I’m sure I’m not alone in wanting this forsaken pandemic to be over and everything to go back to normal – Travel again, go to concerts or just see people without worrying that the great bottle of merlot you brought as a gift isn’t the only thing you left behind. I think it is pretty clear to everyone now, the old normal is never coming back, and we have to find joy and prosperity in the new normal.
It’s not easy to throw out the familiar and things that worked so well for us Before Covid, but there are aspects of economies, investments and assumptions (inflation, returns, guarantees, interest rates) that have changed dramatically. So, what aspects of our wealth plan might be broken?
- Fixed terms. When things are uncertain, you cannot fix it by locking investments into fixed terms with no wriggle room. It is a natural response to try and shoe-horn uncertainty into something more certain, but take a breath, talk to someone neutral and don’t make changes that cannot be undone. A good example of a decision that cannot be undone is retiring from a RA/Pension etc. Yes, you have more choice when it comes to investing offshore, but you have to take an income (minimum 2.5%) and that will be taxed at your marginal rate (up to 45%). Also, if you choose to take more than the R500k (lifetime) tax-free lumpsum, you’ll kiss goodbye to even more.
- Interest rate. The block of your investments that you expect to steadily give your yield and return and preserve your capital is usually in an interest type investment – money market or bonds. This acts as a natural hedge to volatility in stocks, and in retirement it is the cornerstone of your ‘pension’. The consensus, globally, is that we’re at the bottom of the low interest rate cycle and it will start rising early next year. In South Africa, this could be even sooner. This is news is good for retirees needing an income from non-volatile fixed interest assets (but bad news for anyone with debt.) If you’re tempted to lock-in the low rate on a bond, expect it to come at a price – often an extra 2%.
- Drawdown rate on ‘pensions’. In South Africa, when interest rates were slashed at the beginning of the pandemic, very few people adjusted their ‘fixed income’ or ‘yield’ portion of their investments. If you want the capital to sustain an income, growing with inflation for the rest of your life you have to structure it to yield that income and more, so that some can be plowed back into the investment for the capital to grow. To put this another way, everyone is familiar with a ‘money market’ account. Over the term, you get interest and at the end of the term you get the capital back. If you just use the interest then the capital at the end of the term will be the same as when it started. That is not good news. Thanks to inflation, the purchasing power of your Rand investment halves about every 8-10 years. If you’re getting an income from an investment, then you may need to get it checked. In order to grow with inflation and for the capital to be preserved the percentage you ‘drawdown’ from an investment, this percentage needs to adjust with interest rates. A few years back a draw-down percentage of 6 or 7% per annum was acceptable, today that will erode the investment so that it is no longer sustainable. Today we are inclined to go with drawdowns of 4.5%-5%.
- Inflation. We’ve got so used to ‘everyone but us’ having low inflation (and lower interest rates that go with that) but having got a taste of lower rates in RSA in the last year it was nice while it lasted. We have some unique inflationary pressures that I, for one, wish we had left behind. I am talking about the bloated civil service and their voracious appetite for salary increases way above inflation. Since the beginning of the millennium, particularly during the Zuma Error, the civil service exploded, and along with the ‘job for life’ and real salary increases that far outstripped those in the private sector. Tito had already backtracked on the 3-year ‘collective bargaining’ increases before the pandemic, and so far, he has stuck to his guns. Anyone who has tried to get a driver’s license renewal, speak to someone from SARS or go to home affairs know that these are still ghost towns with everyone (still) at no-work-from-home. A chunk of our inflation is ‘imported’ and with commodities rising we are probably in for some ‘return to normal’. Globally inflation is also on the rise, partly driven by commodity price rises and some supply bottle-necks.
- How much should you have offshore. This is a question that I am asked repeatedly at the moment, and while my answer might be a frustrating ‘it depends’ it can be boiled down to some simple guidelines. If you’re more than 15 years away from retirement or firm plans to emigrate (not just wishful thinking or having a pity party) then move it in tranches, and into a tax-neutral location in low-cost flexible investments. Avoid ‘structures’ like Trusts, quasi-trusts etc. Make sure you can sell out of the investment quickly and easily. Upfront costs are a tell-tale sign of less-than-flexible investments. Highly diversified basket ETFs are a good place to start. Early in the pandemic there was a rush to take Rand offshore – a natural panic response, enflamed by fear-mongers with vested interests. A 18 months on with the Rand in the R14s and not R17s those knee-jerk reactions have given some people bloody noses, but valuable lessons have been learned. Have a plan that aligns your offshore wealth with your global future objectives. That might sound like geek-speak so let me rephrase. Decide where you’re going to live/retire. If that is offshore then plan accordingly. If you’re just looking for an ‘escape hatch’ then be realistic about the amount you need. If you just want to get offshore exposure for the sake of your wealth portfolio, that’s great (the best reason for any SA Investor to expose their investment to global ideas), but unless it is in excess to your local needs rather put it in Rand denominated funds (but keep the fees low – there are some fee-heavyweights out there). Why? Moving physical funds offshores comes at a cost, that is to say nothing of getting the exchange rate wrong.
- Diversification. In times of huge uncertainty like we have seen in the last 18 months, wealth assets have been exceptionally volatile, with everyone trying to guess their direction. Perhaps the best we can hope for is capital preservation, and a bit on top to preserve the purchasing power. There are going to be pockets of opportunity, sectors that recover, countries that do better or worse, currencies that are stronger or weaker, but it is a balancing act that needs diversification at every level. Right now offshore portfolios do better in a ‘growth’ (stock) portfolio because bonds and cash are yielding nothing – but that could change.
7. Flexibility of investments. With things changing so much, and specifically with interest rates being at multi-year lows, now is not the time to tie things up into products where the assets cannot be changed. You find this in ‘guaranteed’ products. (How do they guarantee the return of products? They go into the fixed bond market (usually government bonds) and buy the 10/20 year bond that matches your guarantee (plus a bit more for their fees). I probably shouldn’t tell you this, but you can do the same (without any of the fancy ‘endowment’ type packaging) by buying retail bonds. Hint- now is not the time to buy fixed interest bonds. Rule of thumb on ‘termed’ products, lock in high interest rates if they look like coming down, but lock in low interest rates for debt.
- Liquidity, cashflow and resilience. Emergency funds are more important than ever before, and probably should be at around 6 months household expenses not just 3 months. It doesn’t mean that these funds have to sit in a bank account, just make sure that you can get them quite quickly when you need to. Tyme bank’s savings structure is well suited to this.
- Medical risk. We’re probably going to have to deal with Covid for years into the future, and if you get the disease, the side effects may make impact your future insurability. NHI is rearing its ugly head again, but the cynic in me says that that has more to do with the upcoming local elections than anything else. At least a third of the budget allocated to health is squandered or stolen – start there Cyril. You cannot improve the local health system by breaking the private healthcare system. If the government has its eyes on the billions sitting in reserves of the medical aids I have bad news for them. Those funds belong to members and if the government close the medical aids, then those funds will have to be disbursed back to the members. Gap cover is becoming increasingly important too.