It will rain again: financial lessons from the drought

As an emerging country, South Africa is prone to extreme market ‘weather’

LAST summer, Cape Town narrowly avoided a “Day Zero” scenario. If Day Zero had occurred, Cape Town would have faced one of the biggest humanitarian crises in our history. The prospects of the taps running dry, together with the measures taken to avoid this, can teach us a number of important financial lessons.

The JSE is caught up in an economic drought. The FTSE/JSE All Share Index was down 12.3 percent over 12 months and down 12.6 percent a year to the end of November. The question everyone is asking now, is: “How long before it starts raining?”

As an emerging market, South Africa is prone to extreme market “weather”. The past few years have not been kind to investors. Poor economic performance from poor political leadership has severely compromised our country’s credibility and stability as a foreign investment destination. We have therefore not benefited from the “emerging market rainfall” (2015 to 2016) that our neighbouring economies experienced.

We cannot initiate instant economical rainfall. What we can control are our efforts to drive the economy (for example, the two recent investment summits), preserve money (for example, not wasting but spending productively), and capture as much return as possible when it eventually starts to rain.

Although many market commentators may pretend they know where and when it will rain next, market returns come in unpredictable cycles. Understanding that financial returns are often intermittent will help you prepare a more holistic long-term plan for all seasons.

Changing your plan during a drought (for example, moving house/ farm/country to a place that is receiving rain at that given moment) does not seem rational. As you know, properties, businesses, farms and stocks do not sell well during a drought. Therefore, it makes more sense to determine your long-term investment strategy during the rainy season and stick to it (through the drought) at least until the rain has arrived again.

In the meantime, use the following precautionary steps learnt from the recent drought: Stop the evaporation, use 1 only as much as you need. Using a bucket in the shower has taught many Capetonians a thing or two about using only as much as you need. Once you start being aware of how much money you waste, you can easily cut down by paying closer attention. Track the money you spend. Split it between lifestyle choices (needs and wants). Remember all financial decisions (where/how you live, what you drive, what/where you buy, what/ where you eat, what you wear) are deliberate and will determine the severity of your financial pressures during an economic drought.

Save in water tanks. We don’t 2 know how long a drought will last, but we do know that they are cyclical. Put money away during the good rainy seasons. Use a professional to invest this capital, to prevent common mistakes and to help you commit to an investment plan. A full investment “tank” can sustain you during times of drought. The items below are essential:

◆ Make sure you are sufficiently insured (life insurance, income protection and critical illness).

◆ Save up an emergency fund equal to at least three months of income.

◆ Save for short-term objectives such as furniture/holidays/cars/gifts/ treats. Do not buy any depreciating or consumer items (specifically holidays) on credit.

◆ Save diligently and monthly for retirement. Preserve these savings during career changes.

Greywater systems and recycling. 3 Recycle and re-use items for longer during economic droughts. Buy an existing house, rather than building a new one, buy second-hand cars and even household goods. Give unused items such as good clothes, books, baby items and sports gear to your friends and family. You might not realise how much money it will save them.

Don’t waste. Modern humans 4 waste a lot, with food being the worst example of this. Advertising today sells a “new” and “throw away” culture, which is expensive. Do not replace items just because they are old. Repair what you can and replace only the essentials, during financial droughts. In my experience, individuals who reach financial independence comfortably lived frugally. Sink a borehole, become 5 financially independent. Sinking a borehole ultimately brings water freedom, as many of the restrictions do not apply to you. Using a borehole sustainably still requires good judgment, as indiscriminate use will have the hole dry up in no time. Financial independence is the same. It is the ultimate financial freedom anyone can achieve but requires financial discipline, as it can be easily exhausted.

Diversify. As South Africa’s economic 6 seasons remain volatile, we encourage investors to diversify internationally. Although many countries around the world receive good rainfall, no investor will receive constant, continuous returns. Every country and every economy has “rainy” and “dry” seasons. Advisers can help investors to plan ahead for all economic seasons, to flourish financially.

Richus Nel is a financial adviser at PSG Wealth.