As of 1 March 2020, an amendment to the South African Income Tax Act will have definite ramifications on the lives of South Africans living and working abroad.

Now that this infamous ‘expat tax’ is in effect, SA expats are now obligated to pay up to 45% of their foreign income to the taxman when it exceeds R1 million per annum, which includes any fringe benefits provided as part of the job.

But what about investors? How does ‘expat tax’ change your investment strategy and how should you approach offshore earnings being taxed from an investment perspective?

Please remember that the following does not constitute financial advice.

Offshore investments and the expat tax

First, the somewhat good news: investment income is still considered passive income and, if you are residing in South Africa and a citizen but have offshore investments, dividends and the like will be taxed just as they always have been and not under the new ‘expat tax’. Same goes for rental property owned overseas, shareholder earnings and so on. As long as it’s passive, you should be fine.

Active income and expat tax

But what if you do work overseas, at least some of the time? Even for those with stable and reliable employment, maintaining one’s life in a second city can be costly.

In this situation, your choices are frustratingly few. You can either return to SA, find an offshore structure in which to invest those earnings, or formalise the process of financial emigration. Each of these options comes with significant consequences.

For many expats, particularly those who have lived elsewhere for an extended period and thereby assimilated into the culture of their host nation, the idea of returning to South Africa and all its social and political instability is not a welcome one.

If you are a skilled professional with good standing in the other country, the concept of financial emigration may best suit your needs. At a very basic level, this is making the official decision to sever your connection with South Africa and surrender your status as an ordinary resident. Beware though, because doing so will impose strict limitations on what you can do with locally remaining assets, impede your ability to acquire more in the future, as well as having serious implications on capital gains tax. Furthermore, depending on how and when you choose to relinquish citizenship, your actions may be assessed with a distrustful attitude. Especially now, after 1 March.

Two of the main reasons for choosing this route are if you are certain you have no intention of returning to South Africa, or if you stand to receive a substantial inheritance in the years ahead – R10 million or more. Once you’re no longer an ordinary resident, any inheritance should potentially be paid to you directly in the foreign jurisdiction, without the need for approval from the South African Reserve Bank or clearance from the South African Revenue Service, both of which apply to South African citizens.

Investment solutions

Other ways to protect your foreign earnings would be to establish a formally recognised company in a tax-friendly location, through which to invoice your employer, though taking such a path would mean you’ll need to pay very close attention to the specific conditions and requirements, in order to comply with international law.

Finally, it could be an option to put those earnings into an offshore investment platform somewhere the tax codes aren’t so harsh, thereby limiting your exposure to penalties and estate duty. Whichever option you pick, none will be particularly easy or stress-free, but decisions must be made to ensure you have legally compliant structures in place to protect your current lifestyle and future prospects.

Ultimately, the laws surrounding taxation are a quagmire at the best of times, and become infinitely more complex when different countries’ laws are at play simultaneously.

The ‘expat tax’ situation highlights the need for sound professional financial advice within a good understanding of South African offshore investment vehicles, fiduciary laws of the countries in which you earn and what your particular financial goals and needs are.

South Africa has just had its annual Budget Speech, with one of the many controversial topics not addressed being the National Health Insurance scheme. Yet President Ramaphosa stated very recently that he expects it to be fully rolled out within the next five years.

The NHI was initially to kick off on 1 March 2020 but is currently years away from full implementation, with much still unknown about how NHI will actually work.

So, what do we know? Here’s a list of answers to common questions about the NHI in order to keep you up-to-date with the latest facts.

What happens to my medical aid and insurance when NHI kicks in?

Much has been made of the fact that medical aids may not legally cover anything the NHI will cover. While this doesn’t necessarily mean the end of medical aid schemes in South Africa, it’s a major disruption and medical plans will be significantly restructured or made obsolete.

What about other insurance? Currently, there isn’t any obstacle for insurers, particularly life insurers, covering what they already do. So, financial protection in the event of a temporary or permanent disability, a critical illness like cancer or a fatal accident or condition will most likely all still be covered in exactly the same way.

Should I even bother with insurance then?

Government has insisted that NHI will be “comprehensive”, but no list of services has yet been released and, with “comprehensive” being very much open for interpretation, this is unclear. So, at this stage it’s really too early to tell.

Sophisticated treatments such as oncological treatment for cancer patients would likely not be covered (again – this is not confirmed). This is where life insurers would step in, especially as medical aid schemes may have their hands tied by the NHI. A dread disease benefit, for example, would pay out 100% for something like cancer or a heart attack to pay for or contribute towards that person’s oncology bills and the other financial strains associated with critical illness.

Will I have to go to a government hospital under NHI?

In theory, the aim of NHI is exactly the opposite of this – for those who have been forced to make do with government hospital experiences to be able to now access private medical healthcare practitioners.

In practise, all South African citizens will be required to register at their nearest NHI-accredited primary healthcare facility and be limited to primary healthcare only at that facility. Whether those will be private clinics like Netcare, your usual GP or state hospitals is currently anyone’s guess.

Going anywhere other than this has to be officially recommended by the doctor or medical staff at that registered facility and approved – which may make seeing specialists like orthodontists, gynaecologists, oncologists and paediatricians a lengthy red tape experience.

When is NHI coming into effect?

No one knows when exactly NHI will come in. It is currently expected to be fully operational as soon as 2022. This is still the target date for more vulnerable citizens like the elderly, disabled and children.

The National Health Insurance Bill states that the NHI fund must be in action some time in 2026. It remains to be seen whether this will be the case, though. Many medical aid schemes, like Discovery for example, maintain that NHI will take far longer to come into full effect.

How much will I be taxed for NHI?

Again, we don’t yet know. The biggest portion of funding is likely to come from an increase in personal income tax. As medical aid contributions come to many via their jobs, payroll taxes for employees will also likely foot the bill. On the government’s side, what Treasury currently allocates to provinces through provincial equitable shares and conditional grants under the system as it stands now will probably be reallocated to the NHI Fund.

There may also be another bitter tax pill to swallow where the NHI is concerned: no medical aid tax deductions.

While much is still murky when it comes to NHI, many experts believe that the insured population, who are already members of comprehensive medical schemes, will keep paying private medical aid fees anyway to avoid the long waiting lists, queues and restrictions on specialists and GP visits likely to manifest once the NHI does. However, they won’t get any tax deductions for it anymore.

So, the average policyholder will likely pay twice – for NHI and medical aid – and get none of the money back they currently are.

Can I choose my participation in National Health Insurance?

Unfortunately not. All South African citizens and permanent residents will be mandatorily enrolled from the state’s side once NHI comes into effect. There will be no choice involved.

At present, as much is unknown about National Health Insurance as is known – which is understandably worrying for the average policyholder. All of this is even more reason to pay regular attention to your portfolio.

February is the month of love, but it’s also the first real month of the year for most of us, once we’ve got back into our routines and come back to grips with life after the holidays in January. As a result, you may be thinking of how to get your 2020 goals going, especially your financial goals, rather than romance.

However, there is a way to think of both. In honour of the month of love, we’ve made a list of things to ask yourself on behalf of your investment strategy, based on some of psychologists and marriage counsellors’ favourite questions for couples to ask each other.

Do we want the same things?

What do you truly want out of your relationship with your money? What’s your ultimate goal – to retire well? Or be protected from unemployment? To have your loved ones protected after you’re gone?

The reason to ask yourself this is to lead on to another question: do you have the right products for your investment strategy? If the discretionary fund you’re in is geared towards offshore investing with the ultimate purpose of retirement, yet you want income coming from that, you and the products you have may be at odds. This is why it’s helpful to review your portfolio regularly and make it’s still working well for you.

Are we spending enough time together?

The key to making any relationship work is spending quality time together, and the same goes for your investments. Life tends to happen and, often, the whole year can go by without most of us revisiting the status update on our investments. In general, it’s a good idea to revisit your investment strategy and see how investments, annuities and the like are all doing between two and four times a year, or whenever a major life event like buying property, marriage, the birth of a child or divorce occurs.

 What do you really need from me to make your dreams come true?

Some of us can be tempted to treat our financial goals like a wish list or creative writing exercise, summoning up whatever dreams our hearts desire and then setting aside whatever funds, effort and time we deem they have available, without stopping to really calculate whether it’s a realistic picture. Again, this is where it helps to have a financial adviser in your court!

It’s important to frame a realistic and achievable investment strategy, armed with information and ideas you need to really achieve those goals.

What are my habits that you do not like which I should stop?

We all have bad money habits. All of us.

There may be some that are hurting your money more than others and, when stopped or cut back, will lead to a blossoming of your relationship. Not sure what your bad habits are? A good place to start is with our piece this month – ‘What’s the state of your budget?’

Ultimately, a wealth creation strategy is a relationship between you and your money. You get good relationships, ones that go the distance, and you get bad ones. And just like any relationship, it takes hard work and honesty.

One of the hardest aspects of working with tax and tax law is that the rules change slightly every year – making it tricky dice to roll without an expert on your team.

There will be a new law soon that legislates how much tax you as a South African must pay on money you do not earn in and from South Africa.

On 1 March, the new section 10(1)(o)(ii) of the Income Tax Act (known as ‘expat tax’) comes in after an extension period granted by the government previously. The section was controversial in that the government said in 2017 that the Taxation Laws Amendment Bill would be done away with completely and all money earned overseas by South Africans would be taxed by the South African government.

Government has backtracked slightly – as of 1 March, 2020, any money over and above R1 million earned by a South African outside of South Africa is subject to South African tax under the new changes.

Here is an overview of how the expat tax could impact you:

Only for South African residents

If you are domiciled in South Africa and are a ‘tax resident’ in the eyes of SARS, then this will apply to you. It also applies to those who have been living in SA for any period in the past year before 1 March 2020. This becomes null and void if you’ve been out of SA for 330 consecutive days, SARS lays it all out here.

Types of income taxed

These vary, but include any salary, wages and forms of remuneration for active employment. Commission, leave pay, bonuses, travel allowances and reimbursements and anything else like that which is earned outside of South Africa will be taxed after the R1m mark.

What will not be taxed

Passive forms of income, like rent earned from a property owned overseas, investment dividends or shareholder amounts for companies outside of South Africa, will not be taxed. This section of the Income Tax Act is all about income received for work.

Only for individuals

The ‘expat tax’ is not for businesses, trust funds, NGOs… only for individuals. In other words, anyone that can earn a salary. Certain independent contractors will also not fall under this tax, but not so for anyone working for a foreign company. If you’re in South Africa or a ‘tax resident’ in the eyes of SARS, it doesn’t matter where your company is domiciled.

How much will you be taxed?

SARS says that everything above R1 million will apply for “the normal tax tables for that particular year of assessment.”

The rates have not changed since last year, so ostensibly that means 41% for those earning R1 million nett income annually and over and the maximum 45% for those earning R1.5 million annually, and over. This means that the maximum anyone will get taxed is 45% – including those getting taxed by the country they are earning in. So, if a South African working for a UK company gets taxed 20 percent on that income by the UK, South Africa will only tax them 25% maximum. 

If you earn money from anyone outside of South Africa and feel this may apply to you, you may want to book a chat so that we can work through the possible implications. 

Gross earnings can add up faster than many realise, especially with the exchange rate being what it is. Ultimately, it’s worth being clued up on anything that affects your money and wealth creation journey.

Each year we are presented with our president’s State of the Nation address and the finance minister’s budget speech around the same time. The SONA is closely linked to how money is spent; it’s a powerful reminder for us to consider the close link between our lives and our budgets!

Good finances begin and end with good budgeting – when you have a good budget and stick to it, you’re often 90 percent of the way to wherever you want your money to get you. But what is it about budgets that make it so hard to stick to them?

Failed state 1: The fantasy budget

This may sound familiar: you decide to work out your new budget, so you write down your income, your monthly expenses are guesstimated and some vague savings goals like ‘get out of debt this year’ or ‘save R4000 for retirement every month’ are set.

What’s wrong with this picture?

It’s not specific enough.

Many of us don’t work with an accurate measure of what we are spending day to day. We tell ourselves we spend R250 on our morning cup of coffee at work because that’s an amount we’re subconsciously okay with, when it may be closer to R550 per month. We tell ourselves we’ll ‘get out of debt’ but haven’t tracked exactly how much is owed on the credit card, or how much our interest is costing us.

A budget based on speculation is a fantasy budget.

A better budget: Get real about tracking

There’s a reason why almost every diet out there insists that you start by tracking exactly what you eat – reality is hard, but it works.

To start creating a budget, take a look at your bank statements for the last 3 months at least to determine your real expenses and the exact amount you make monthly. It’s also worth looking at the exact amount of debt outstanding on anything like credit cards or store accounts and, if you have savings goals, the exact amount you’ve saved so far.

Not only will you have a clear picture for the first time, you’ll also be inspired by the dose of reality to keep saving and keep an eye on those expenses.

Failed state 2: The too-tight budget

A super realistic budget shaped by the step above is great, but can sometimes lead to the second most common error in budgeting: a too-tight budget.

This may seem contradictory to you, but it is very important not to account for each and every cent with no flexibility. An okay budget works with exactly what you get and spend in your real life, right now. A good budget realises that life is what happens when you’re making other plans.

If you have no leeway in your budget for emergency expenses, you’re going to struggle to stick to your budget. Emergencies happen, spontaneous purchases happen and sometimes things cost more than even a carefully-planned budget can account for.

A better budget: Set up your own emergency fund

Everyone has sudden expenses, everyone has emergencies. Therefore, everyone can benefit from an emergency fund.

Whatever you can save to guard against these surprises is good, but a general rule of thumb to aim for is three months’ salary tucked away, which will cover you for many unforeseen, unfortunate events. Also, don’t undervalue the importance of insurance for your household items, income and movable assets – not just for your property and car.

Failed state 3:  The emotional budget

You’ve set up your budget and are ready to go, but are you looking at your expenses through objective eyes? Many people classify wants as needs, when in fact they could spend less on eating out, cellphone upgrades, new shoes or the work cafeteria.

Another instance of being emotional with budgeting is when we are unrealistic about how much we can save for certain goals. If our savings goals are unrealistic, we’ll struggle to achieve them and lose precious momentum we need to keep at it. 

Saving is like brushing your teeth – it’s the everyday habit that makes it effective, not a once-off effort.

A better budget: Cut back what you can

Be accurate about what you spend, then evaluate what you can do to cut that down – you’d be amazed at how small amounts add up.

Can’t see your blind spots? Give your budget to someone you trust. They may be able to see with fresh eyes and say: ‘do you really need a new car every year or a bagel from the canteen every day?’

Failed state 4: The solo budget

No man is an island, and very few budgets are either. If you’re married and/or have kids or are living with someone else, you need to take them into account. Why? Because they may well have their own budget ideas that could clash with yours, or you can be assuming something on their part incorrectly. Just because it’s your spouse who always picks up the dry cleaning doesn’t mean that they’ve got it on their budget. And they may well have decided on an aggressive savings plan you know nothing of. It helps to check.

A better budget: Talk the talk

Sit down together and compare budgets. Also, this could be a great opportunity to plan together for a shared incentive, like a holiday. If you have kids, inviting them into the budget conversation can be invaluable education for them too.

Every investor has their own unique style when it comes to the rigorous decision-making process that goes into what to include in their portfolio and how to weight it. January, with the fresh perspective that comes from a break and a new financial year pending, is often the ideal time to take a look at investment decisions from a new angle.

One of the most useful ways to do that is the big picture look at trends affecting investing on a global scale.

This ‘seeing the wood for the trees’ approach can help with a far longer-term approach.

Here are some of the macro trends experts are saying will most affect investors in 2020 – and far.

Agitated agriculture

Climate change, the hot and bothered elephant in the room in most macrotrends analyses, continues to affect foresights by experts.

In PwC’s ‘Doing Business in Africa’ report, it was forecast that agricultural productivity throughout the continent could be reduced by as much as a third over the next 60 years due to climate change. This will be under even more pressure due to the fact that numerous experts have estimated the world’s biggest population growth for the next 50 years to unequivocally come from Africa. With less agricultural produce and more mouths to feed, what will happen for investors?

This is in direct contrast to the short view, outlined in the 2017/2018 PwC South Africa Agribusiness Insights Survey, which said that agribusiness drives 65 percent of Africa’s employment, with most bigger agribusiness CEOs forecasting a sunny 10 percent revenue growth for coming years.

To invest in agribusiness or not to? That is the question. It depends largely on an investor’s risk profile.

ESG excellence

One shorter-term upside for all this climate focus will likely be the continuing expansion and sophistication of ESG funds, perhaps into a formidable asset class in their own right. ESG has traditionally been seen as a ‘tree hugging alternative’ fund in SA, but has already seen a marked renaissance in the past six months.

However, the environmental ‘E’ sure to be emphasised with all this talk of climate change is likely to only further the ESG interest and value for savvy investors who are willing to look.

The rise and rise of pharmaceuticals

Less of a problem for the rest of Africa – but still a concern for SA – is the global ongoing trend in ageing populations getting older.

We are living longer, but often not living healthier. This has already led to an absolute boom in the frail care and pharmaceutical industries and this is showing no signs of slowing down. Shareholders of medical aids, established drug companies and private healthcare institutions like Netcare are still likely to be laughing all the way to the bank in 2025.

Tech takings

In October, tech thought-leader Gartner made an uncommon media appearance by announcing the findings of their 2019 CIO Survey and, as a result, their 2019-2020 technology trends, which they presented to government as the mostly likely to benefit public services in the next year or two and what their CIOs should look at investing in.

It provides valuable insights for the average investor too.

Startups specialising in digital identity protection software and ‘XaaS’ companies (software companies providing a generalist ‘anything as a service’ range of offerings through the cloud, paid for via subscription). The survey found that a significant 39 percent of government organisations say they plan to spend the greatest amount of any new funding on cloud services above anything else – which for investors means that this industry is ready to boom.

All of these pose attractive opportunities for the average investor, but remember that the savvy investor doesn’t only look at trends – they invest in what they know with the solid advice of a financial professional who knows what they’re doing.

Here’s to a good 2020!

Swiss banks hold a certain cachet about knowing good from bad investments, and currently the hottest topic on their lips are ESG funds.

ESG stock options – or, rather, ‘Environmental, Social and Governance sustainability’ – have been steadily gaining traction among investors in the last few months, emerging into something of a buzzword.

Once considered a ‘hippie tree-hugging’ concept, ESG funds are having a moment in the sun (hopefully a sustained moment…). And, in December, they’re likely to have more of a moment still. After all, this is the season of charity and goodwill to all. Wouldn’t it be nice to ensure that our investments were in line with ethical corporate behaviour and preserving our planet?

But ESG investing is far more than just putting money behind nice people. It can make sound financial sense too, according to the big players.

Expert opinion

For Marriott’s Dividend Growth Fund, which has a solid track record, it’s less about ESG for ESGs sake and more about the fact that companies synonymous with sustainability practises and good governance tend to also have more solid predictors of success in the market.

“Marriott’s investment team monitors and reports on ESG issues on a regular basis. An area of particular importance to Marriott relates to company reporting and disclosures. Companies with a reputation for withholding important shareholder information will not be considered for inclusion in a portfolio as the future prospects of these businesses cannot be determined with a high degree of certainty. Companies which take advantage of ill-informed consumers are also immediately excluded, not only from an ethical standpoint, but also due to the unsustainability of exploitative business models. The Marriott team also carefully consider environmental initiatives undertaken by companies to ensure their products and future business prospects are sustainable.

“Studies have shown that companies which pay, and grow, their dividends tend to outperform the market over the long term. This is evident in the performance of Marriott’s local equity fund – the Dividend Growth Fund – which has won a number of awards for risk-adjusted returns,” said Marriott’s Robin Hartslief in a recent press release about ESG funds.

The charts below illustrate the dividend track records of some of the companies the Marriott Dividend Growth Fund currently invests in. As you can see, it pays to be the nice guy:

ESG in the rest of the world

Overseas too, the Financial Times noted this month that ESG tends to seriously outperform in some key areas. “ESG assets under management have grown the fastest among smart beta strategies, at a compound annual growth rate of more than 70 per cent over the past five years, according to a recent report from Bank of America Merrill Lynch,” it said. In Europe, Lipper EMEA Research noted that “we have witnessed an above average increase of assets under management driven by market performance. Additionally, a high percentage of the overall net inflows in the European fund industry are invested in mutual funds and ETFs with a sustainable investment approach.”

ESG funds offer exciting opportunities for investors. They are still a tiny portion of the market in SA with not much but the fact that they’re a buzzword known about them when it comes to the average investor.

Just like with any other change in investment strategy, this requires a comprehensive conversation before making any switches, but if you’re looking for new options – ESG funds could be a great addition to your portfolio.

December should be a time of peace, cheer and goodwill to all men. But, if you’re a South African investor, it’s the month that likely brings up residual trauma of some decidedly un-jolly happenings from recent years’ Decembers. Cabinet reshuffle. Nenegate. Steinhoff. What is it about the twelfth month of the year that turns the festive season into the silly season?

If you’re understandably nervous this time of year as an investor, fear not. While no portfolio is fireproof to completely uncontrollable events like black swans and major unforeseen global macroeconomic events (like the first 2016 Brexit referendum), there is a lot you can do to limit your exposure to market-affecting shenanigans on the home front.

Here are a few ways to ensure that your portfolio doesn’t go ‘ki Dezember’ crazy this month, if the markets do:

Manage your emotions

It’s amazing how simple logic is so easily questioned when the buying of Christmas gifts, expensive holidays, Black Friday remorse and seeing far more family and friends that we usually do all play into the mix. Against this highly emotionally charged backdrop people tend to behave a little irrationally. And, when it comes to investing, emotional = dangerous.

The age-old maxim of ‘buy low, sell high’ works for a reason. And, most of the year, you may well stick to it. In December, be aware that you may try to knee-jerk sell. Don’t do it. Unless a major macroeconomic event like the actual apocalypse is happening, let’s have a quick WhatsApp catch up or a short phone call to double-check the best options.

Cash is king – in context

You don’t get much more liquidity than cash. And in times of trouble or uncertainty, people opt for several versions of the old ‘cash under the mattress’ trick, like holding cash in a standard bank account or stocking up on Krugerrands.

Cash is an option, but it works best inside of a diversification strategy. Nothing short of a very well-proven crystal ball will help you move exactly the right thing at the right time to the right place. It’s about having all your assets in different places, different classes and with different levels of liquidity that will see you through.

Don’t make any sudden moves

When it comes to investing, always remember: any change costs something. A change when everyone else is pulling the same change (like investing offshore), is also expensive. Try not to suddenly pull huge lump sums out of equities and into a different class without it being in line with your long-term strategy.

A move like this, which may seem simple enough, could cost you five times: the price of the fee to pull money out of equities, the setup price of moving into bonds, the loss of momentum on your equities, the loss of any compounding you may have been about to tap into or eventually attain on your equities and the price of starting from zero in the new asset class.

Switching things up in your portfolio is sometimes necessary, but it must be done inside of a comprehensive strategy, not a panicked whim. When nearing the end of an investment term, it could be a good time to change your weighting in various classes and the diversification of your portfolio. Feeling scared watching the news is not.

Be commitment wise

Don’t get involved in something you don’t know well. December is often the time of year-end bonuses. Feeling jolly, you may think: ‘hey, why not try out Bitcoin?’

Unless you’ve been studying the market history, inner workings and headlines surrounding Bitcoin for more than a year, maybe give it a little more thought.

Many tried this back in 2017 when Bitcoin was trending and either lost all that irreplaceable, untraceable investment in a hacker’s spree or waited until December 2018 to find out it was worth 80 percent less.

Ultimately, investing always works best when you have a trusted, second opinion to every move you want to make. Either knuckle down and focus on the people around you and let your money work for you, or let’s get in touch and have a comforting cup of coffee to bolster your portfolio.

People are often quick to comment on doom and gloom posts and add their voice, and with the current subdued economic outlook, there seems to be plenty to be grim about. But what if we looked at something, like inflation, and highlight a positive South African success story?

“… Inflation??” you cry.

Hear this out.

When people speak of inflation, it’s often the villain of the financial story. It’s blamed every time we swipe our cards to pay for goods and services, or look into our bank accounts when times are tight.
And why not? After all, the very concept of inflation is that our money is now worth a little less than it was before.

But, inflation is not that bad guy it’s made out to be. In fact, the lack of inflation can be far worse.

When inflation is bad

Most people confuse inflation with hyperinflation – an excessive amount of inflation in a short space of time. A classic example of hyperinflation is what happened to the Zimbabwean dollar. In first world countries, hyperinflation usually only happens in very dire circumstances (the German Deutschmark after WW1 comes to mind).

Inflation, on the other hand, is when the prices of things in a country go up moderately, usually three percent or less in one year. Just under two percent is considered typical.

When inflation is good

Inflation can be good for three kinds of people: savers, earners and investors. If you are simply spending all your money, inflation is undoubtedly negative in the short term. You can now afford less things than you could before. Inflation also does – in most cases – tend to trickle down to salaries as many employers aim to increase salaries on a regular or annual basis in order to compensate for inflation.

But if whatever you have isn’t likely to be spent any time soon, inflation can be a very good thing. To put it very simply, inflation is measured by economists as how much money is exchanged for goods or services in a country. This means that the money part of the equation increases in value.

If you have used that money to buy, for example, a house, then that house is now worth more than it was. Someone else wanting to buy it from you after an inflation hike would have to pay you more than you paid at first. This means that, for investors, inflation is great.

The world’s ongoing inflation woes

Global markets, particularly the US, haven’t had material inflation in quite a while. Risk of deflation has been talked about – more than a decade, in fact – and that is indeed very bad.

Deflation is what economists call ‘demand-pull inflation’ – when you have too much supply and not enough demand on goods. This happened to the property market in America in 2013 and, to a lesser extent, has just happened a couple of years ago in South Africa. House prices plummeted by as much as 30%, meaning that no one was buying. Why buy now, when you can wait a month and get an even better deal then? People couldn’t sell their houses without losing a lot of money.

South Africa and inflation

In contrast to elsewhere, South Africa has been relatively protected from inflation issues. We mostly hover around the four percent mark, with increases of less than two percent a year.

According to Investec: “during the past two decades, the significant swings in South Africa’s inflation rate have been driven to a large extent by exogenous shocks, mainly energy prices (international oil prices and domestic electricity tariffs), food prices and the exchange rate. More recently, inflation appears to be firmly under control… headline inflation has been within the target range of 3-6% since April 2017.”

Investec goes on to say that their “current forecast is for headline inflation to average 4.2% in 2019 and 4.6% in 2020, compared with the SARB’s forecasts of 4.2% and 5.1%. We expect core inflation to average 4.2% in 2019 and 4.4% in 2020. By historical standards, inflation is subdued, but not dead, and not without risks. We assess these risks, however, to be fairly balanced.”

This is quite different from other countries, whose inflation rates are well below that are starting to be a real concern.

(Source: Statistics South Africa and Investec Asset Management, as at 30.09.19. Investec Asset Management forecasts are from 01.09.19 onwards.)

When it comes to coffee-shop conversations, little is said about the long game in the investment space – it’s often about which asset manager did well this year, what outperformed everything else in the last quarter… etc.

But, if you’re an investor, chances are high that you’re saving for future events that have a five-year-plus event-horizon (as we all should!).

Here are four thoughts for investors looking to improve their long-term results. If you’re feeling shaky in your investment behaviour, these will certainly help to master your long game.

Tip 1: The past does not predict the future

It’s the most common mistake in the book, so entrenched in investment culture that even the most seasoned among us fall into this trap. It’s the thinking that ‘X Asset Managers beat the index by nine percent last year so they’re the best bet this year’. X Asset Managers in turn, who may not even have the same actual people on board anymore or may have undergone a whole host of other changes to the ‘magic formula’, adjust their fees up accordingly.

There are plenty of problems with this. One is that, if you keep a close eye on the top performers, you’ll notice that the same managers are almost never ever in the top spot consecutively. This means that if you doggedly follow the best performers, you’re going to switch funds every year, decimating your return potential.

Secondly, as we’re well aware of in other spheres of life but conveniently forget in investing, our global future and rate of change in the next decade will be different to anything in the last century.
“But surely that won’t change the actual nature of the markets,” some may say.

Yes, it can. We’ve already had what should be an impossibly long bullish cycle and more black swan events in a decade than ever before. We need to beware.

Tip 2: Switching frequently is usually a bad idea

Most of us know the two cardinal sins of investing: not preserving when switching jobs and chopping and changing funds or managers too often.

But what about when a crisis hits? Switching from other assets into cash may be just as harmful.

When the going gets tough, generally, most investors go for cash. And there is some wisdom to this – cash is a great low-risk asset that generally does well in times of crisis and is therefore event-horizon specific. But taking money out of, say, equities, and exchanging it into cash is often a case of winning the battle but losing the war.

The thinking is that ‘if I get this out of equities before equities experiences a downturn and put it into cash, then switch it back, I’ll save the amount I would have lost.’ This gambles the losses from switching with the gains made from avoiding a loss when markets turn south. The problem with this is that most (who are not whizz asset managers by profession) will get the timing wrong. This leaves you with two losses when, longer term, simply staying put would have made more sense.

Tip 3: Care about shares

There are widely held misconceptions about different asset classes, many of which are harmful for players of the long game in investment. One of the most common is that equities are risky while bonds are safe, and cash is the safest of all. And a short-term glance at the market may seem to confirm this belief, however the opposite is true when it comes to longer-term strategies.

Think of investing in cash (a.k.a. the money market) as the investors’ equivalent of stuffing your cash under the mattress. If your aim is to not lose any money – then you’re in luck. That money may be safe from being lost short-term. But it’s also not growing as much as it could, while other things like CPI are making it worth less and less. Equities, on the other hand, have shown to give back the bigger returns compared with cash longer term, even though short-term your chances of making losses are higher.

The lowest annualised local equity returns versus the highest annualised local cash returns over different investment terms

Based on historical returns data since 31 November 2007. Source: Morningstar to end of December 2018

Tip 4: You get what you pay for

One of the biggest ‘grudge purchases’ of the financial world, after insurance, is the fees associated with funds. Some charge two or three percent, others far less. Most investors see that as three percent that could have been invested on their behalf that’s now going into someone else’s pocket.

However, you really do get what you pay for often with funds, just like everything else. According to Discovery’s August Smart Money newsletter, “the total expense ratio (TER) of an investment fund gives an investor an indication of the total fees of that fund. If we compare a relatively high-cost fund (TER of 2.47% in 2008) with a relatively low-cost fund, (TER in 2008 of 1.41%), the ten-year return from the more expensive fund was 77% higher than that of the less expensive fund.”

The good news is that regulation has cracked down significantly on what a fund may legally charge in terms of fees, why they charge fees and how transparently they disclose this information. In essence, you should only pay so much and know precisely what it is you’re paying for. If not, the law is on your side as the consumer, something which wasn’t always the case when this industry was younger.

Having enough for future life events is a marathon, not a sprint. Let’s put these four tips into play, and you and your wealth will be able to go the distance.

Original article: Discovery