Knee jerk financial reactions that can hit you where it hurts.
When we are fearful or confused (and there has been way too much of that this year), it might feel like doing something rather than nothing will give you closure or clarity – and that may be the case, but if the action is too rushed, or not properly researched, you can do permanent damage to your wealth.
Taking money offshore that you’re going to need. Investing offshore is the flavour of the month now, and not without good reason, but this doesn’t mean you do it at all costs because some people are telling you that SA Inc is going to hell in a handbasket – and soon. I have gone into this in much more detail in the blog (HERE) but as a rule of thumb, only take money physically offshore if it is excess to your needs. Bringing it back creates a whole new layer of fees, and you run the risk of Rand depreciation not working in your favour. There are plenty of ways of getting offshore investment exposure right here. There is also a critical mass (probably around $100,000) that you need to make it worth your while. If you really think that you need something in case you have to become a refugee some Kruger Rands would work just as well.
Using risky investments to make up for lost time. The older you are the less risk you can afford to take on in your portfolio, and it is important to understand the riskiness of each investment. Risk can take several different forms; the risk of losing capital, risk of skipped dividends, risk of illiquidity (not being able to sell it quickly because there is not a ready market), risk of being locked in (time clauses, another form of illiquidity). If you don’t clearly know what your income is going to be for the rest of your life, and that it won’t run out before you do, then it is easy to become fearful and look for ‘better returns’. Conmen and slick salesmen know this, it is why so many victims of scams are retirees and pensioners.
Getting suckered in by product salesmen. In the financial services industry there are (still) some super slippery and slick salesmen, more concerned with flogging you one of their products than actually giving you sound advice (especially if the advice does not end in a sale). One of the reasons I became an Independent Financial Advisor very early on was that I didn’t want to be beholden to one provider with one suite of products but wanted to be able to recommend a range products as the industry evolved. If an advisor tries to push you into products or ‘solutions’ with their company name on it, the hairs on your neck should be standing up. If they start adding ‘terms’ (time limits, usually 5 or 10 years) or fancy ‘structures’ (Trusts, quasi Trusts, Endowments, tax havens, offshore pensions) into the mix – run! There are circumstances where these “Structures” make sense (mostly for “Larney Ous with Long Bucks) but for the most part they are horribly oversold.
Careful of decisions that can't be reversed
Not having an Anti Nuptial Contract (not ANC, we have one of those and they aren’t much use). If you want to get married, take the time to invest in a Contract, with or without Accrual, and don’t just be all romantic and impulsive and default to Community of Property. It is not just a sharing of assets that you accumulate but the debt and losses too. If one of you goes bankrupt, you both do. If one of your companies goes under (with entrepreneurship becoming so woke and popular), you can lose the family home and everything in it.
Cashing out your pension. When you leave a company you have the choice of ‘preserving’ some or all of the pension, or cashing it out. The tax when you cash it out is punitive and equivalent to years of savings. Your advisor should be able to run a simple tax scenario for you to show you just how stupid it is. The only person that will thank you is SARS.
Retiring from your pension preserver/RA etc too early. In terms of the pensions fund act, RAs and preserver can be retired from at age 55 (you can too from Pensions, but you usually have to leave the company first). There are some pundits out there encouraging you to retire the second you turn 55 because you can invest the ‘compulsory annuity’ offshore. There is also a mad scramble to get in under the end of Feb deadline (maybe) to cash out Provident Fund Preservers. If you’re still earning, the annuity is going to be taxed at your marginal rate (do you even know what your marginal rate is?) The 1/3 lumpsum is taxed according to the ‘lumps sum rules’ – but you do not have to take it. If you really do need to ‘retire from’ the fund (not just reacting to FOMO) then get decent advice- even if you never have before. Once you have made the decision it can’t be reversed.
Check your assumptions
Rand Depreciation concerns. Over 10 years the Rand has depreciated at around 9% a year – but over 5 years it has been almost zero – so don’t use Rand deprecation as your only rationale for offshore investing – especially if it is not long term (8yrs plus). Anyone who took money offshore when the Rand/Dollar was at 18 in April 2020, is not looking at Rand conversions on their portfolios today (R15.50). The ‘best’ reason to invest offshore is to get exposure to much better equity growth prospects than we can get here right now (and you don’t have to physically get it out to do that). Offshore investments work best in ‘Growth’ portfolios – investments that you aren’t going to need to tap into for 8 years or more. When you need an income from the portfolio, you get much better yields right here.
Being focussed on fees to such an extent your wealth bleeds. The problem with cutting to the bone is that you can kill the patient unless you’re a professional. Sure, there are plenty of institutions and brokers out there milking fees but it can still be a win-win. When it comes to investment put it in perspective. To give you an example, three years ago a prospective client, a pensioner with almost all her portfolio in REITS but objected to paying 0.5% in an annual fee. At the time the index was around 800. Eighteen months later she came back (to see if we would work pro-bono again) and the index was 600. It is now at 200. A 2% loss a month for 3 years, 140 years’ worth of financial advisory fees. Remember that it is the markets or asset classes that give you your returns, not the advisor or asset manager, but the blending of those assets is the professional’s secret sauc