Falling interest rates is one of the precious few things to smile about at the start of a recession. Banks have dropped their prime lending rate from 15.5% to 11% over the past six months. But governor Mboweni has signalled that this might be the last rate cut for a while. Should you fix your mortgage rate now before prime starts soaring again?

In South Africa, variable mortgage rates, expressed as prime minus a percentage negotiated between you and your bank, are the norm. But most banks also give you the option to fix your mortgage rate for a period of between one and 10 years. Unfortunately, you can potentially run into two problems when you fix that rate.

Firstly, you are bound not only to the rate that you’ve been offered, but also the term that you’ve chosen. Should you wish to get out of that 10-year fixed rate contract, for example, your bank could enforce a heavy penalty.

Secondly, the fixed rate offered is often not very attractive. It is driven by the expectations of traders in the fixed interest rate market. If you think you have a few good reasons to expect rising interest rates, the traders have probably priced in those same expectations. In these market circumstances, the result is a fixed interest rate which is higher than the current prime lending rate.

There are exceptions. John Loos, strategist at FNB Homeloans, recalls that FNB offered 13% to a fixed rate client in January this year, 200 basis points below prime at 15%. At that time the overwhelming consensus in the market was that a series of rate cuts is on its way, the majority of traders predicting it would be somewhere between 300 and 400 basis points. Will this client beat the average rate of the interest rate cycle over his selected term? Who knows? Like any gambling game, the winner ends with a distorted sense of his or her powers of prediction.

Rather than an instrument to try and beat the country’s average official interest rate over a selected term, the fixed interest rate was designed to provide mortgage owners with some certainty. It makes most sense for those who would not be able to afford their mortgage repayments when rates rise, and for those who sleep better when they know exactly what their repayments for the next few years will be. Like any insurance, though, the certainty comes at a cost: the premium that traders in the fixed interest market charge for exchanging the risk of the variable rate and providing you with the safety of the fixed rate.

Sprawling cities, congestion, the race for resources (and a parking spot), a consumer economy, more waste than the earth can absorb… Most of us have witnessed the side-effects of an economy growing rapidly year after year. Yes, uninterrupted growth was the myth of the New Economy. But already in 1942 the economist Schumpeter predicted that the capitalist economy cyclically moves towards a point of creative destruction, when the old and obsolete (often monopolies) need to make space for the new (often innovative entrepreneurs).

At its core, the slowing down of an economy (aka a recession) is nothing more than a reality check. Awfully over-simplifying the complex social system that drives the economy, the “boom” part of the cycle can be seen as the optimism of new businesses and its reliance on the upwardly mobile consumer, combined with the greed, optimism and shareholder pressure of the large, established businesses setting forever more challenging targets and making their business decisions accordingly. The “bust” part of the cycle is simply reality.

When the sub-prime crisis eventually hit the US, Paul B Farrell could think of 17 reasons why America needs a recession. A few months later in an article published in the Boston Globe, Drake Bennett also takes a philosophical look at the potentially positive effects of a recession on an individual. This year, with the global recession confirmed, Denise Kawaii also posted some good points on why the slowdown is not necessarily a bad thing. She’s particularly upbeat about the positive effect an economic downturn has on creative writing, music and the arts.

Yesterday our National Treasury announced that South Africa is now officially in a recession, having experienced two consecutive quarters of negative economic growth. Time to despair, attack or reflect?

The knee-jerk reaction is to blame the banks and government. But the truth is that both parties have behaved quite prudently during our most recent economic boom phase. Restrained by the National Credit Act (NCA), banks could only lend to individuals who could afford it, largely abating the current housing market woes of the US and UK, for example. Despite pressure from trade unions and other economic liberalists, the Reserve Bank also stuck to its policy of firm inflation targeting, keeping interest rates high at a time when almost the entire globe was wearing rose-tainted glasses and borrowing and expanding. Our fiscal position is also much better than that of many developed countries.

For those of us who have watched the squirrels, learned something and stashed up on cash, now is an opportune time to attack those bargain assets: undervalued shares, easily affordable property and auctioned second-hand goods. For those of us who are experiencing our first economic handbrake turn, let us not forget to fill up the tank in future. It may take longer to reach our destination than we thought.

How long will this recession last? Treasury is hopeful that the Confederations Cup and the 2010 World Cup could pull us through soon. But a lot also depends on the appropriate allocation of our National Budget expenses, boosting infrastructure for growth after 2010, and of course on maintaining political and socio-economic stability in the country.

Let the rest and reflection that usually accompany a recession not pass us by. But eventually we will need individuals’ creativity and innovation to get us out of this slump and start growing again.

Mother’s Day, Father’s Day, Birthdays, Christmases, weddings… There seem to be no end to the event calendar and the accompanying anxiety of searching for the perfect gift for the occasion. But are your efforts to express your affection perhaps a waste of time and money?

A few years ago, in his book The Five Love Languages, Gary Chapman introduced the idea that every person has a preference for one of five love languages:

• Words of affirmation
• Quality time
• Receiving gifts
• Acts of service
• Physical touch

And no matter how many gifts you purchase for someone whose primary love language is quality time, for example, she will only really feel loved when you set aside leisurely time for her and listen attentively to every word she says. What people tend to do, naturally, is assume that the other person needs the same gestures as them to feel loved. But as any good marketer will know, it’s less a case of Do unto others what you’d like done to yourself than Do unto others what they’d like done to themselves.

My short glossary for each of the five love languages:

Words of affirmation

Affirmation – letting someone know that they’re one of the best things that every happened to this planet

Sincerity – what that person hears more than your words

Love letter – the ’boxed’ version of your affirmation and something they can hold on to

Quality time

Quality time – It may involve only a few minutes, but when it’s over you feel like you’ve touched the essence of the person with whom you spent those minutes.

Active listening – open, attentive, non-judgemental listening to the words and the feeling behind the words

Receiving gifts

The thought – Which message do you want to send to the recipient? What have you noticed they need most at this point in their lives? What do they represent to you?

The value – The combination of creativity, perfect timing and thoughtfulness is priceless.

Acts of service

The service agreement – Always out of free will; sometimes on request; never on demand

Physical touch

Skin hunger – the adult version of failure-to-thrive syndrome, as observed in babies who are not held and cuddled

Friday we will be saying good-bye to holiday-ridden April with … yet another public holiday, the worldwide celebration of the improvement in the socio-economic conditions of workers. But were does this holiday come from?

Labour Day has its origin in the British Eight-hour day movement, led by Robert Owen from 1817 for several decades. Its slogan, “Eight hours labour, eight hours recreation, eight hours rest”, illustrates the goals of the movement perfectly. At the time, the working day lasted between 10 and 16 hours, 6 days a week. Despite Owen’s toiling, most countries had to wait until the early and mid twentieth century for a work day to be legally limited to eight hours.

Not all developed countries enjoy this work hour protection, though. And some bend the rules in pursuit of more time at the office. The Japanese, for example, are notoriously bad at sticking to their 360 hours per year restriction on overtime (about two hours per work day). Furoshiki or ‘cloaked overtime’ – workers staying at the office with the lights off or taking work home – is widely prevalent. It’s no accident that the Japanese language has a word specifically for death from overwork: karōshi. In 2007 there were 147 karōshi deaths and 208 cases of severe illness due to work-related stress.

This would explain the market in Japan for the i-pot. In this work-focused culture there is often no-one to regularly check in on elderly parents. But no worries, this kettle sends a signal through to a relative’s laptop, monitoring whether the elder is still alive and well and switching on the kettle regularly.

While working long hours is common among cultures that associate hard work with a good and meaningful life (look no further than the Afrikaner’s Calvinist work ethic locally), fear of losing your job can also be a big driver of working longer hours than necessary. But the reality is that, for most people, the law of diminishing returns kicks in after about 7-8 hours of work per day. In other words, at some point the extra hours start to add very little extra productivity. In fact, excessive overtime could even cause you to revise and destroy some of your good work due to fatigue and the poor judgement that often accompanies it.

Work-related burnout is a very real threat, with people in the ‘caring professions’ being particularly susceptible, according to Christina Maslach in Burnout: The Cost of Caring. In worst-case scenarios, burnout could lead to contempt for your clients and ultimately total abandonment of your career.

‘A 40-hour work week? Forget it!’ says Tim Ferriss on the other end of the work-life scale from karōshi. How about the 4-hour work week? Ferriss propagates the new rich lifestyle – valuing time as your greatest resource, in order to pursue the adventure called life.

I can appreciate Ferriss’s philosophy. While regulated work hours are necessary to protect repetitive task or support service workers from employer exploitation, a fixed number of hours per week for anybody else doesn’t really make sense. There are just too many other variables driving productivity: intelligence, experience, creativity, inspiration, peer-appraisal, physical fitness, EQ and biorhythms – to name only a few. Hours at work seem a very poor indicator of value added. And we haven’t even brought human capacity to create value-adding systems and ultimately earn a passive income into the equation yet.

But while we’re given the choice to either take a break or not on Friday, let’s celebrate!

The deadline for South African micro businesses to register under the new, simplified turnover tax system is 30 April 2009. Not only could this lift an administrative burden from your shoulders, but also leave significantly more after-tax money in your pocket. Find out whether this system could work for you.

Who may want to register for the new turnover tax?

• Profit-making non-professional service providers
• Profit-making trading businesses with large profit margins
• Profit-making trading businesses with medium-sized profit margins that could benefit from the significant compliance cost savings

Who qualifies for the turnover tax?

Sole proprietors, partnerships, close corporations or companies with an annual turnover not exceeding R1 million may register.

What types of businesses are disqualified?

• Businesses of which the tax year does not run from the beginning of March until the end of February of the following year
• VAT-registered vendors
• Professional services, including accounting; actuarial science; architecture; auctioneering; auditing; broadcasting; broking; commercial arts; consulting; draftsmanship; education; engineering; entertainment; health; information technology; journalism; law; management; performing arts; real estate; research; secretarial services; sports; surveying; translation; valuation; or veterinary science
• Public benefit organisations
• Clubs
• Businesses of which the investment income (interest, dividends, rental income) form more than 10% of the total income of the business
• A ‘personal service provider’ according to the SARS definition
• Another few, less commonly applicable exclusion. Please see the SARS checklist for turnover tax

What are the main benefits?

• In the case of profitable, high profit-margin businesses the total annual tax payable could be significant lower than with the normal tax system.
• Simpler administration.

Why is the turnover tax system simpler than the normal tax system?

• Under the normal tax system, it can be quite complicated to calculate the taxable income according to the SARS definition.
• No VAT is payable under the turnover system.
• Under the turnover tax system, no secondary tax on companies (STC) is payable if the annual dividends are less than R200 000.

What are the main differences between normal tax and turnover tax?

Normal tax system	Turnover tax system
Tax is based on your taxable income (after deductions)	Tax is based on your total turnover
Uses amounts accrued during the tax year	Uses amounts received during the tax year
Capital gains tax based on either 25% or 50% of only your taxable capital gain (‘profit’)	Capital gains tax based on 50% of the total proceeds from the sale of a business asset
Potentially have high administrative burden	Simple administration

What are the turnover tax rates for 2009/2010?

Turnover	Tax
R0 – R100 000	0%
R100 001 – R300 000	1% of each R1 above R100 000
R300 001 – R500 000	R2 000 + 3% of the amount above R300 000
R500 001 – R750 000	R8 000 + 5% of the amount above R500 000
R750 001 and above	R20 500 + 7% of the amount above R750 000

In comparison, what are the normal tax rates for 2009/2010?

Taxable income in R	Tax for sole proprietors under age 65 after deducting primary rebate
0 – 54 200	0%
54 201 – 132 000	18% of each R1 above R54 200
132 001 – 210 000	R14 004 + 25% of taxable income above R132 000
210 001 – 290 000	R33 504 + 30% of taxable income above R210 000
290 001 – 410 000	R57 504 + 35% of taxable income above R290 000
410 001 – 525 000	R99 504 + 38% of taxable income above R410 000
525 001 and more	R143 204 + 40% of taxable income above R525 000

For companies, profits are taxed at 28% from the first R1. To this, STC of 10% on all dividends declared needs to be added.

For small business corporations, no tax is payable up to R54 200 of taxable income. For taxable income between R54 200 and R300 000, 10% tax is payable on the amount above R54 200. For taxable income exceeding R300 000, R24 580 + 28% of the amount above R300 000 of tax is payable.

How are capital gains taxed under the turnover system?

Capital gains tax is payable at 50% of the selling price of business assets.

In the case of a sole trader, what happens to other non-business earnings?

Any salaried income, as well as interest, rental income and dividends earned in your personal capacity, will be subject to normal tax and handled outside the turnover tax system. The turnover tax is therefore a stand-alone tax and the taxable turnover from a qualifying micro business will be ring-fenced.

What if you’re currently VAT-registered?

You would need to de-register from the VAT system before you can apply for the turnover system. (Exit VAT may apply.)

Who may want to think twice before registering under the new turnover tax system?

• Loss-making businesses have little incentive to change to the turnover system.
• Profit-making businesses with really small profit margins may end up actually paying more income tax under the turnover system.
• For businesses considering selling large business assets soon, it may be worth staying under the old system to benefit from the smaller capital gains tax.
• Businesses with clients that prefer VAT registered vendors as an indication of formality and good standing, may lose clients when de-registering for VAT to apply for turnover tax status.

To get a better idea of the types of businesses that will benefit most from the turnover tax system, have a look at BDO’s article

What if you’re only starting your business during the current tax year?

A new micro business needs to register, if interested, under the turnover tax system within two months from the date of commencing business activities.

Can you change between the turnover and normal tax system as you please every year?

No. You will need to apply before the start of the tax year in which you want to fall under the turnover tax system. If you choose to exit the turnover tax system, you cannot re-register for at least three years.

What records would you need to keep?

• All amounts received
• All dividends declared
• All assets worth more than R10 000
• All liabilities worth more than R10 000

When do you pay the turnover tax?

The turnover tax year runs from 1 March to the end February of the following year. Income tax is due in two six-monthly provisional payments.

For more details on the new turnover tax system, visit your registered SARS branch or the SARS website.

When I was about five years old I got my first ‘grown up’ bike, a classic black broad-wheel pushbike. My dad told me that he intended to put side-wheels on it, but if I wanted he could hold it and I could give it a test run. ‘No thank you, no need to hold it,’ I told him. With my feet barely touching the pedals, let alone the ground, you can just picture how spectacular the fall was when I lost the less than two seconds of momentum that kept the bike upright. I waited for the side-wheels until I gave it another try. Some lessons are only learnt the hard way.

As you may have noticed, the US banking system is still taking the gravel and dirt out from under its skin after an earth-shattering fall – the greatest since the Great Depression. Some of the assets owned by US banks have dropped in value so rapidly that the market has frozen and it has become almost impossible to trade these ‘toxic’ assets. As a result, over the past year the market capitalization (number of shares in issue multiplied by the prevailing share price) of many banks has diminished three-, four- or even more than ten-fold, as is the case with the once mighty Citigroup and Barclays, for example.

But it is not only the shareholders of these financial companies that have seen their investment portfolios blasted to pieces. Ordinary citizens are suffering too. Because of their own precarious financial situation, banks are not parting with any comforting cash in the kitty right now, and have become extremely reluctant to lend to almost anyone other than those who barely need the loan. Not the kind of environment that enables entrepreneurs to start new businesses and existing businesses to expand. Economic growth and job creation has screeched to a halt.

Even more worrying, is the fact that the link between the government’s generosity towards the banks (in the form of bail-out plans and quantitative easing) and the banks opening their hands for potential borrowers, appears severed for the moment. Basic monetary policy (lowering interest rates and/or releasing more money to stimulate the system) is failing. And, unlike South Africa, the US has very little room for fiscal manoeuvring (using the national budget to invest in infrastructure or spending to stimulate the economy).

But the most disturbing is the latest plan by Geithner to effectively use tax-payers’ money to sponsor investors who are willing to take some toxic assets off the books of the largest banks. And who wouldn’t be willing if the terms are so enticing as to provide potential upside (growth in the value of the assets) with almost no downside (the US government and taxpayers will carry most of the burden if the toxic assets remain worthless)? No wonder some of the top executives of the banks have already indicated that they would be very interested in this investment opportunity in their personal capacities.

To put it bluntly, the caretakers of many US financial institutions have become spoilt brats. Not only is their sense of their own importance as inflated as their salaries (which in 2007 peaked at 181% of the average for all US domestic private industries), but they are also abusing the close political relationships between government and financial enterprise. For example, as former IMF economist Simon Johnson points out, Robert Rubin, once the co-chairman of Goldman Sachs was also the Treasury secretary under Clinton, and later became the chairman of Citigroup’s executive committee. Henry Paulson, the CEO of Goldman Sachs, was also the Treasury secretary under George W. Bush.

Expecting that their friends in government will always be there to bail them out, the upper echelons of the financial industry continue to borrow excessively, lend irresponsibly and invest in assets which they barely understand, but which satisfy their lust for continuously higher returns. But higher returns and above-average growth always comes at a price: risk. Risk is and remains the most misunderstood (and sometimes totally ignored) concept in the financial industry. When risk continually realises in your favour and you reap the higher returns, you start to believe that you’ve tamed the market. But the high-risk investment landscape is, by definition, always unpredictable and when you are surprised by the vicious, previously hibernating bear, only then do you know whether you are truly comfortable with that specific risk landscape. Unfortunately, the managers of these financial institutions did not venture into the wilderness alone; they also dragged shareholders, home owners and taxpayers along on the hunting trip.

In times like these the US government cannot afford to act like the indulgent grandparent, allowing its greedy child to run amok and create ruin without experiencing the consequences. Stronger interference, even up to the point of temporary nationalisation, is necessary. If the US financial system does not learn its lesson here and now, it may be taking even bigger risks as soon as it is back on its bike again.

After all these years in the investments industry, I thought that I’d become irreversibly conditioned to keep all emotion out of the wealth creation process. For example, do you have any idea how many of these hope-greed-denial-fear slides I’ve seen in fund manager presentations?

What it’s trying to depict graphically, is how emotion distorts what should be the fairly straight, upward-sloping line of share prices growing with inflation and domestic economic output. An upward-sloping straight line is what you’d expect from a rational market; the curvy graph is how the market actually grows and declines due to irrational reactions and/or corrections over the short term. Investors’ euphoria or greed causes share (or property) bubbles. This means that investors sometimes end up hugely over-paying for an asset, leading to such a diminished return on their investments, that they would have done better by just leaving their money in a bank account.

So, for years I’ve believed that bringing emotion into your financial plans is always a bad idea. Until I recently read Kiki Theo’s Money Alchemy and had a slight change of heart. Firstly, she points out that wealth is a feeling. While Investec Private Bank may think you have too little assets to become one of their high net worth clients, you may feel wealthy because you have no debt, ample income for your needs and, in reality, no financial worries. Wealth is relative – not a new concept at all.

But Kiki takes the idea of wealth as a feeling a step further. She uses feeling to take you to a place of wealth. If you feel that you haven’t reached the end of your wealth journey yet, how then would that destination feel to you? Is it the feeling of safety when you switch of the lights in your children’s bedroom at night and know that you can provide in all their material needs? Or is it more the excitement of knowing you can catch any plane to a dream destination of your choice at any time, because there is plenty of cash in the bank for luxuries? Focus on that feeling. Hold it in your heart for a few seconds every day.

For the first time, the roots of the word emotion, which loosely translate to energy in motion, make sense to me. Rather than a force to be suppressed, emotion can be a powerful force that carries you to your dream destination, financially and beyond.

Friday morning it happened again. A small commotion, police officers and fingerprint specialists arrive on the scene, and afterwards locks need to be replaced. Although I was lucky this time and found my car with the boot wide open, but still there, the neighbours were less fortunate and lost their car and other valuables. With the previous round of break-ins it was my turn.

Unlike love, very few would say that it’s better to have owned and lost than never to have owned at all. Losing jewellery or gifts that are irreplaceable and carry so much sentimental value always feels pretty senseless. How can you cushion yourself against the blow?

Keep your insurance up to date.

Do you have a household inventory? Check whether the contents cover of your insurance policy has kept up with your purchases. If, for example, the assessor values your household content at R100 000, but you are only covered for R50 000, you carry the excess amount plus 50% of the value of items stolen. If a claim of R10 000 is approved, the insurance company will pay only the 50% risk that it carried (R5 000) less the excess amount. Specifically mention personal purchases, like cameras and spectacles, in the ‘General all-risk’ section of your policy.

Make sure you can prove ownership.

Knowing insurance companies, you’ll probably end up with a ring from Sterns if you don’t have a photograph and the receipt of your Uwe Koetter wedding band. Preferably keep this evidence in a place where the burglars won’t be able to find them, for example on a secure website or as attachments in your Gmail account. Also, specify your jewellery in the ‘specified all-risk’ section of your policy.

Know your rights.

You can appeal when the insurance company does not accept your claim. It may be good to have a broker on your side if you want to win this battle.

Don’t attract attention.

This one I learned from my domestic. Draw the curtains when you’re not home or when you have the garden services/maintenance around the house. What people can’t see, they generally don’t know they want.

Invest in a home safe.

This has saved me plenty of tears with my last burglary. Make sure you bolt it into a corner of a room, where it is most difficult to use leverage to break it out of the wall again.

Despite all of these precautions, I sincerely hope you never need to claim again…

It’s happened again. It’s a new year and you’re dying to improve your finances and learn about generating and growing wealth. But every time you open a business paper or magazine, you start yawning and notice some cracks in your walls that you’ve never seen before. How does one achieve this level of dullness?

Try and be as stuffy as you can

Did the greyness enter when financial service providers starting branding themselves as serious businesses – believing that a little lightness and informality will lead clients to believe that they can’t be trusted with money?

Complicate things

Shall we blame the various financial professions: accountants, actuaries and financial industry lawyers? Did they consciously exclude clients from the inner circle of financial power by wrapping the industry in so much jargon and convoluted sentences? So that clients in the end could not make out head or tails of the products that were being offered.

Don’t give enough background information

Context keeps clients awake while they are reading about your new product or service. But there’s another reason why enough background information is important. The grey and seemingly stable austere of the financial industry hides a lively and unpredictable place. Things can change overnight and the more familiar clients are with the risks of their investment or insurance product, the less likely they are to do a bank-run or cancel a product when financial turmoil strikes. Institutions that realise this, will provide potential clients with plenty of background information, written in client-friendly language.

Steer clear of colour and beauty

At large, the financial media has been an aesthetic desert – not catering for more creative clients, or for those attracted by beauty. (Unless of course you count the long-legged blondes that have been used to attract a predominantly male clientele.)

Don’t bother with stories – they’re for children

Even adults are drawn to (and remember) entertaining stories that gives them more insight into the business, its philosophy and values.

Build no relationship with your client

Many global businesses attribute their success to their move towards not only strong and reliable brands, but brands that enter in a pseudo-personal relationship with the client – what Saatchi & Saatchi has coined ‘lovemarks’. (Think Apple, Mini Cooper and Levi’s). Financial institutions are slow to follow.

Think that money solves all problems

As in any other industry with lots of money going around, financial companies are sometimes guilty of thinking that just sourcing the most expensive leaders, consultants, or partners will give the best results, instead of searching for the people who are most passionate about the product and the company’s target market.

Mercifully, the industry is slowly changing. Many local financial service providers are following the UK, US and Australian trend of presenting all their documentation in clear, easy-to-read English. Allan Gray has used strong narratives in all their ads of the past few years to explain how they approach investment. Coronation’s creative ‘Vincent’ production grabbed the attention – maybe because it is exactly the opposite from what you expect from a financial services ad. Old Mutual’s has added some light-hearted illustrations to their handy online financial planning tools.

We may soon run out of sleep-inducing literature.

Life is too short for being little – Benjamin Disraeli

It’s a pity so many people confuse a simple life with a small life. A recession may be looming and worldwide consumers are tightening the belt, but you can simplify your finances without cramping your style:

Be more focused

Do you really want to start a new business, train for the Argus, write a book, learn to tango in Buenos Aires, climb Kilimanjaro, fly to India to find yourself, take French cooking lessons and qualify as a dive master all in one year? Sometimes really focusing on one aspiration at a time, with mindfulness and gratitude, can be the greatest experience of your life.

Determine which dreams and desires are yours

Is it really you wanting that 5-bedroom house with the swimming pool or are you perhaps trying too hard to fit in with colleagues and acquaintances?

Cut the clutter

Get rid of everything that doesn’t give you joy anymore, but requires maintenance, insurance and storage space. To allow new experiences into your life, you need to create the mental and physical space.

Examine your expenses

Which costs can you cut in half without feeling deprived? Love sushi? Use one of the several 50% off midweek-specials. Don’t have a time switch on your geyser yet? Using one, you can easily halve your electricity bill. Planning your annual holiday? Why not take a winter break this year and enjoy huge discounts on accommodation.

Use all the free stuff to enlarge your world

From Skype’s free instant messaging and telephone calls to Google’s free email and storage space, it’s never been cheaper to chat with friends from all over the world, or run a business from home.

Consolidate and simplify your debt

Not only will one loan repayment every month feel less overwhelming than settling several accounts, but it could also save you a small fortune in interest. Check which of your loans or accounts charges the lowest interest. (It’s very likely to be your home loan.) Then apply for just enough extra credit on that low-interest account to settle all the debt of your higher-interest accounts.

But most importantly, don’t let the recession mentality bully you into thinking small. Money has an uncanny way of following big plans, executed simply and elegantly.

If you operate in the information or knowledge economy, have only a plain vanilla offering, and don’t really engage with your clients, now may be a good time to change careers. The world has changed (and for the better).

The ivory towers of professional bodies are slowly crumbling as free information is flooding the web, empowering web users en masse and putting downward pressure on the cost of advisory fees. Is this the end of making money from knowledge-sharing? Definitely not, and thousands of websites are reaping handsome profits in the new information era, but the revenue model has changed. Income is mostly in the form of advertising or survey hosting fees, while some money can still be made from the information itself – in the form of a 2nd tier, more advanced offering with paid membership.

Specific role players will benefit more from the changed economy than others:

The pioneers:

Surfing habits form quickly and are hard to break. Therefore businesses that woo web users first with a real value-add service, often have a distinct advantage to other businesses that enter later.

The impartial:

Wisely, users generally rate impartial advice from an independent business higher than the information feed from a business which could have a vested interest in the advice given. While experts are still respected, they now have to make space for the ‘wisdom of crowds’ as well, as reflected in websites like hellopeter.com.

However, companies are highly aware of the premium users place on peer reviews and several have disappointingly faked positive feedback on social networks. There will be an increasing demand for the services of independent integrity analysts, who will focus on anything from spotting online comments by companies masquerading as happy customers to investigating any kickbacks for positive reviews by forums and other social media networks.

The filters:

With the sheer volume of information around, users will increasingly find value in websites that firstly rate the quality of content and then feed through only the information that is relevant to them.

The specialists:

Experts in a specialised field (for which there is a market) have always been in a better position than generalists to make money from their knowledge. With plain vanilla information being freely available, specialisation may now become a necessity, rather than a choice.

The engagers:

More and more users expect a two-way conversation with an information provider instead of a one-way information feed. They want to be able to ask questions and comment on articles. The language in which information is written will also become increasingly important. Jargon, ‘legalese’ and a technical writing style have kept laymen in the dark and advisory fees sky-high for centuries. Those who can translate technical terms and speak the web user’s language will have a distinct advantage in the new information age.

My brother bought a wheel alignment business in the Karoo about a year ago, in a town where business owners could easily while away the time in monopolistic bliss. And rosy were my sibling’s prospects – until the previous owner (to whom my brother paid good money) opened another workshop in town and equipped it with the very latest in wheel alignment technology. It was enough to dazzle prospective customers. And release the fighting spirit of my brother.

The competition forced him to think really hard about additional services that he could offer his customers. For example, as his alignment technician had some experience as a mechanic, they discussed whether he could fix simple wheel-related problems too. The technician was delighted to have more variation in his day and customers now enjoy a one-stop wheel service. My brother dropped his prices slightly and probably makes less money now than he initially expected, but he is constantly coming up with new ideas to increase customer loyalty.

People react differently to competition. Some view business as a zero-sum game, in which it’s best to completely eliminate your opponent and carry away the entire bounty. By definition, this is destructive competition. Some actively seek out competition, narcissistically needing to always win to boost their self-esteem. Others are quite happy to exist without competition, but when faced with this particular challenge, they use the competition to:

• Adjust their ideas about what is possible (raise the bar)
• Bring out the best in themselves
• Help them find their own niche
• Test their commitment
• Be part of an evolutionary process (better products and services at lower prices)
• Confirm their belief that there’s enough for everyone

After all, the root of the word ‘compete’ means ‘to seek or to strive with someone’. And with competitors sharing so much common ground, there are many examples of initial rivals turning into very good friends – after having created a more efficient and affordable industry.

On 3 November, when trading starts for the 2008 Make a Million competition, thousands of South Africans will experience first-hand how derivatives work. Unlike previous years, when entrants bought the actual share, they will now be buying single stock futures (SSFs) – a leveraged and slightly riskier game.

What is an SSF?

An SSF is a 3-month futures contract, of which the price is linked to the actual listed stock (aka share). When you enter the contract as a long position, you are betting that the share price will rise during the contract term; when you enter as a short, you are betting that the share price will fall. At the moment there are more than 250 SSFs available on the South African Futures Exchange.

How does it work? An example:

Say you want to buy 100 Anglo American ordinary shares, but don’t have the capital required. With SSFs you can get exposure to the share price movement over the next three months, but with less capital. This is how it works.

The pricing: If the Anglo American ordinary share (AGL) price was R300 today, you could expect the December 2008 futures contract to be priced around R31 000. That is because you have to buy SSFs in lots of a 100 each (R30 000 for a 100 of AGL) and the financing cost or interest is then added to this amount. If dividends are expected before the futures contract close-out date, the dividend amount is deducted to reach the AGL SSF price.

The margin deposit: You don’t have to provide R31 000 to buy the AGL SSF contract, though. You only put down the required margin, which depends on the volatility of the underlying share price and can be anything between 10% and 20%. Let’s say the margin for the AGL SSF at the start of the futures contract is R4 600. That’s all you need to give your broker when you buy the contract, which is exactly why you are paying a financing cost on the value of the underlying share. This is a geared investment (i.e. with borrowed money). Just keep in mind that, as far as price movements are concerned, you are exposed to a R30 000 asset. If it loses R3000 of its value, you carry the full R3 000 loss.

The contract period: There are four SSF contracts per year for each share. Your December AGL SSF contract will expire on the third Thursday of December, i.e. 18 December 2008. If you don’t sell your contract earlier, you will end up with any increase in the AGL share price (x100) in your cash account on that date.

Margin top-ups: In the mean time, until you sell the contract or it automatically expires, it could get tricky if the share price falls. Say the AGL price drops from R300 to R270 in one day. With your contract of 100 shares, this means you end the day with an unrealised loss of R3 000. The broker will automatically take R3 000 from your cash account to recover the loss. If you don’t have enough money in your cash account, you’ll have to deposit extra money with your broker.

How does buying SSFs differ from buying shares?

• You get more gearing. If you want to borrow money to buy a share, you usually have to provide at least 70% of the capital and a bank may lend you the other 30%; with a SSF you get exposure to the total movement in the share price with only a 10 to 20% margin deposit.
• You could lose more than your capital. If your margin deposit was only 10% and the share price falls by more than that before you get a chance to sell out of your position, you’ll have to pay in more money.
• It’s easier to short a share with an SSF. If you believe the share price is going to fall, you can just instruct your broker that the SSF contract is a short position.
• You generally pay lower brokerage on SSF transactions.
• Buying SSFs is not a buy-and-hold game. You need to watch the share price daily and decide whether it may be necessary to close out your position. Unlike shares, you can’t just sit out a large price decline until it recovers a few months or years later. With price volatility, your cash account could increase or decrease dramatically from day to day – or even turn negative.
• While you can either invest in shares or speculate on their short-term price movements, the 3-month contract term of an SSF is too short for fundamental investment principles. Unless it’s being used to hedge out short-term share price volatility, SSFs are traders’ instruments.

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The Make a Million competition

For competition entrants a few additional restrictions apply, e.g. the compulsory closing out of positions when you’ve lost more than half of your margin deposit. Visit www.makeamillion.co.za for more details.

Liquidity (capital available for investments) has become very scarce. As a result, stock markets everywhere are collapsing and a global recession is looming. How do you keep up an abundance mindset while world economies are feeling the pinch?

What is an abundance mindset?

An abundance mindset views the universe as an infinite source constantly supplying inspiration to create more life and wellbeing. It is also a belief that there is enough for everyone and that someone else’s gain is not your loss. Life is not a zero sum game.

Why is it crucial for growth?

When you believe that you have everything you need to prosper, you become more generous with your time, knowledge and material resources, instead of hoarding it out of fear of scarcity. Sharing makes a community stronger, smarter and enables it to grow faster. No resources are left latent. www.myggsa.co.za and www.angelmoola.co.za are examples of how resources are circulated online among total strangers.

People with this mindset focus on the potential and creatively moves towards it, rather than focus on their current material resources only. They know it is possible to create something from nothing (especially from very little capital).

When you believe that you will eventually be cared for by a higher power (yes, an abundance mindset requires faith), you tend to be more adventurous and take on more risks – essential for material and spiritual growth.

An abundance mindset combats jealousy, one of life’s most destructive emotions. So what if your friends or colleagues all live in massive houses/go overseas every year/won the lotto? Their good fortune does not take anything away from you. By not wishing them this prosperity, you are wishing life to be smaller, more restricted.

What an abundance mindset is not

Believing that there’s enough for everyone doesn’t mean you can sit back and be lazy, passive or uncompetitive. It means using healthy competition to raise the level of your game and with it the standard in your industry.

Seeing abundance everywhere does not mean you can afford to be wasteful or reckless with the resources you have. Natural resources are the first to jump to mind, but the same applies to capital. Irresponsible lending to borrowers unable to repay the debt from the start of the bond was the root of the international liquidity crisis. It’s a chilling example of how substantial capital resources can be reduced to almost nothing overnight.

How do you cultivate it?

Like any new habit, it takes regular practice and persistence to establish an abundance mindset.

• Practise seeing the abundance around you every day. Even if you live in a desert (maybe especially if you live in a desert) you’ll notice how the whole planet is geared towards growth and more life.
• Focus on growing your earnings by adding significant value to your clients; don’t fixate on cutting costs.
• Practise being generous with yourself. Don’t deny yourself time and material resources – you need them to grow. Also, don’t feel guilty if you want to spend a fortune on a dream holiday and you created more value to your client or employer than the cost of the holiday. As a bonus, your holiday also helps to pay the salaries in the hospitality industry.
• Practise being generous with other people. Give more to people than they expect. You won’t dry up if you are also being good to yourself.
• Don’t spend any time on jealousy – rather count your blessings every night.
• Find a creative outlet. It’s good to have something like a melody, a drawing, a sculpture or some creative writing reminding you that it is possible to create something from nearly nothing.

Acknowledgement: Much of my belief in the magical power of an abundance mindset was inspired by Wallace Wattles. Thanks, Nicky, for introducing me to his thoughts.

If you’re an enthusiastic share investor, you’ve probably wondered about this one before. Should you outsource the stock selection to a portfolio manager or should you do it yourself? A few things to consider:

Do you have the skills to pick shares?

What a fantastic boost to the ego it will be if your share portfolio performance beats Allan Gray or one of the other award-winning unit trust managers. But unless you know how to analyse a company, accurately estimate its future cash flow and evaluate its business strategy, chances are slim you’d keep it up over the long term.

While I find it great fun to trade my own shares, I have no delusions. My share picking skills are not on par with award-winning investment houses with their CFA-qualified and experienced teams.

Do you have the time to manage shares?

Following company news and calculating whether the share price adjusted appropriately is a full-time job. Unit trust managers have whole teams focusing on the shares in a specific sector. They have the time to visit companies, attend shareholders meetings and ask the difficult questions.

How much are you spending on trading costs?

Because share trading costs generally form a larger percentage of the trade with small amounts, and you often pay a minimum amount (e.g. R120 with ABSA), you could end up paying away more than 1% of the trade for transactions smaller than R12 000. Unit trust fund managers, on the other hand, pool your money with other investors and negotiate much lower trading fees with their brokers. However, what you score in trading costs, you could lose in investment management fees, which are automatically deducted from your unit trust investment every year.

Does SARS view your trading profits as income?

If you are someone who won’t draw the money in your trade account within three years, but believe in frequently trading shares to benefit from short-term price fluctuations, you may find you’re paying less tax if you outsource the job to a unit trust manager who has the same short-term, opportunistic approach. That is because SARS is likely to view your trading profit as income if you sell your private account shares within 3 years of purchase. If you’re in the top tax bracket, this means you have to pay SARS 40% of the profit.

But unit trusts managers can trade the shares as often as they like – they don’t pay tax on their gains in the portfolio. You pay tax on the growth in the unit trust price from the time you invest until you eventually withdraw your investment. If you keep it for longer than three years, SARS views the growth as a capital gain and not as income – even though the fund managers had the freedom to sell shares whenever they saw opportunities. This means you could pay four times less tax than if you traded the same shares yourself.

How much risk do you want to take on?

Unit trust funds are usually well diversified and invest in portfolio of at least 20 shares. This diversification decreases your investment risk. It’s therefore unlikely that you will lose 80% of your money in one year; it’s also unlikely that you will gain 80%. With your own share portfolio you don’t have the restrictions of the Acts regulating unit trusts and can hold only one share in your portfolio, if that’s what you want.

If you’re either a speculative, high-risk investor or a semi-retired portfolio manager, a share trading account will probably appeal to you more.

The Satrix products seem to be very popular with passive, index-tracking share investors in South Africa; the spacious seminar venues for the launch of the Satrix RAFI 40 were fully booked. But does this fundamental indexation product even belong in the index-tracking family? And is it the most affordable South African product pursuing fundamental indexation goals?

What is fundamental indexation?

One of the criticisms of just tracking an index, is that you by definition buy all shares in the index (e.g. the ALSI 40) indiscriminately. If there is a lot of hype or speculation around certain shares and they start to form a larger portion of the index as they become more expensive, you are buying potentially over-priced shares. Fundamental indexation tries to exclude these over-priced shares from your portfolio by looking at fundamental factors (the figures in the company’s financial statements).

Research Affiliates in the US developed the RAFI® methodology to include only shares that look promising in terms of the following fundamental factors of a company:

• sales
• cash flow
• book value
• dividends

Because it uses fundamental factors, fundamental indexation is closer to active management, and not passive index-tracking. These are the same factors that active managers look at when they construct a portfolio.

But fundamental indexation differs from most actively managed share portfolios in that it is quantitatively managed. This means that a mathematical software package can analyse the fundamental data and build the RAFI® portfolio. There is no or little human involvement.

What are the pros?

1. Cheaper than active management

Because there are no portfolio managers and analysts that analyse data and visit companies daily (and need to get paid), the costs are normally lower than non-quantitative active management.

2. Less likely to buy over-priced shares

The software will not always get it right, but it decreases your chances of buying hyped shares.

3. A chance to out-perform the equity index

You only get an opportunity to out-perform the index when your portfolio differs from the index.

What are the cons?

1. More expensive than index-trackers

There is usually an annual license fee for using the RAFI® technology – a lucrative business model for Research Affiliates. There are also more brokerage costs due to the re-investment of dividends. Therefore a RAFI product will cost the investor more than an index-tracking product.

2. No human judgement

The computer software will not know the story behind a company’s financial statements or the management’s vision and strategy. It only looks at past data and will not understand why the data looks the way it does.

3. The risk of under-performing the equity index

This is the flip-side of the third advantage listed above. You can only under-perform the index when your portfolio differs from the index.

Which South African products offer fundamental indexation?

1. Plexus Rafi® 40 SA Enhanced Strategy Fund

Plexus has exclusive rights to offer the enhanced Rafi® 40 technology in Africa. By ‘enhanced’ they mean that they have taken the plain vanilla methodology and adjusted it for South African circumstances. Sales and cash flow, for example, are more important fundamental factors locally. It selects the 40 most promising shares from the 100 largest companies listed on the JSE and re-balances quarterly. The total expense ratio (TER) on their August fact sheet is 1.15%.

2. Old Mutual Umbono RAFI® 40 Tracker Fund

Old Mutual Umbono applies the plain vanilla Rafi® 40 technology, which rates sales, cash flow, book value and dividends as equally important fundamental factors. It looks at all companies listed on the JSE when it selects the 40 most promising shares and re-balances once a year. The TER on their June fact sheet is 0.93%.

3. Satrix RAFI 40

When it lists on 16 October 2008, this product will use the same plain vanilla technology as Umbono, but it is an exchange traded fund and not a unit trust, like the Plexus, Umbono and Nedgroup Investments funds. Satrix does not expect the fund to have a TER higher than 0.7% per year. In addition, if you buy this product through the Satrix Investment Plan, there is an annual administration fee of 0.8% if you have less than R100 000 invested. For larger amounts, the administration fee decreases according to a sliding scale until it reaches 0.45% per year. Brokerage is 0.1% of all purchase and sale amounts.

4. Nedgroup Investments Quants Core Equity Fund

This fund uses Taquanta Asset Managers’ price-indifferent technology to quantitatively build an equity portfolio. Their way of thinking is similar to Research Affiliates, but they developed their own technology. Interestingly, the fund doesn’t use the FTSE/JSE All Share Index or the ALSI 40 as its benchmark, but rather the average general equity unit trust portfolio. The TER on its August fact sheet is 1.17%.

How does the past performance look?

The South African products do not have long enough track records to reach a meaningful conclusion. Some of the product providers will show you back-tested (simulated) performance graphs. While I want to give them the benefit of the doubt, this is not real performance with real money. The verdict is still out on who has the top-performing fundamental indexation product. Even though there is no human involvement with fundamental indexation fund management, the performance will only be as good as the methodology developed by the people involved.

So, you’ve decided you have enough time to sit through all the ups and downs of the stock market and hope that handsome returns will reward your patience. I bet you’re getting plenty of contradictory advice from other share investors, who seem to be divided into two main camps: the index-trackers versus the believers in active equity management.

What is the difference?

With index-tracking you buy all the shares in the index in the same weightings as that index. If you track the FTSE/JSE All Share Index, for example, your index-tracking fund will invest in all the shares listed on the JSE and if Anglo American makes up 20% of the JSE, your fund will allocate 20% of its capital to Anglo American. In other words, index-tracking funds just replicate an index and their managers don’t have to decide which shares offer value for money. They are therefore also called passive managers.

Active managers, on the other hand, seldom buy all shares in the index and if they think Anglo American is too expensive relative to its anticipated future earnings, they may decide to invest only 5% of the fund in this share, for example. Conversely, if they think a share is cheap, they may buy more of it than its percentage weighting in the index. They have the freedom to actively pick shares in quantities that they think suit the shares’ value-for-money ratings.

To choose active management, what do you have to believe?

1. Shares are not perfectly priced all the time

Active management only makes sense if you believe that the market does not price companies correctly over the short term, which offers opportunities to buy under-priced shares.

2. Managers who consistently out-perform the market exist

Sobering slide 5 in the latest Nedgroup Investments September 2008 Partnerships Roadshow presentation shows that over the past seven years, the average equity unit trust manager returned 22% after fees – the same as the JSE All Share Index. Active management seems less futile when you think that, if about half the managers under-performed, half of them had to out-perform the Index. In other words, out-performing managers exist, but are they consistent?

I don’t expect a fund manager to out-perform every year. In fact, studies show that for a fund manager to out-perform over the long term, he often has to take contrarian views, which could frequently make him one of the worst performers over the short term. Your typical active manager expects the value of his chosen shares to unlock after three to five years only. With ‘consistent out-performance’ I therefore mean out-performance on a rolling 5-year basis.

3. You know who the out-performers will be

You should be able to get hold of the names of the rare few managers who have consistently out-performed on a rolling 5-year basis over the past 20 years. But that is historic performance. Do you believe that they will continue to out-perform?

4. The out-performance will out-weigh the higher costs

When you compare past performance, remember to look at the return after all fees and fund expenses were deducted. Generally, active managers are more expensive than index-trackers due to the time that they spend on researching and valuing companies.

When you choose passive management, what are you settling for?

1. Average stock market performance

While there’s little risk of investing in the worst-performing equity fund, you have no opportunity to out-perform the stock market either.

2. No way to detect and avoid market hype

It is a mistake to think that index investing is less volatile than active investing. When the stock market or one specific sector (e.g. IT) moves into ‘bubble’ territory, you automatically buy those over-priced stocks as part of the index. And experience the subsequent price correction.

How do you access active management?

1. Unit trusts

There are almost as many actively managed unit trusts as there are shares listed on our JSE. You can familiarise yourself with the managers by reading about their process and philosophy and studying their fund fact sheets. Equinox provides an on-line list of most South African unit trust portfolios.

2. Your employer’s fund

Maybe your employer’s pension or provident fund offers member choice. In other words the fund trustees allow you to pick the underlying portfolio from a shortlist. I would expect at least one of the options to be an actively managed fund, but its equity exposure will probably be limited to 75%.

3. A retirement annuity

Many modern, flexible retirement annuities allow you to choose your own underlying investment portfolio and an actively managed fund should be one of the options. As far as I know, Allan Gray is currently the only company that allows you to choose a 100% equity portfolio if you invest in their retirement annuity.

4. Your own share trading account

If you have the time and skill to analyse companies yourself, you could also build your own equity portfolio with an online share trading account. Just keep in mind that the tax treatment of trading profit is not always as favourable as with a unit trust portfolio or retirement annuity.

How do you access passive management?

1. Satrix

Satrix has created exchange traded funds (EFTs) which invest in the main South African equity indices. The Satrix 40 fund has a total expense ratio of 0.37% – a good selling point. But if you invest through the Satrix investment plan, the annual administration fee is 1.0% of the market value of your investment! In addition, your brokerage fee on any purchase or sale is 0.1% per transaction. For large investment amounts, it may be cheaper to use a stock broker rather than the Satrix plan. Also, your dividends don’t automatically get re-invested when you invest in the Satrix 40, but are paid to you after costs. This means your capital grows slower than if dividends were re-invested.

2. Unit trusts

There are a few unit trust portfolios that track the JSE All Share or the ALSI 40. Currently, Gryphon’s All Share Tracker Fund seems to offer index-tracking at the lowest cost: a total expense ratio of 0.69% and no initial fees.

3. Your employer’s fund

If your employer’s retirement fund offers member choice, I’d expect them to also offer a low-cost index-tracking option as one of the options.

In the next post we’ll have a look at the new investment methodology that tries to keep over-priced stocks out of your portfolio: fundamental or risk-adjusted indexation.

Before I became self-employed, I used to drive down Kloof Street early in the morning on my way to the office, staring longingly at the inviting coffee shop counters, stacks of glossy magazines and steaming cups of cappuchino – all symbolising to me an abundance of time. To think, meet, read, invent and dream. Or just watch the clouds paint, then change their minds and re-paint Table Mountain again.

When I started my own business, I initially frequented these coffee shops to live out my fantasy, but very soon the passion for my new business and the desire for focus kept me at home, where I am most productive. Except for Thursdays. Thursday mornings my cleaner kicks me out of my city pad and I become a coffee shop exile. Over the past few months, this is how I have experienced a few of Cape Town’s coffee shops – when you actually want to get some work done:

Beleza, Kloof-nek Road

Not exactly a sanctuary of silence, but they cater for laptop workers with plug points and the staff is generally friendly and helpful. On top of it, they probably have the best value-for-money breakfast in town and excellent coffee as well. (I think they source from Origin.) With a Bloody Mary as the first item on the breakfast menu, Beleza is perhaps not suitable for meetings with more sober clients. Unfortunately, they don’t cater for early birds either and open after 9am only.

Deli 55, Kloof Street

This church-run deli takes me back to my small-town years when bazaar tannies spoke to me in diminutives and every cupboard seemed choc-a-block with home-made preserves. They’ve really made an effort to create a peaceful, water-featured patio protected from street noise. Inside, there’s only one plug point which is a bit clumsy, and your laptop cable could easily trip someone heading for the preserves shelf. But they’ve got great food, if you like fresh, healthy produce. And I keep on going back for my favourite coffee brand, Limu – of which they also sell the roasted beans.

Melissa’s Food Shop, Kloof Street

Melissa’s remains a firm favourite. Their service can be slow some days, but then they also don’t mind if you hog their space for a few hours without ordering much more than coffee. Not that you can work for more than your laptop battery time, as there are no plug points for customers. This is a good spot to meet clients, suppliers or colleagues. Even though there’s not much privacy, everybody else is too busy with their own meetings to bother with yours. Don’t leave without one of their perfectly brewed pots of tea or their Nutella laced hot chocolate. Healthy, tasty lunches too.

Origin Coffee Roasting, Hudson Street

A place of worship for coffee lovers – you have to experience this space at least once. Unfortunately, I could not pick up an i-Burst signal here, but friendly and engaging staff tailed me with my double espresso in my quest to find one. Perhaps better for lively meetings than solitary slogging away at your computer.

Sage Organic, Hatfield Street

This petite, organic coffee shop close to Parliament can easily accommodate up to four laptop users. Their breakfasts arrive in generous portions and the French-speaking waiters are friendly, but let you get on with your work. Due to the size of the space and not enough white noise, Sage is not ideal for business meetings.

The Wellness Warehouse, Kloof Street

After surviving the growing pains of its first year, the Wellness Warehouse has managed to create a serene enough spot in the middle of buzzing Kloof Street. The space works well for meetings, as well as solitary work, and there is a laptop counter with power points for about five people. This is also a convenient place to recycle your home office paper – bonus.

Vida e Caffe, Kloof Street

This particular outlet is great for take-away coffee or checking out customers from the surrounding film and other interesting industries. But you don’t really expect some quiet time from a brand built around lively staff chatter and loudly broadcasted orders, do you?

You’ve decided which asset class and investment product suit you. It’s time for your last main investment decision.

Which product house?

The product provider could be a life assurer, a unit trust management company or a linked investment service provider (LISP). When choosing product providers, look for companies that are:

1. Focused on small, retail clients

Many companies claim that you, the retail investor, are important to them. In reality, they prefer to take your money through intermediaries like financial advisers or retirement fund trustees, rather than dealing directly with you. Signs that they are not really that interested in direct clients include:

• Very little investor education literature
• A poorly staffed call centre and irritable staff
• A website that provides very little practical information on the investment process
• No clear communication, a.k.a. simplified English policy
• An almost immediate referral to a financial adviser when you contact them

Most companies seem to still believe that dealing with direct clients is too time-intensive and expensive. A rare few know how to leverage modern technology to cost-effectively service even the smallest retail investor well.

2. Fit and proper

With unit trusts, it’s highly unlikely that your money can just disappear. The Financial Services Board approved the independent trustees who look after the money in the trust. Still, it’s always important to verify that the company you want to invest with, is fit and proper. I usually check that they at least have a licence with the Financial Services Board and read on HelloPeter what existing clients are saying about them.

3. Flexible

I choose companies that, irrespective of the investment product I choose, provide me with ‘open architecture’ to build my own underlying investment portfolio. If I, for example buy a retirement annuity, I want access to any one or a combination of unit trusts available in South Africa as the portfolio in which my portion of the retirement annuity fund will invest. Just be careful, if the product provider has an in-house investment manager, you may pay extra (in the form of an administration fee) if you prefer a third-party investment manager.

4. Transparent

Ideally, you want to be able to see a list of all the underlying assets in which your investment product invests, as well as all the expenses associated with the product. It’s very difficult to know exactly how much of your investment portfolio is paid away as expenses and administration costs if you invest in opaque old-fashioned policies. But if you choose an open architecture product, you can track the total expense ratio (TER) of your chosen underlying unit trust portfolio.

5. Affordable

With unit trust portfolios, the total expense ratio (TER) is a ratio expressing the investment management fees, audit fees, custodian fees, portfolio bank charges and taxes as a percentage of the market value of the portfolio. (These costs decrease the return on your investment.) The ratio changes every quarter and is based on the previous year’s expenses. The TER does not have to include the portfolio’s stock broking fees and these can be quite high if the investment manager trades often. Some companies, like Allan Gray, decided to include brokerage in their TER calculations to give the investor a better idea of the true costs associated with running the unit trust. This makes it more difficult to compare the cost of different unit trusts using their TERs, but generally unusually high historic TERs require further investigation.

The TER does not include all costs carried by the investor. You could also be paying a fee to a life assurer for providing the wrapper of your investment. Or an administration fee to a LISP for acting as an agent in the investment process. And if a financial adviser helped you with your application process, you could also be paying initial and ongoing adviser fees (also called ‘broker fees’). The adviser has to disclose these costs and you will have to sign on the form that those are the fees that you have negotiated.

The life insurance industry uses another ratio, the reduction in yield (RIY), to indicate the annual impact of expenses on your investment. Unfortunately, this is not comparable with the unit trust industry’s TER. It’s a good idea to always ask for a complete cost breakdown for all products that you are considering. In the case of open architecture products, also enquire whether the underlying portfolio pays a rebate to the product house from which you’re buying the product and whether that rebate is passed on to you in the form of lower costs.

That covers your five big investment decisions. You probably have plenty more questions like ‘Satrix or unit trusts?’, ‘your own share trading account or someone else’s fund?’, ‘direct or listed property?’ We’ll cover these asset class-specific questions over the next few weeks.

Which investment product?

Foreigners are often surprised at the sophistication of the South African financial industry and the wide array of products available here. Don’t worry, I won’t cover them all in this post; only the three most popular ‘wrapper’ products available to individuals.

What is a wrapper? Your investment portfolio forms the heart of your investment. In other words, your choice between interest-yielding assets, shares, property and offshore assets drives the growth and volatility of your investment. The structure around your portfolio is the wrapper. Your choice of a wrapper will determine how your investment is regulated, when you may withdraw your money, how much tax you pay on income and capital gains, and many other issues that surround your investment.

1. Unit trusts

Unit trusts allow you to pool your money with many other investors, all investing in the same portfolio as you. The portfolio can consist of only interest-bearing assets, property, shares, offshore assets or any combination of asset classes. The assets are held by trustees on your behalf. You share in the growth and income of the portfolio in the same proportion as your number of units to the total number of units in the portfolio. You can access your money within 24 hours and add money to your investment at any time.

Unfortunately, you don’t get any tax-relief for your contributions and you become liable for capital gains tax when you withdraw your money (if there was any capital growth). You will also receive a certificate every year to show how much interest, rental or dividend income the portfolio earned and you have to declare this in your tax return.

Unit trusts form part of a bigger group of investment products called ‘collective investment schemes’ and they are regulated by the Association of Collective Investments. Their prices are published daily in most newspapers and you can view all the assets in the portfolio at least quarterly.

2. Retirement annuities

Technically, buying a retirement annuity actually means you become a member of a specific retirement fund. The fund’s trustees look after your interests. Sometimes the trustees buy an old-fashioned retirement policy on behalf of all members or an individual policy for each member. Often the policies contractually bind you to contribute premiums on a regular basis until a certain retirement age and penalise you if you stop contributing earlier. The life insurers issuing the policies usually appoint asset managers who choose the underlying investment portfolio.

Nowadays there’s a more modern, flexible and transparent version of the retirement annuity which allows you to choose your own investment portfolio (often a unit trust) and also allows you to contribute only when you can – without penalties. Still, neither version allows you to withdraw your money before you reach age 55. The age is determined by retirement fund legislation.

Why would anybody choose to be locked in for so long? Retirement annuities currently provide great tax benefits for the self-employed, as the government wants to encourage you to save for old age. As a tax-payer, you may therefore receive a tax rebate on your contributions, subject to certain limits. In addition, neither you nor the retirement fund pays any tax on the income earned by the investment portfolio. It’s only when you start drawing your pension, that you could pay tax on your retirement income exceeding the annual income threshold.

Unlike unit trusts and endowment policies, regulation requires the trustees to use their discretion when they decide who your dependents are and where the money should go after your death. As a result, they may overrule your beneficiary nomination.

3. Endowment policies

Like the old-fashioned retirement annuity policies, endowment policies have become unpopular because of the high penalties life insurers charge when you end the policy or stop your regular contributions before the contractual end date. Traditional endowment policies also do not allow you to select your own underlying investment portfolio and don’t always regularly disclose all assets in the portfolio they select on your behalf. Legislation effectively forces you to remain invested for five years. If you need the money earlier, you can withdraw it, but won’t receive more than your contributions plus 6% compound interest per year.

With all these restrictions, why do some people still prefer this wrapper? Unlike unit trusts, you don’t account for your investment income and capital growth in your tax return. In other words, you are not taxed directly; the fund that pools your contributions with that of other individual policyholders will pay the tax to SARS on your behalf. Currently the rate is 30% on all interest and rental income. Even though you are not taxed directly, the net effect is that you are left with only 70% of the interest and rental income earned by the portfolio. Individuals paying more than 30% tax on their annual interest and rental income may therefore benefit from the 30% tax rate of the endowment policy. Unfortunately, the policy doesn’t allow you to use your R19 000 annual interest exemption as an individual – interest earned by the portfolio is taxed from the first R1.

An endowment policy is therefore only an option if:

• You are a high income tax payer
• You expect substantial amounts of interest or rental income from your investment portfolio

Endowment policies have also evolved over the years. It is now possible to purchase policies that allow you to choose your own underlying investment portfolio, often from a wide range of unit trusts. Because the unit trust is wrapped within the policy, it follows the tax and other rules of an endowment policy, but offers the transparency of a unit trust investment.