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We spend so much time talking about bad financial products. Is there such a thing as a good financial product? If so, where would you find them?
Listener Bronwyn got badly burned with financial products in the past. She’s been paying 15% fees on an Old Mutual education policy and took out a Discovery retirement annuity that hasn’t returned anything above her contributions for the past six years. Now her financial advisor wants her to invest in Body Corporate Bridging Solutions, which apparently guarantee a return of 17.5%.
In this episode, we provide a checklist for buying financial products. When comparing similar financial products, think of the following:
- Fees
Let this be your point of departure. As winner of books and life, Ronel, explained last week, “If I get 10% growth, and inflation is 6%, there is only 4% left for growth and compounding. If I pay 3% or 4% in fees, I will only get back what I put in, adjusted for inflation.”
- Guaranteed returns far above retail bond rates
As Simon points out, the government is the only party that can realistically guarantee returns, because the government owns the printing press. You can check government retail bond rates website here.
- Counter-party risk
Investments are for the long-haul. As winner of books and real life, Lesigisha, pointed out, the principles of compounding relies on time, not money. If there’s not much information available about the company taking your money, be very careful. Counter-party risk should be considered alongside fees, though, in the case of older, bigger corporations who probably won’t go bust but happily pocket your investment returns.
- Active or passive
Simon and I spend a bit of time discussing this point. The SPIVA report indicates that actively-managed funds underperform the market year after year. However, if an actively-managed fund makes you feel more comfortable, don’t forego it just because we say so. It’s your money, after all.
Win of the week: Sean worked out if you’ll be better off at Absa or EasyEquities. He also worked out how many years it would take him to make back the penalty.
ABSA’s new inactivity cost is essentially R40.25 per every two months, but only charged five times as there would be a trade in the beginning of the year,
This adds up to R201.25 per year for the next 14 years (R2 817.50 excluding compounding or about R6 780.98 at 15% growth adjusted back with 6% inflation).
After that the fee is R241.50 per year until you remove the money, which assuming my daughter is financially savvy will be a long time as she is only 18 months old today.
Anyway before getting myself worked up about ABSA essentially stealing a month’s income from my daughter, I decided to objectively look at the numbers (boring Excel attached to check calcs) and do a comparison between EasyEquities and ABSA
For my family it’s cheaper to use the EE platform by quite a bit,
We will pay off the moving of the two ETFs in just under two years.
For someone using a monthly deposit it may be better to pay into ABSA until the TFSA allowance is maxed out and then only move to EasyEquities.
Hope this helps some peeps.
Click on the link below to download the spreadsheet.
Shout-out to Lean, who recently started listening and seems to be going through the episodes front to back. They wrote about tax on whisky, from many moons ago.
Claire wrote to say my newsletter editorial really hit her in the feels.
Your “editorial” this morning really struck a chord with me… Of course that’s how they make their money. And the same goes for any of the other things we buy, oh so complicated: wine, perfume, cars, homes blah blah ~ have a great week!
Chas wants to know if we have transcripts.
I have listened to most of #96, then I was interrupted by a phone call so I lost the thread.
I am 78 and a bit deaf so I battle to keep up with your rapid delivery. Do you provide a transcript that I can study in my own time or is there a way I can pause to digest what you just said and then go on again?
I always want to learn more about investing.
Thanks for a lively intelligent show.
Transcripts are for one day when we grow up. It is our highest priority in terms of this show.
Thinus has a question about structuring his pay cheque.
When allocating your salary to different “pockets”, should you use gross or nett salary?
Alexander sent this great email about selling his house.
When selling a primary residence does one pay CGT for the amount above R40,000 regardless of what you have spent on the house?
We sold our house for R50,000 less than we bought it for about four years ago.
We paid more than R500,000 towards our loan (which was mostly interest of course)
We spent about R100,000 on renovations before we moved in.
After the sale we end up with R70,000 in our pocket.
Of the R500,000 (paid into the bond) R120,000 went to the principal amount.
We sold for R50,000 less than the principal amount.
In my book, it’s a loss of R530,000 (500k + 100k -70k). Or may I only deduct the renovations? Which is still more than the 70k, but in principle can one only deduct physical improvements?
Living there cost us a fuck-ton of money.
Obviously we are getting very little out of this deal, but even if we made R600,000, I would be able to prove that it cost us much more to live there so there is no “gain”.
What can I deduct from the money we get from selling a primary residence?
How does this compare to a buy-to-let property?
If you can deduct a bunch more for a buy to let, would it be worth it to buy and let to yourself?
We’ve had a few more emails from people who are upset about Absa’s fee increases. John says this is not the first time.
I bought a small amount of the Absa NewGold ETF years ago and had never done anything else with them.
They sent me a letter (in the POST) about 18 months ago telling me about a new minimum admin fee, payable quarterly. On my pretty small account it amounted to an admin fee of something retarded like 10% a year!
After querying it and getting a shrug of the shoulders, I thought FUCK THEM!! I did some research found EasyEquities, sold my ETF, was below my CGT threshold and reinvested two days later with my newly minted Easy Equities account at a newer, much higher base cost.
With EasyEquities being such a user friendly, reasonably-priced platform, I’ve subsequently invested multiple times what I originally had with ABSA. Their, EasyEquities’ gain.
We foolishly forgot to pick a winner for Sam Beckbessinger’s book Manage your money like a fucking grownup. Njabulo, who writes for us, snuck in his submission.
Whatever your investment or savings plan is, it is important to consider inflation and fees. If the investment can’t outperform inflation after fees, that investment is making you poorer.
Jen was the Win of the Week in episode 90 for figuring out that people who don’t earn a steady income can still structure their savings by doing it by invoice paid instead of by month.
As a self-employed person without a fixed income, I can’t structure a pay cheque because I don’t get one. But I can apply the same methodology to each amount that I receive.
Since my last email to you about this, it has been going well (although April has been a kak month so it has not been easy).
On the odd occasion when I have been tempted to forget about my system in favour of instant gratification, I just listen to beginning of episode #90 again where you discuss my email. Straight away I am committed all over again, like I would be letting you down if I didn’t stick to my guns. I know I should be motivated by how happy future me will be, but sometimes it is hard to think for two people at once.
The second brain wrinkling fact, and this isn’t mine but a repeat of what you said, is the idea that our total income over a lifetime is a finite amount. Every time you spend money on something, there is something else you can’t spend money on. Has that bit of information affected my spending habits!
You are changing my life and I have turned into a bit of a fanatic about all this. I am constantly annoying the crap out of everyone I know because I am trying to convert them all to The Fat Wallet Show, for their own good.
This, as well as iTunes reviews and mentioning us when you deal with any financial services provider really helps us. Thanks!
The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.
