PSG answers questions on investment, and insurance questions. Picture: Independent Newspapers.
I’m a young working professional with a limited investment portfolio. I would like to diversify my investments to achieve short-term goals (like buying my first house) and long-term goals (preparing for retirement). How do I go about developing an investment diversification plan that aligns with my risk tolerance and financial objectives?
Marzél Swart, a wealth adviser at PSG Wealth, Pretoria East
To differentiate between short-term and long-term goals is a good place to start. It is always important to keep the objectives separate to prevent your emotions from getting in the way.
For the short-term goals, I’d recommend that you consider an interest-bearing investment solution which is not as volatile as exposure to equities. Currently, rates on money market accounts are around 7 to 8% a year, which could be a good place to start. There are no fluctuations in the capital value and the funds are readily available when you need them.
There are a few options when it comes to retirement planning and saving for long-term goals. You can choose between a retirement annuity, a tax-free savings account and a unit trust investment, to name a few. Normally, there is a minimum monthly contribution of R500, so I’d recommend that you start with a debit order and try to at least increase that annually with inflation. There are benefits from a tax perspective when saving in a retirement annuity and a tax-free savings account, but nothing prevents you from starting with a combination of products. I’d recommend that you discuss it with your financial adviser to get the best possible advice.
With the investment products, you can choose underlying unit trust funds, aiming to beat inflation over the long-term with a combination of cash, property, bonds and local and international shares. A combination of the asset classes, with an overweight portion in shares, is the best way to gain maximum growth in the long-term. The capital value of the investments will fluctuate in the short-term, but nothing will beat that if you stay invested for the long-term. Remember, the sooner you start saving, the better compound interest can start working for you.
I’ve heard a lot about the power of compounding interest but don’t understand how it relates to my investment portfolio. Can you explain how it works and why it’s important?
Pierre De Bruyn, a wealth manager at PSG Wealth, Northcliff
Simple interest is a technique used to calculate the proportion of interest paid out on a sum over a set period at a set rate. The principal amount remains constant in simple interest.
The example of simple interest below shows how interest is generated and paid out to the investor.
The compound interest for an amount depends on principal and interest compounded (added to the principal) over periods. The principal amount grows by the amount of interest which is added to it at the end of each period. This is the main difference between compound and simple interest.
The example below shows the effect of retaining interest as part of the principal and generating “interest on interest”. In these simple examples above, the effect over 3 years is significant. Over long periods, this is even more so.
Albert Einstein is said to have described compound interest as “the eighth world wonder”, saying: “he who understands it, earns it; he who doesn’t, pays it.”
I recently learnt that I can either invest in a life annuity or a living annuity. What is the difference between the two and how can I choose the correct one? Is this something I need to choose at the inception of my journey?
Suzette von Broembsen, a wealth adviser, PSG Wealth, Rosebank
The difference between a living annuity and a life annuity is significant. A living annuity offers a regular income after retirement through market-related investments, while a life annuity provides a predetermined amount for life without market-related risks. Upon retirement, one can choose between three options, depending on your circumstances:
1) A 100% allocation to a living annuity, with complete discretion on your annual income levels (limited to between 2.5% and 17.5% of the capital amount), as well as the underlying investment. You can switch between underlying investment at any time but review your income level only once a year. The income is market related, so it is up to you and your financial adviser to ensure that the capital is not depleted by withdrawing income at too high a level.
2) A 100% allocation to a life annuity, with a specified income level chosen at retirement. The income level you select remains fixed.
3) A combination of a living annuity (market-related investment) and life annuity (fixed guaranteed income with no or limited guaranteed capital at death).
The decision between the options isn’t critical during one’s working years. Instead, focusing on saving for a retirement annuity (RA) or employee retirement fund is crucial. This is because a living or life annuity is, essentially, the conversion of the funds into an income-generating stream after retirement age.
The optimal contribution to an RA depends on personal lifestyle needs. Consistent, smaller contributions early in life are beneficial due to tax-efficient compounding over time. This builds a strong foundation for a valuable life or living annuity upon retirement.
Ultimately, financial advisers can assist in determining the best combination of annuity options based on individual circumstances. It is essential to understand that the choice between a living and life annuity is secondary to the decision to save efficiently for retirement. By focusing on savings behaviour and making optimal contributions to retirement funds, individuals can secure financial freedom and a comfortable retirement later in life.
What are the potential implications of the recent few years on the investment environment, and how can we best navigate the changes in the financial environment?
Anet Ahern, the CEO of PSG Asset Management
The past few years, especially since Covid-19 hit, have been tough for investors and could potentially lead to big changes in the returns that investors receive from the various asset classes over the next decade or more.
This could be due to several factors, including higher inflation and interest rates, underinvestment in real assets following the global financial crisis, the urgent need to transition to a green economy, and the development of more resilient supply chains.
To navigate the evolving landscape, it is important to collaborate with experienced investment managers who have a proven track record of delivering over the long term and who can pinpoint global opportunities. Attempting to merely replicate past strategies might not be successful in the new environment.
The 3M (moat, margin, management) investment approach that we use at PSG Asset Management has proved itself valuable over time. It helps us find good investment opportunities for our investors. Although they might take a while to pay off in the changing financial world, we believe they will probably tilt the odds of success in our investors’ favour in the long run. The approach has helped us to look beyond the short-term market noise to secure longer-term growth for our clients. A well-chosen partner and a long-term outlook are key.
I am renting my property and would like to install solar panels. I understand that my landlord would first need to grant me permission to do this. However, I do have a question about how the insurance of the solar panels would work.
Karen Rimmer, the head of distribution at PSG Insure
Once you have received your landlord’s approval, you can, depending on which insurer you are making use of, request that the value of the solar panels is included in the sum insured on your home contents insurance policy. Some insurers may have separate sections under which solar panels must be included.
In general, all insurers will require that the solar installation be carried out by a certified installer who can issue a certificate of electrical compliance upon completion of the job.
In addition, installations need to abide by several industry standards, called South African National Standards (Sans), which are a set of building standards and codes that are used to ensure the safety, health and sustainability of buildings.
In all cases, insurers will require an engineer’s certificate to be submitted, which can verify that the installation was completed in accordance with the standards.
Your policy wording will outline which exclusions may apply. Some of these may include electrical failures, any defective or non-compliant components under the Sans codes, any components covered by a manufacturer’s warranty, ordinary wear and tear and electrical grid failure. For this reason, it’s vital to read the T&Cs in your policy document, paying close attention to what you are covered for, what the prerequisites are for cover to be in place and any exclusions that could apply.
Our expert advisers can ensure that you are well-informed about the installation regulations governing solar systems and understand the necessary maintenance procedures to ensure their continued functionality.
PERSONAL FINANCE
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