According to Investopedia.com, Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain, otherwise there would be very little motivation to speculate. To read more on speculation, http://www.investopedia.com/terms/s/speculation.asp There are some notable speculations in history. It serves us well to learn from these examples, so that individually we don’t repeat the mistakes of the past. The FIRST example is the Tulip Mania in Europe in the 17th century. As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. The contract price of rare bulbs continued to rise throughout 1636, but by November, the price of common, "unbroken" bulbs also began to increase, so that soon any tulip bulb could fetch hundreds of guilders. That year the Dutch created a type of formal futures market where contracts to buy bulbs at the end of the season were bought and sold. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfil any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. At the height of the craze, a tulip bulb could fetch 5 hectares of land! The SECOND example of speculation is the Roaring Twenties stock-market bubble in the US. From 1924 to 1929, the Dow Jones Industrial Average stock market index went up from 100 to almost 400, effectively up 300% in the space of 5 years. The market then crashed, with the index going down all the way to 30 in 1932 before recovering. The THIRD example of speculation is the more recent Dot-com bubble. The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000, representing 450% return in 5 years. Then it crashed all the way to 1,200 in 2002. It took 16 years for the NASDAQ to reach this high again.
Read more: Dotcom Bubble http://www.investopedia.com/terms/d/dotcom-bubble.asp#ixzz4rZSKg0hn
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In Support of Financial Planning Institute's forthcoming Financial Planning Week from 2 - 8 October, as well as The Big Drive 4 Financial Freedom, I have decided to use this platform to share contents from my book on Investment Options. Starting from today, each weekday I will share a snippet, in promotion of financial freedom.
Follow me and learn with me! The Concept of Investing: According to Investopedia.com, Investing is the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. Simply put, instead of spending your money now, you put money away. You invest money for a period of time. After that period of time you expect to get more than what you put in, as you should profit from investing. Example: Bongani invests R10,000 for five years in a unit trust. After 5 years he withdraws his investment and gets R16,000 back. He made a profit of R6,000. ![]() You may have heard of a return on an investment, but have you heard of an investment measure called the internal rate of return (IRR)? The return on investment (ROI) – sometimes called the rate of return (ROR) – is the percentage by which an investment has increased or decreased over a certain period. By contrast, the IRR measures the actual return on an investor’s money in a portfolio. The IRR calculation takes into account all fees, the investment term, and additional investments and withdrawals, and calculates the growth of the investment in a meaningful way. This enables investors to determine whether their portfolio is on track to achieve the return they need to maintain their standard of living. The IRR calculation shows a portfolio’s return on an annualised (per year) basis. If, for example, you had R100 on January 1 and R110 on December 31, and you made no deposits or withdrawals between those two dates, your IRR would be 10% for the period. If, however, you made monthly deposits of R1 (or R12 in total) and your portfolio was worth R110 on December 31, you would have a negative IRR of –1.9%. After investing a total of R112, you would have less money (R110) than you invested. If, on the other hand, you withdrew R1 every month and you had R110 at the end of the year, your IRR would be 23.2%. Your cash flow during the year would have been R12, and you would have ended the year with an additional R10 in the investment. The IRR calculation is also referred to as the money-weighted return calculation. This is different from a traditional time-weighted return where we exclude any client-generated cash flow in and out of the portfolio and look only at the initial value (R100) and the final value (R110) and get a return of 10%, which ignores how much money had been added or withdrawn over the period. Although these are very simple examples, they illustrate the importance of knowing a portfolio’s IRR. In reality, additional variables, such as fees, are taken into account, thereby providing a more realistic picture of your return. Knowing your portfolio’s IRR is important, because it enables you to monitor whether you are progressing towards achieving your financial goals. It indicates the actual return, including cash flows in and out of your portfolio, over the period. By comparing the IRR to your required rate of return – the rate that your portfolio needs to achieve in order to meet your lifestyle requirements, for example, inflation plus 2% – you will be able to assess your progress towards your goal. Interestingly, two people may be invested in the same portfolio but have a different IRR, because their deposit and withdrawal patterns are different. Let’s say, for example, that the market increases 10% over the year, but it first goes through a valley, falling 5% in the middle of the year. If Investor A added to her portfolio while the market was in the valley, whereas Investor B made a withdrawal, it means that Investor A bought at a discount, while Investor B realised a loss. In this example the portfolios’ overall performance was the same, but their individual IRRs will be different. If, during a financial planning exercise, calculations show that you need an annual return of 3% above inflation to achieve your lifestyle objectives, the calculation assumes that, as long as the money is invested in your portfolio, it is earning 3% above inflation. The IRR calculation is the most appropriate formula for checking whether you are actually earning what your financial plan says you need. To get advise on investment options with a track record of good returns, please contact Kevin or Thato, email: [email protected] tel no: (011 658-1333) Source: Business day live ![]() There are a huge variety of offshore investment opportunities that enable you to grow your wealth using a vehicle that suits your income and lifestyle. In the event of your passing, these investments are a legacy that will continue to serve your family. However, in order for you and your family to make the most of your investment, you need to make a few responsible decisions from the outset. When selecting your offshore investment, you can choose between listed or unlisted equities, fixed income, property or cash investments. It all depends on your risk appetite. For example, listed equities are always a good option because they are very liquid and priced daily, while fixed income investments include bonds issued by the government, corporates or banks as well as money market products (very short-term debt instruments). Before investing, it is therefore important to research and understand the different kinds of offshore investments and what they would mean for you. One important consideration is the tax implications of your investment. Offshore property investments, for example, may have certain tax conditions in the country you are investing in. For many investments, tax is only applied in the country in which the money and its growth resides (source based tax regime). However, it is important to understand the law of different countries to avoid being taxed twice. Tax on offshore assets becomes a critical consideration in the event of your passing, as your loved ones may wish to bring the money back into the country as part of your local estate. Remove any uncertainty on the matter by getting professional advice on your portfolio. A knowledgeable tax consultant will be able to assist you in making your offshore investment and your overall estate more tax efficient. This does not mean avoiding tax, but rather ensuring that your investments are structured in the most tax efficient way. The biggest risk to your offshore investment after your demise - is a lack of planning. Unfortunately, when it comes to estate planning, people don’t see their own mortality, which means that their affairs are often not in order or kept up to date. Millions of investments often go unclaimed because the investor has not planned for the worst-case scenario. There is no need for this to happen to you, as future-proofing your offshore investments is very simple. All you need to do is become diligent about documentation from the moment you invest offshore. Record and save every correspondence and detail about your investment in one place. Document what the investment is and provide clear contact details on who needs to be contacted in the event of your death. Many of us are not good at administration. If you know this isn’t your strong point, simplify things further by hiring someone to do it for you! Commit to the process and remember that it doesn’t have to be expensive or complicated – anybody can do it themselves under the guidance of the Master of the Supreme Court. When it comes to securing your offshore investment for the future, the best advice would be to imagine what it would be like if it were you consolidating your estate. What information would you want to be in the envelope? What processes would you wish were in place? When planned correctly, an offshore investment is a powerful vehicle to create lasting wealth, even when you pass away. With some simple planning, your loved ones will have an ongoing, sustainable legacy. Source: Personal Finance ![]() Retirees advised to pick both a living and a guaranteed annuity for peace of mind. Your best bet for a sustainable retirement income is to combine a good value-guaranteed annuity with a well-managed living annuity, leading financial advisers agreed at a recent Financial Planning Institute (FPI) conference. A guaranteed annuity offered you "insurance" against the risks of outliving your retirement capital, but there were a number of things seriously wrong with these pensions, advisers said. Every member of a pension fund, retirement annuity and, in the future, possibly a provident fund, must at retirement use two-thirds of their savings in these funds to buy an annuity — a sum of money or pension paid to someone regularly. Most South African retirees choose to generate a pension using an investment-linked living annuity in which they must decide how to invest their lump sum and then what level of income to draw from the investments as a pension. But these annuities involve complex decisions on how the investments will perform and the level of income that can be withdrawn, and provide no guarantee that the income level can be sustained for the rest of your life. Only about 20% of retirees choose guaranteed annuities that provide a pension for as long as you, or if you choose, you or your spouse, live. These annuities can provide a level income, a fixed increase or inflation-linked annual increase, or an increase based on a share of the returns on the underlying investments called a with-profits annuity. The 2015 winner of the financial planner of the year award, Wouter Fourie of Ascor Independent Wealth Managers, told the FPI's recent Retirement and Investment Conference that "level, fixed-increase and inflation-linked annuities have traditionally not offered good value — they are too expensive for what you get". With-profit annuities offered better value, he said. "We need to challenge the life companies. I think they are making a killing out of these annuities," Fourie said, because in his view life companies paid too little income from the investment. If you chose to receive an escalating income from a guaranteed annuity, the income drawn from your capital could be lower than the yield you could earn from investing in a government bond, he said. Life assurers invest mostly in bonds to provide you with the income they pay you when you take out a guaranteed annuity. The income offered on guaranteed annuities should therefore increase or decrease in line with bond yields, but Craig Gradidge, an independent financial planner with Gradidge Mahura Investments, said guaranteed annuity rates did not appear to have increased despite increasing bond yields. Andrew Davison, the head of implemented consulting at Old Mutual Corporate Consultants, said it was not true that a bond could deliver a superior return. You would need a 35-year bond to ensure an income from age 65 to 100 - the age you need to plan for because people were now living for longer, he said. A guaranteed annuity can deliver a higher pension than the interest and capital repayments you could get from a 35-year bond because annuities pool investors' capital and the annuity payments are based on the average life expectancy of the group, which will be lower than 100. Davison said the pricing of guaranteed annuities should be more transparent, but retirees should not underestimate the benefit of the insurance such policies provided against the high risk of outliving one's savings. "We typically insure our cars and homes, but at retirement most of us choose to use a living annuity without any insurance against a key unknown factor — how long you are going to live," he said. Old Mutual tested the ability of a R1-million living annuity to sustain an initial income level of 6.5% of the capital, increasing by inflation each year. It tested 75 annuities with starting dates six months apart from January 1951. The annuities were invested in balanced portfolios of equities, bonds and cash and the average real (after inflation) return was 5.5% a year over the entire period. However, the sequence in which good and bad returns were earned, combined with the consistent income withdrawal, resulted in 42 of the 75 annuities failing to sustain the required income, Davison said. The shortest period over which an annuity supported the required income was just 13 years. Fourie said the best option was to use both a living and a guaranteed annuity, but annuity providers needed to do more to enable the combination to work for you. You should be able to initially split your capital between a living and guaranteed annuity and then to slowly migrate capital from the living annuity to the guaranteed annuity, he said. Life companies should be able to offer guarantees on living annuities, and the administration fees should not be charged as a percentage of the amount invested, Fourie said. Finally, you should be allowed to reduce your withdrawal from a living annuity to zero, he said — currently you must withdraw at least 2.5%. This would enable people to use a guaranteed annuity for their basic income needs and to withdraw from a living annuity only when investment markets favoured this, or when they needed to access funds, for example for medical expenses. If you would like to find out more information about Retirement Annuity, please contact Kevin or Thato, email: [email protected] tel no: (011 658-1333) Source: BD Live ![]() Findings from the 2016 Sanlam BENCHMARK Survey show that many retirees’ income – even in the affluent market – is not keeping pace with inflation, leading to a reduction in the buying power of their post-retirement incomes. This points to the necessity of supplementing the savings you have in your employer’s pension and/or provident fund. Supplementing your retirement savings with a retirement annuity A retirement annuity, or RA, is an ideal vehicle for this purpose. Investors can receive tax benefits by investing up to 27.5% of the higher of their taxable income or remuneration into retirement savings products (RAs, pension and/or provident funds). The tax-deductible amount is capped at R350 000 per year. Re-investing the tax saving can significantly increase the final value of your investment. In addition, while saving in an RA, you don’t pay tax on any interest or dividends, and no capital gains tax is applicable on the growth in the investment. Depending on the investment platform, investors can select from a wide choice of underlying investments in their RA, including risk-profiled investment funds, local or foreign funds, actively managed or passive index-tracking funds, single manager or multi-manager funds, as well as an individual share portfolio or exchange traded funds. The maximum exposure to asset classes, however, is governed by Regulation 28 of the Pension Funds Act. Current limits include a 75% maximum exposure to equities, 25% to property and 25% to offshore investments, although an extra 5% can be invested in Africa. Investors have until the end of February each year to take advantage of the tax benefits for that particular tax year, by adding a lump sum to their RAs. Tax-free Savings Accounts – a vital part of any investment portfolio The benefits of Tax-free Savings Accounts (TFSAs) are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn. Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio, requires some consideration and professional financial advice in this regard is invaluable. It will take investors 15 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when re-invested in the TFSA. Given this negative impact of withdrawals on your contribution limit, your TFSA should be viewed as more of a long-term investment; there are other investment vehicles more suited to short-term savings or emergency funds. Other important considerations involve weighing up contributions into a TFSA versus a regular investment plan, as well as into a TFSA versus a retirement annuity. TFSA vs Investment Plan If an investor is currently investing, for example, R5 000 a month into a discretionary savings plan, it will make financial sense to split the investment, i.e. invest R2 500 into the discretionary savings plan and R2 500 into a tax-free savings plan in order to utilise the tax benefits of the TFSA. TFSA vs Retirement Annuity Weighing up contributions to a retirement annuity (RA) versus a tax-free savings account is a slightly more complex decision. Together with your adviser, you need to look at the advantages and disadvantages from a tax perspective. While for both options the growth within the product is free of dividends tax, income tax on interest and capital gains tax, only contributions into an RA are tax-deductible. The TFSA will, however, offer more flexibility in terms of access to money, whereas RA funds can only be accessed from age 55 upwards. Lump sum withdrawals from RAs are only tax free up to certain limits, while there is no tax when withdrawing from a TFSA. However, it needn’t necessarily be an ‘either/or’ choice. Using the two in combination can deliver superior results. Investing on behalf of your children Parents can also open tax-free savings plans for their children, i.e. a family of four, with two children, can save up to R120 000 tax free (in the 2016 tax year). From 1 March 2017, the limit increases to R33 000 per individual per year, therefore a family of four can invest up to R132 000 per year. This is an ideal way to save for a child’s education and can also help to cultivate a savings ethic from a young age. Note that when investing on behalf of your children or transferring an investment to them, donations tax of 20% of the amount donated is payable. Investors, however, have an annual donations tax exemption of R100 000. Investors are encouraged to consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile. To get a quote for a Retirement Annuity or Tax-Free savings account, please contact Kevin or Thato, email: [email protected] tel no: (011 658-1333) Written by: Roenica Tyson Source: Sanlam The SASI (South African Savings Institute) has a initiative annually in July called annual Savings Month which focuses on encouraging alternative savings solutions. This year a panel of industry experts discussed developing alternative mechanisms to help South African consumers, already under pressure and over-indebted, to save.
Below is a list of tips from SASI to help you save:
To get Financial Planning advise to assist in ways you on how to save and invest, please contact Kevin, email: [email protected] tel no: (011 658-1333) Source: Saving Institute |
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