Cape Town – The world is seeing a move away from “business as usual”, but ultimately, as much as things change, they have a way of staying the same, according to Danie Venter (CFP®), advisory partner at Citadel.
“Set those goals for 2017 and plan accordingly. Start with ensuring that you don’t overspend this festive season. Have a budgeted approach to tackling the holiday spend and try your best to apply your festive season bonus – if you are lucky enough to get one – effectively,” said Venter.
“Cash is king and cash flow even more so. Paying off your debt sooner than later will allow you to establish that investment portfolio you’ve been putting off.”
In his view, it is important to remember that investing is about time in the markets and not timing of the markets.
“Understand the impact of the investment decisions you make and consult a qualified financial adviser – preferably one who holds the CFP® qualification. Ultimately, failing to plan is planning to fail,” said Venter.
What are the options
According to Venter you can invest in an actively managed unit trust portfolio which allows a bunch of similar investors to put their money together to buy a combination of investments such as shares, bonds, listed property or even cash.
Alternatively, you can acquire a passively managed Exchange Traded Fund (ETF), for instance the Satrix 40.
ETFs generally track one asset class specifically, for example, the top 40 listed companies trading on the JSE. You can even hold an ETF which tracks the S&P500 in the US.
According to Venter the key question is what returns these asset classes have delivered and what it means for you. Another key factor to consider is what expectations and risks are associated with each asset class over the medium term (five years) and how the uncertainty associated with recent events locally and globally might affect your investment.
For example, if you bought and held global shares (equities) for five years you would have earned 21.59% over the term. In other words, if you invested R10 000 in the MSCI All Country World Index (in rand) five years ago, you would have roughly R26 575 today.
Venter explains that when you buy a share (or equity) what you are paying for today is the future earnings the company will generate for you as a shareholder. In other words, current earnings and future expectations support the price you pay today.
“The South African market finds itself in a peculiar scenario as current earnings are under pressure. Bear in mind, however, that the majority of SA listed companies sell goods to the international market and often in US dollars,” said Venter.
“The weakening of the rand has, therefore, resulted in higher than expected earnings when converting back to rand. So there may be a glimpse of hope within SA equities. Expect muted performance from SA equities with a few star performances by particular companies.”
Venter explained that investors hate uncertainty and have become extremely skittish towards unexpected news headlines.
For example, as the US election results were being announced and it emerged that Donald Trump was probably going to win, US equities lost about 5.5%, only to do an about-turn several hours later and recover 6.5% from the low point by close of the trading day.
Similarly, after the Brexit vote, the UK market was under considerable pressure as global investors feared for the worse. Several weeks later, the market has stabilised and is testing the levels seen prior to the referendum.
“Earnings have been under pressure in both the UK and the European region since 2007 and you can expect a bumpy ride in equities as lacklustre economic growth is set to continue,” said Venter.
Over the past ten years, SA property has returned 17.6% per annum and claimed the winning seat for domestic assets.
“In recent months, property has achieved fresh highs and is currently tracking relatively sideways as local economic conditions are challenging,” said Venter.
“Local property as an asset class has, however, remained largely stable in comparison to its global counterpart. Nonetheless, you should be cautious when including the asset class in your portfolio.”
In a world in which returns are muted and investors are willing to take on more risk in order to generate positive returns many foreigners have snapped up SA bonds, generating impressive results for the asset class in spite of much uncertainty on the home front, according to Venter.
He cautioned, however, that just as fast as the funds have flowed into the market, so too they may leave. This could, in turn, have a knock-on effect on the rand which could stumble somewhat against other international currencies.
It is also important to consider the tax implications on holding this asset in your portfolio.
“Year-to-date, before considering tax, cash has shown stellar returns given the limited risk associated with holding funds in a money market account. Cash will be affected by interest rate decisions taken by the Monetary Policy Committee (MPC). Given all the uncertainty surrounding the SA climate at present, the MPC will have a challenging time balancing interest rates and inflation,” said Venter.
“Over the long term, however, holding cash does not pay, as it is highly unlikely to maintain its purchasing power – that is combat against the effects of inflation.”