How can I align my investments with my risk tolerance, time horizon, and financial goals to effectively grow my wealth? Jac De Wet, Wealth Manager at PSG Wealth, Somerset West
An appropriate answer would demand a detailed assessment of your personal and financial circumstances. However, there are principles you can use to guide your thinking to optimise your portfolio. Consider dividing your portfolio into three ‘strategies,’ each with a distinct aim or expected return, time horizon, and risks: wealth creation in the long term, wealth preservation in the medium term, and income/liquidity provision in the short term. Here’s how it works:
Income/liquidity: The aim of this portion is to provide for any short-term (1-3 years) income or capital needs. Focus on cash, bonds, and other income-generating assets, as these offer lower risk and high liquidity for short-term needs.
Wealth preservation: This part bridges the wealth creation and income/liquidity portions and should aim to provide moderate growth (inflation + 2% - 3%) for medium-term goals (around 3-6 years). A higher allocation to growth assets like equity (30% to 40%) would provide the necessary increase in return, although at slightly elevated risk levels.
Wealth creation: The purpose of this portion is to achieve higher growth over the long term. Returns exceeding inflation by 3% to 6% over periods exceeding 7 years are appropriate. Such an investment would require a higher risk tolerance, as a higher return typically implies potential higher risk.
Over time, the different 'strategies' function like a waterfall: surplus funds in the income strategy are added to the wealth creation strategy and ‘flow’ back down to the other 'strategies' as needed. This provides a risk robust foundation for your investments to achieve sustainable growth within any given time horizon. The proportions and underlying investments are directly related to your specific circumstances, goals and needs, and can only be measured properly by a qualified professional.
What are the most effective ways to review and manage my finances ahead of the holiday season to maximise savings and minimise financial stress? Kim Wheeler, Wealth Manager at PSG Wealth, Northcliff
We all look forward to the festive season, relaxing, reconnecting with friends and relatives, celebrating life’s joys and welcoming another year of boundless possibilities. It’s also a time with a large price tag, and when the New Year’s party is over, we know the struggle of making ends meet as “Januworry,” kicks in.
Financial planning is critical - determining your financial goals, with realistic strategies and reviewing your financial plan regularly as circumstances change. It’s also not just about the big things like retirement, but about planning for holiday expenses and things like school uniforms. “Januworry” hits us because we forget it’s coming!
Removing the “worry” from “January” involves three “Ps.”
Prepare for holiday expenses in the monthly budget. Decide on objectives and save for them through monthly deposits in a designated account. Prioritise spending, and limit unnecessaries – do we really need that restaurant meal? This will ensure that there will be money to enjoy in December without maxing out the credit card, which only contributes to more “Januworry” blues.
Plan December spending and stick to budget. Decide what to spend each day, and where to make big-ticket outlays and don’t exceed it.
Provide for January, as part of the holiday funding plan. December salaries are usually paid early and will be needed not only for holiday gifts and socials but also for stocking up for school and surviving the everyday expenses of another month. January payday can seem ages away, which is why sticking to your holiday budget is essential.
Prepare, plan and provide: three messages for the festive season, and beyond. Particularly for a worry-free start to the year ahead.
What’s the best way to manage my student loan debt, and should I prioritise paying it off over investing in property? Alexi Coutsoudis, Wealth Adviser at PSG Wealth, Umhlanga Ridge
Managing any debt, in this case, your student loan debt starts with having an understanding and visibility of your finances. The simplest way to do this is to create a monthly budget. Having a handle on your cash inflows (salary etc.) and outflows (fixed costs like rental/bond, food spend, debt repayments, childcare etc.) is crucial if you want to manage your affairs efficiently.
If you don’t have a documented plan to pay back your student loan debt, now is the time to make one. In higher interest rate environments like now, systematically paying down debt is one of the most beneficial investments you can make. At a minimum, ensure you're meeting monthly repayment requirements to maintain a positive credit history. Knowing the interest rate on your debt can also guide you on whether to prioritise higher repayments or to allocate extra funds toward other investments, such as property, if it offers a potentially higher return.
When it comes to complex investment trade-offs, like deciding between investing in property or paying down debt, a reputable financial adviser can assist you in creating a documented financial plan. It all starts with detailing what your short and long-term financial goals are. Once these are clear, making informed financial decisions and prioritising effectively becomes much easier, enabling you to manage resources efficiently and work toward your goals.
How does the recent interest rate drop by the SARB (South African Reserve Bank) impact future financial planning? Specifically, could you explain its potential effects on various asset classes such as equities, bonds, and real estate, and how should I adjust my strategy to optimise returns and manage risks in this economic landscape? Ben Vermeulen, Wealth Manager at PSG Wealth, Outeniqua
The recent interest rate cut by the South African Reserve Bank should bring relief to millions of indebted South Africans, especially if the rate-cutting cycle continues for an extended period. Lower interest rates lead to increased consumer spending and economic activity. Furthermore, banks are more willing to lend funds, as loans become more affordable. Higher economic growth should result in increased company profits, contributing to higher equity prices.
The property market will also benefit from lower interest rates. Affordability will improve as purchasing a property becomes less costly. Additionally, the largest single expense for listed properties is the interest expense, which will decrease as interest rates fall.
Bonds exhibit an inverse correlation with interest rates; when interest rates decline, bond values increase and vice versa. Historically, lower interest rates have been favourable for the returns on equities, properties, and bonds.
In 2022, we witnessed the negative impact of rising interest rates, as nearly all asset classes struggled.
It is important to note that the correlation between lower interest rates and higher prices for other asset classes does not always hold. There have been several periods in the past century when lower interest rates coincided with stock market weakness. Conversely, there have also been times when the stock and property markets performed exceptionally well, even during periods of rising interest rates.
For these reasons, we discourage adopting a strategy based solely on changes in interest rates. Instead, we recommend building a strategy aimed at achieving inflation-beating returns, regardless of whether interest rates are rising or falling.
Over the past 50 years, equities have outperformed cash in rolling five-year periods 93% of the time, while properties have outperformed cash 95% of the time during the same timeframe.
We advocate for a well-diversified portfolio that includes cash, bonds, equities, and properties. Maintaining a slightly higher cash allocation during periods of rising interest rates and a slightly lower allocation when rates decline may help enhance returns.
My family and I will be going on holiday this coming December. While we are excited to have a break after a very long year, I am concerned about leaving my property unoccupied for a long period of time. From an insurance perspective, what do I need to keep in mind to ensure our home remains covered from any potential issues? And is there anything I need to do before heading off? Karen Rimmer, Head of Distribution at PSG Insure
Thanks for this! 2024 has most certainly been a whirlwind of a year, and you deserve to take that well-deserved break without having to worry about what might happen to your property while you are away. To give yourself peace of mind, there are a few simple yet effective steps you can take to ensure your home remains protected.
The first step is to ensure you have reviewed and updated your short-term insurance policy, including ensuring that your cover reflects the current value of your possessions. This will ensure that you are covered and will be reimbursed for all assets should disaster strike. You should also consider whether you’ve had any renovations done on your property, or if you’ve added any new security features or acquired new valuables, as this will impact the policy and level of coverage you have on your home and its contents.
A key issue that many homeowners encounter is that they have not armed their security systems properly before leaving their property and have also not informed their insurers that they plan to leave their property unattended for an extended period of time. Sometimes, this can be a requirement for maintaining cover, so it’s essential you tick this off the list before you head off.
Additional safeguards you can put in place from a security perspective includes hiring a house sitter, arranging someone to collect your newspaper and move your bin indoors so it appears as if someone is home to deter opportunistic criminals – and lastly, be social media savvy. Be careful when sharing your holiday plans on social media, as this can alert criminals to your absence. I’d recommend speaking to one of our qualified advisers, who will be able to give you greater clarity and peace of mind should you need it.
PERSONAL FINANCE