Notes from my inbox special edition: taking stock of your portfolio

The idea of marking the start of a new year by committing to be better is as old as human civilization. Historians believe that the Babylonians started the custom of making new year’s resolutions 4 000 years ago. The month of January is named after the two-faced Roman god Janus, who both looked back to the past year and forward to the new year, presumably to keep an eye on whether the ancients stuck to their new years’ promises. During the Middle Ages, knights purportedly renewed their vows of chivalry at the end of every year. In our age, most resolutions focus on self-improvement and often involve the intent to eat a healthier diet or exercise more. We can use this innate human urge to help us adopt better financial habits too.

Herewith a checklist with ideas that can help you to improve your personal finance habits:

PROTECT YOURSELF AGAINST CYBERCRIME

JP Morgan Chase & Co., the largest bank in the US, recently reported that hackers attempt to infiltrate its systems a staggering 45 billion times every day. We must all assume that our personal information has been compromised in the various data breaches at credit bureaus and other service providers. The key risk for individuals is a compromised email account. Once fraudsters have access to your email account, they can learn about your financial relationships and behaviour, impersonate you in engagements with your asset manager and intercept or alter communications sent to or from your account. Use a strong, dedicated and regularly changed password for your email account and enable two-factor authentication. Remember that we will never send you an email with an embedded link that requires you to login or divulge any of your personal information, nor any kind of investment offer via messaging  apps or social media. Only transact via our official secure online site.

BE MINDFUL OF THE DIFFERENCE BETWEEN REGULATED AND UNREGULATED INVESTMENT OFFERINGS

We have seen an increase in the promotion of unregulated investment products, often with high promised rates of return, implied capital guarantees and no or very limited disclosure of the actual underlying securities in which your money is invested.

Only banks and insurance companies are specifically regulated to provide guaranteed investment returns. All other investment options require the taking of risk in the pursuit of returns. The gold standard for market-linked investments is regulated collective investment schemes, which include unit trusts and exchange traded funds. Regulated funds require the separation of assets from the fund manager, which are held in custody under the control of independent corporate trustees. These funds disclose their underlying holdings and are subject to investment diversification requirements, which are designed to protect investors and are managed to provide liquidity when you need it.

A good way to reference claims about future returns is to benchmark against the risk-free interest rates available in the market. The base rate of interest is the repo rate, set by the South African Reserve Bank at its regular Monetary Policy Committee meetings, which is currently at 8.25%. Another good reference point is the five-year fixed deposit rate offered by the large banks or via RSA retail savings bonds, which at the time of writing is around 9% to 10% before tax.

Remember, when something sounds too good to be true, it most often is!

WHY YOU NEED EQUITIES IN YOUR PORTFOLIO

Net cashflows in the unit trust industry show that many conservative investors continue to prefer bonds over equities in their domestic portfolio allocations. This preference is anchored in historical performance outcomes. Over the past decade, the FTSE/JSE All Bond Index returned 8.1% p.a., compared to the disappointing 6.5% p.a. from the local equity market (as measured through the FTSE/JSE Capped SWIX Index). Investors are also taking comfort from the high yields still offered by local fixed interest investments, with the Coronation Bond Fund yielding 10.6% at present.

We think that investors are not giving equities adequate credit for their ability to better protect purchasing power during economic crises, as explained in detail by Seamus Vasey in his analysis of relative domestic asset class performance across countries such as Argentina and Turkey that recently experienced economic dislocation. We continue to hold the view that more conservative investors, especially those relying on their portfolios to provide an income for life, are better served by investing in multi-asset funds. These funds, such as Coronation Capital Plus (2023 return: 16.5%) or Coronation Balanced Defensive (2023 return: 14.9%), include healthy equity exposure and provide offshore diversification. This makes them more appropriate for longer term investment horizons than managed income funds such as Coronation Strategic Income (2023 return: 10.5%).

RETIREMENT ANNUITIES REMAIN AN ATTRACTIVE COMPONENT OF A SOUND FINANCIAL PLAN

Personal pension plans, called retirement annuities (RA) in South Africa, have always offered a very attractive deal to investors: in exchange for locking money in until you turn 55 and then committing to use two-thirds of the accumulated capital to buy a pension, you get an immediate tax break on your contributions and tax-free growth while your assets remain invested. The deal for investors was sweetened last year, when the offshore investment allowance you can hold in your RA was increased to 45%, making it possible to build a more robust portfolio with better diversification options and higher expected returns. The deal will improve some more once the new two-pot system is introduced, allowing pre-retirement emergency access to up to one-third of RA assets in case of unforeseen events or hardship. While the opportunity cost of lost compounding and claw-back of prior tax deductions make early withdrawal a last-resort option, it is useful to have this added optionality. We will explain the new two-pot system in much more detail before the new rules become effective. Meanwhile, you can read Rael Bloom’s article on what the two-pot system entails here.

MAXIMISE THE TAX BREAKS AVAILABLE TO YOU

With the end of the tax year fast approaching, it is worthwhile to ensure that you have maximised the tax breaks available to you. If you need a refresher, you can find our summary of the key investment incentives available to you here. We will update this list for the 2025 tax year on 21 February, the date of this year’s Budget Speech.

READ OUR COROLABS!

We annually publish a series of practical investment guides, explaining the trade-offs and opportunities across the different investor needs. Whether you need immediate income over a short investment period, are a retiree needing to live off your capital over an extended period, are looking to achieve long-term growth, or are interested in diversifying offshore, we’ve got you covered. The series is available here.

As always, I invite you to contact us via clientservice@coronation.com if we have failed to live up to your expectations in any way.

Disclaimer
SA retail readers
SA institutional readers
Global (ex-US) readers
US readers