YOUR QUESTIONS ANSWERED
How to balance risk and reward?
I am interested in diversifying my investment portfolio, but I have a low risk appetite. What lower-risk investments can I look at that will ensure that I am still building up wealth over time?
Name withheld
Richus Nel, financial adviser at PSG
Wealth, Old Oak, replies: There is a direct correlation between the level of risk investors are willing to take and the expected potential reward linked to that opportunity. Low-risk investments generally provide short-term comfort but poorer investment outcomes over the longterm.
I am not aware of any sustainable “lower-risk” investment solutions (after tax) that will ensure wealth creation over the long-term. The world is currently faced with a high inflation outlook over the short-to medium term. The investment strategy I consider protecting wealth best over the long-term is a well-diversified equity investment.
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Diversifying from cash: There are still plenty of investment risks around. However, with current market valuations, it has to be one of the most opportune times over the last 20 years to enter financial equity markets. Bold investors have an ideal chance to obtain proportionate ownership in great businesses, at greatly reduced prices.
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Diversifying from equities: Selling low out of equity markets only to reinvest after uncertainty has cleared must be the most damaging investor behaviour often witnessed. The result of doing this is repeated permanent loss of capital, until the investor is annihilated. Investors should reject their default “savings mindset” when investment risks increase.
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Understanding risk: Investment risks that should be feared most are the permanent loss of capital and inflation diluting purchasing power.
With the current equity market valuation (especially Jse/europe), the following quote from Winston Churchill rings very true: “This is no time for ease and comfort. It is time to dare and endure.”
It’s always best to speak to your financial adviser so they can guide the specific goal towards investing to build your wealth.
Saving for a child’s education
My partner and I are trying to start a family and we would need to start saving for our children’s education in the near future.
What’s the best way to adjust our budget and savings to add this into the mix, and how much should we look at putting away?
Name withheld
Graham Lovely, wealth manager, PSG Wealth, Claremont, Cape Town, responds:
I suggest that you and your partner each open a tax-free investment plan, and you do the same for your children once they’re born. This is an investment vehicle that enables you to grow your capital without paying tax on investment growth. It allows for flexible contributions (up to specified legislative limits) while giving you control over your choice of underlying investment options.
You may also choose to make withdrawals at any time. In terms of how much to budget, an example of one product requires a minimum debit order investment of R500 a month, R1 500 a quarter, R3 000 half-yearly or R6 000 yearly. You can also combine debit orders and ad hoc lump sum investments as you choose.
You can elect to automatically increase your regular contribution by a specified percentage each year to combat the negative effects of inflation. You may not contribute more than R36 000 per tax year or R500 000 over your entire lifetime. All growth, dividends and interest earned in the tax-free investment plan is tax free.
Getting my affairs in order
I have recently been diagnosed with a terminal illness and need to get my affairs in order to ensure that my family is looked after when I am gone. I have a life insurance policy in place but have accumulated some debt over the years. How do I know if my life insurance policy covers whatever I still owe, as well as any “extra” costs attached to my passing (in the form of taxes, executor’s fees etc.) before my dependants can access my estate?
Name withheld
Ulandi Janssen, wealth adviser at PSG Wealth, Menlyn, responds: I am so sorry to learn of your diagnosis.
An estate plan needs to be done as soon as possible. This will enable you to determine how much of the life assurance policy needs to be allocated to your deceased estate to cover debt and estate costs, such as executors’ fees, income tax, capital gains tax, Masters’ fees, and estate duty. The estate plan will also enable a financial adviser to set up ways in which estate duty can be saved, putting your estate in a position that more capital from the life policy be allocated to your dependants.
This allocation can be done by means of a beneficiary nomination on your life policy to your estate. The remaining value of the life policy should then be allocated to your dependants, by means of nomination of beneficiaries.
It is important to allocate only the amount of life cover needed to cover estate costs and debt, as this portion will form part of your deceased estate, and therefore will attract estate costs, such as executors’ fees.
The remaining value of the life policy will not attract executors’ fees, as this portion will pay directly to your dependants and therefore not form part of your deceased estate.
Lastly, I would also encourage you to ensure that your will is updated and signed according to the Wills Act to ensure a smoother process for your beneficiaries.
How to insure my business property?
I’m about to get my first business venture off the ground and would like to know what I should be considering when it comes to insuring the commercial property I want to purchase. What are the most important aspects that I should be taking into account?
Name withheld
Karen Rimmer, head of distribution at PSG Insure, replies: First things first, it’s essential for you to consider that, in the event of an unfortunate accident such as water damage caused by a leak, a fire or accidental equipment damage, not being insured could end up costing you far more than the total of your insurance premiums. You could therefore think of insurance for your business in terms of the three important “Ps” – “protection”, “preparation” and “peace of mind”.
Secondly, you need to make sure that you don’t under-insure, as unfortunately many business people sometimes do.
It’s therefore vital to first work with a valuation expert to provide an accurate valuation of your property, and then to secondly seek the advice of an insurance adviser who will provide you with a working understanding of how insurance may benefit your specific operation. They can provide sound advice on risks that are specific to your individual needs.