The Fat Wallet Show with Kristia van Heerden

Podcast: The price-weighted index

In Latest, The Fat Walletby Kristia van Heerden

FW_120819For two years we’ve had to live with the shame of the Listener Love Index. The wisdom of the crowd is not quite so wise when it comes to stock selection. Let that be a lesson next time a friend offers a hot stock tip.

This week we finally replace that horror show with our new index – the Fat Wallet Price-Weighted Index (FWPWI). The methodology is one step dumber than that of indices weighted by market capitalisation. Market-cap indices multiply the number of shares in issue by the share price. We ignore the shares in issue and focus on nothing but the price. You’ll find JSE-listed companies within the R80 to R250 price range at the start date. 

I’m curious about how this index will fare against our benchmark, the Satrix 40. In essence we’ve stripped the outliers – at the top we’re talking Naspers and a bunch of commodity stocks. At the bottom, property. 

We end up with a fairly defensive index. You’ll find a number of consumer staples and retailers – those businesses we can’t do without during tough times. The index is heavy banks, which could turn out to be disastrous if that dreaded downgrade finally comes. Here’s hoping Dario is right about that.

Below is a video of how we put together the index. In the podcast we discuss why understanding this matters to beginner investors (and everybody else). The coolest part about this index is that you can easily replicate it for your portfolio. You simply add the average price you paid for your holdings and divide by your number of holdings. That will give you a DIY bird’s eye view of your overall wealth.



Beeped version is below.


Steyn

I’ve started to realise that property might not be a very good investment. As I understand it, there are two factors that make a property a poor investment:

  • On average it only grows at around 7% – just a fraction above inflation
  • CGT doesn’t care about inflation

I ran the numbers and it became clear that the CGT you will pay after 20 years almost strips your growth entirely. 

If you buy a property for R1m and it grows at 7% per year, it will be worth R3.95m after 20 years. 

In today’s money it would be worth R1.23m. So in real terms, your property only grew by R230,000.

If you want to sell it, CGT will be calculated on the total growth of the property and not the inflation adjusted value. CGT will therefore amount to R210 000. After 20 years you only made R20,000 profit. This is sad.

This has not been the case with our two properties. We’ve been very fortunate with both of them:

We bought a rental property in a new development three years ago.

They only finished and transferred last year October. 

Over the past three years, the property has grown tremendously and in the meanwhile new phases were added which made the development quite sought-after. 

The developer kept some units in our block and is now selling them for R1.5m. If I can sell it now I will make a nice profit, but I can’t since there’s a clause that restricts me from selling before five years unless I’m willing to pay a penalty. This is to keep speculators from tanking the prices.

We also bought another house which is our primary residence at about R400,000 under market value. 

  • Is my rationale correct that by cashing in on this equity and putting it into ETFs or an RA, would be better over the long run? 
  • I’m considering putting the two bonds in a structured facility at FNB. This might give us a better interest rate (currently 9.5 and 9.6% respectively). Do you know anything about structured facilities and is there anything I need to look out for?

Lastly, I’d like to share a property hack:

I have a 55 day interest free period on my credit card. So each month I put my whole salary minus debit orders in our bond.

For the next 55 days we live off the credit card’s interest free period. We clear the credit card after this period and restart this cycle. If we continue to do this over the next 20 years, we will save about R260 000 in interest and take 18 months off the term without using any of our own money. 


Dario

SP has kept our credit rating below investment grade….for now.

I can’t say I agree with Ramaphosa in all things, but I do recognise that he has the potential to steer this country into a better direction.

I am a firm believer that he will at least get SP & Fitch to upgrade us up to investment grade.

I think we have some time to prepare for this. I don’t think 2019 is the turning point just yet. How do we best position ourselves and how much upside is there?

I currently hold some STX40 in my TFSA but I think investment grade affects bonds the most considering our JSE is largely offshore


Gregg

You have my school-going son investing R300 a month of his pocket money into a Global ETF – how’s that for awesomeness! I’d much rather he do that than blow his money on what typical teenagers get up to now a days. Well done guys! 

If I buy a house worth R1.5m, but I take out an access bond for R2m, it means I have automatically created an emergency fund of R500K. I don’t pay interest on what I don’t utilise, so I would only be paying interest on what I spent, in this case the R1.5m. 

I totally get it that this is not the same, nor as good as buying a house for R1.5m,  then putting R500,000 into the bond thus reducing it to R1m, but still being able to access that R500,000, all the while it is “saving” me interest. This is ideal. 

But in the first instance, if one does not have a big enough emergency fund, is this not a good way to kick-start one?


Rudolph wants to know if raising taxes does the same thing to the market as raising interest rates does in terms of inflation, economic growth, investments, corporate profits, government revenues, etc?


Ben wants to know if it’s dumb to sell his old EW40s for ASHEQs in a TFSA.


The Fat Wallet Show with Kristia van HeerdenThe 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.

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