolute basics, wealth is what you have left over after you have consumed your income. The wealth equation. Income minus consumption equals wealth. If we can’t grow the wealth that is already there at any great level, then you must make sure more keeps going into it by earning more or spending less. (I said basic, not easy).
Anyone advertising investing property as low risk (and high yield) today should be shot at dawn (not by her obviously). Property is a highly risky asset class right now with quantum shifts taking place right under our noses. The pandemic has caused an acceleration of these already noticeable changes, especially in office space and retail, but it goes way beyond that. As work-from-home (or sleep-at-the-office) becomes entrenched, more people will be untethered to city centres and office parks and can literally live where they want. Is any sector safe? I think the pandemic has shown us that clearly that is not the case. Non-payment of rent in many places have been protected by no eviction ordinances (and good luck getting back rent). Property and REITs (Real Estate Investment Trust) have gradually declined over years, and they might be coming to a new normal where buying them can make sense again. When you invest in property, especially offshore property, be aware. Rather buy into a large and liquid (easy to sell) REIT with broad exposure. Don’t get locked into ‘termed’ products ( 5 years is typical). When choosing a vehicle, compare the yields, if you want to lock yourself into a smallish, specific niche then you’d better be getting yields and returns several percentage points above the big, liquid funds.
Earning more is hard. Companies are shedding jobs at an unprecedented rate, so salary increases and promotions are going to be few and far between. If you look at the global trends, all of which have been sped up by this pandemic, then working for yourself in one shape or form is really the only answer. You might need to upskill or get more experience before you make the jump, but it is the best way to long term wealth. One nice side-effect of working for yourself is that nobody tells you when you have to retire or, even worse, be pushed into “early retirement.
Reducing your Consumption is the easiest place to get more wealth. Start with the big things. Buy just one house for the whole of your life, every time you move to a new house you flush tens of thousands of Rand of your wealth away. Buy something that you can improve and expand, not the best house in the worst suburb (rather visa-versa) or build yourself, slowly with a long term plan. There is a school of thought that you should rent and not own, but owning a house by retirement means you aren’t going to have to pay rent (just rates and utilities) for the rest of your life. It’s actually part of your retirement savings. Downsizing rarely comes with cost savings, and retirement homes with frail care are only really needed in the last few years of your life – and there are ways of mimicking that without the costs. Cars should last 10 years. I understand that cars and houses, both of which are highly visible, are all wrapped up in emotion and ego. We like to friends and family to think well of us, and think we are successful, and these are very visual cues to that – we don’t exactly pin our wealth statements to the front door. Consider that Warren Buffett has lived in the same house for decades and his cars are usually 10 or more years old. If you find it difficult to care less about what people think perhaps a coaching or shrink session would be a good investment in your long-term wealth. Self-sabotage is probably the biggest killer of wealth you can find.
Paying the bank interest on credit or credit cards makes no sense. When ever someone asks me if they should put a bonus or windfall into a bond, I ask them if they pay off their credit card 100% at the end of every month. If not – guess what I advise? Despite interest rates having come right down, interest on credit has not. Why pay the bank 18%pa interest or more? You probably have debit/cheque card as well as a credit card/s, so the easiest way to bring this balance down (over time) is to make the revolving payment on your credit card (and more if you can) then take it out of your wallet/purse and put it in a drawer until it is paid off. Use your cheque card, it works exactly the same for online banking, except it comes off your chequing account immediately. If you’re over your head with debt, consider debt review. It does not have the same legal ramifications as bankruptcy, and you keep a clean credit record when it is over. IMHO, Never put your bond into debt consolidation unless you absolutely have to (you will end up in debt review for decades).
A Family Affair
Building wealth needs to be a family affair. The sooner you teach your children how to look after money (and free them from the emotional gratification from consumption) the better. Usually the ages between empty-nest and retirement should be an era of wealth accumulation. If you’re not teaching those offspring to fly young, and they are still acting like dependants well into their late twenties and beyond, you only have yourself to blame. Stay at home spouses are a luxury very few of us can afford these days, and in an era of 50% marriage failure, another wealth killer. If you are the stay-at-home parent, think through the possible long term ramifications (like trying to get back into a job market after a 10 year hiatus). At the very least, run a home-business, keep upskilling yourself (especially in technology). I like to listen to business books (and kill two birds with one stone), a good side gig one is “Side Hustle by Chris Guillebeau”.
Your income and wealth must be diversified. Anyone who has been relying on rental income (especially pensioners) during the pandemic will likely be quite unhappy right now, and it isn’t going to get much better soon. Hundreds of thousands of jobs have been destroyed and are never coming back. Dividends have been cut, but they will probably be back in a year or so. Interest rates in RSA have halved this year, and hence income from money market likewise slashed.
We advisors usually have a “house view” (or views) of the asset allocation we need to put our clients into at any point in time. In the past that mix is usually good for 8 months or so – not so anymore. We have been having to review our mix on a weekly basis as interest rates drop precipitously, dividends dry up, stock loses value, bond coupons drop, rental incomes decrease etc. If professionals are battling to construct portfolios, individuals have little chance.
You need to protect your wealth from unexpected consumption, in other words, use insurance. Medical aid and Basic short-term insurance are obvious, but life, disability and dread disease are also important. Until such a time as your savings/retirement pot is full and you could retire tomorrow, you must protect your ability to earn an income and your dependants if you were to die prematurely.
Fees might be goggling up what little growth your investments are giving you. For the sake of the long-term health of your wealth make sure that the fees you’re being charged are competitive. The two potential weak spots are the choice of unit trusts that can range in fees from around 0.7% to 2.8% and can cost you thousands over time for no increased performance. You know I always say never to use an insurance platform, so I won’t rabbit on about that – their fees don’t just nibble at your wealth, they take big fat greedy bites. Some seemingly cheap funds and ETFs have nasty EXIT fees. Watch out for ‘fund of funds’ those are funds made up of other funds and might look cheap when you look at the fund fact sheet but hidden under the covers are all the other Unit Trust fees that you are paying as well. Some platforms and advisory houses use these fund-of-funds because they like seeing their name up in lights, not for your benefit. Watch out for vested interests. If an advisor (who is being paid a fee) is recommending you move your wealth into ‘their’ fund-of-funds, they are being paid twice.
I abhor ‘upfront’ fees when it comes to investment. This is a relic from the good old days of brokers when they got all their commission upfront, and they can’t give up the habit. Legally they can charge up to 3.5% of the investment as an upfront fee, and you may get the argument that all of the work they have to do (like a full financial plan) has to be done upfront and it will take them 4 years or more to make up the lost fees, but it is going to make a huge hole in your investment. Everyone deserves to get paid, and there is nothing more soul destroying for an advisor to spend hours helping a client put a plan together and nothing happening to it, but it is a risk you have to take. There are ways to get around this that are win-win for both client and broker, but this is the topic for another day.