First time buyers need to be of essential details that should not be overlooked during the purchasing process; this is difficult as excitement and the associated freedom can override the logical thought process. Home ownership is essentially a commitment, a marriage between yourself and the property you are interested in and should not be taken lightly.
When evaluating your affordability of the property is – assuming you do not have a car payment now – will you be able to afford a car payment at a future date when you purchase this property? First time buyers should gather relevant to ensure an informed decision is made, as well as being fully aware of your future long term plans.
Some points to consider:
1. It is not just a matter of being able to afford a monthly repayment, you also need to assess whether this repayment is a high percentage of your income (I recommend that a bond should never exceed more than 25% of your income, this buffers in a safety mechanism should interest rates rise). You also need to place the less visible costs into your estimation of affordability, such as insurance, maintenance, and improvements.
2. Even if you can afford the monthly repayment, have you considered that the costs of purchasing a property can be as high as R50 000 on a R1 000 000 purchase? You also need to consider whether it is a buyer or sellers’ market? (Are the interest rates rising, is the economy growing or shrinking etc.). It may not be such a bad idea to hold back on purchasing until you have saved up a nice big deposit, of at least 20% in my view.
3. The adage “buy the worst house in the best area” is something to consider. Property location is an extremely important factor when buying, it does not matter how much money you throw at a property in a poor area to improve it, and it is likely you will still not make as much money as you should if you decide to sell your property later. Always speak to your estate agent about the amenities in the area (schools, hospitals, shopping centres and lifestyle experiences).
4. When you buy a property, chances are very good that you will need a loan from the bank. The golden rule here is that you should always consider an access bond. It is in your best interest to place extra funds into the bond, but you may need access to these additional funds in event of an emergancy or should a lucrative deal come your way.
5. Do not be scared to ask for a price below the advertised selling price; you will often find that sellers inflate their price so that they end up negotiating to a price that they were comfortable with. Also be aware of factors that affect your offering price, such as rising interest rates, low GDP growth rates, over-supply of new cheap developments and the urgency of the seller to secure the sale.
6. Use resources available to you. Your bank will generally have all the information available on the property you are interested in as well as the area it is situated in, this can be a departure point as to the price you are willing to offer. There are also third party providers who can provide this service for a fee.
7. Consider your “why” when wanting a property, as the purchase of this particular property you are looking at may not be ideal. It is not smart to constantly “upgrade” your lifestyle and change properties simply to acquire an additional room or a poo; the transaction costs add up very quickly. You should also consider what shall be done with the property when you out-grow it; can this property be used as an investment property? Your financial advisor would be able to evaluate the asset in this light.
All in all, a property purchase is one of the biggest purchases of your life and getting this wrong may be the difference between your dream retirement or retiring in a sub-standard lifestyle. Property costs you a lot more than you think (especially in a high interest rate environment). It is easy to buy and hard to sell, so think carefully about which property you will decide to “marry”.
Robert Starkey RFP, MIFM
Wealth PlannerRead More
A financial Advisor has the responsibility of assisting clients in selecting investment portfolios for their various investment requirements; this is the responsibility to select the appropriate asset allocation for you based on targeted risk, returns and time horizon objectives and generally comes in the form of having to choose the right unit trust for your investment.
I often come across clients’ portfolios whose solution is to hold multiple balanced funds as the underlying unit trusts, which I believe is an attempt by the advisor to ‘diversify’ the portfolio –this, in my opinion, is a quasi-approach to attempting to reduce risk and does not always work as the advisor intends.
One of the biggest contributors to risk is the asset allocation of the portfolio (i.e. placing more money into volatiles assets if the time horizon is short); blending balanced fund managers may exacerbate this risk instead of reducing it. The reason for this is the discretion that the various managers may have to re-balance the underlying weightings towards various asset classes, let’s explore this idea further.
Managers may, at various points through an investment or economic cycle, increase or decrease their holdings in, let’s say equity or bonds. This is alright if, on average, the fund manager’s combined in your portfolio hold opposite views on the market or hold different mandates as their changes in weightings will hopefully offset each other, by one manager increasing equity and the other decreasing the equity (or any of the other asset classes). The problem arises when the managers hold the same convictions to the asset classes and move in conjunction with each other (which is very common as most managers in a specific investment “space” may track the same benchmark or fall into the same peer group for ratings).
Your portfolio may now be more aggressive or conservative than when you originally set the account up, which may not be ideal to your required solution – said otherwise, this means that you cannot control your asset allocation. Everyone understands the analogy “buy low and sell high), and without a structured asset allocation you lose this opportunity in a structured and emotional way. If you initially allocate / invest 40% of your portfolio to the stock market (equity) and the stock market performs well then your allocation may, hypothetically, increase to 45%. You then should “trim” down this portfolio drift back to 40% and take the profit; this has the effect of keeping your account’s risk and return objectives in check. You also get some benefit if your stock market allocation falls, hypothetically, to 30% as you will then sell from the other assets classes to put more money into stocks, which you will now be buying at a cheaper price.
This is very complicated but my three simple recommendations to overcome the problem of not being able to control your portfolio asset allocation would be to:
You should approach your financial advisor’s recommendations with the “why, why, why?” tactic until you are satisfied with the reasoning that your financial advisor provides behind their recommendation. Remember that an advisor is only as good as their support, and without the appropriate software to assist the advisor, keeping track of your account manually may mean that your account gets neglected, especially if your advisor has a large number of clients.
There is evidence for both blending balanced funds (split funding) or using building blocks to tailor your specific asset allocation, the trick however does not lie in which is better but which is best for your strategy.
Robert Starkey RFP, MIFM
MARKET REVIEW… What happens in China does not stay in China…
SA EQUITIES – Weighed down by Resources
Graph sourced from RMB
The JSE’s low beta set to be challenged as earnings downgrades persist
• For the quarter Developed Equity Markets outperformed riskier Emerging Markets by almost 10%, the worst relative performance since 2008. The biggest drag on EM performance was Brazil (-36%) and China (-23%). Greece (-36%), Indonesia (-24%), Colombia (-24%) and Peru (-21%).
SA BOND MARKET … finds late support
COMMODITIES… suffer pain and more pain
CURRENCIES … Commodity and Current Account Deficit Currencies hit the hardest
• During the quarter the rand weakened 12.1% against the USD, in response to the global risk-off move that hit all high-risk high-yield and commodity linked currencies.
• Post quarter end, the Rand is currently benefitting from the expected delay in Fed hikes, commodities rebound and the general risk-on sentiment. However the medium-term view remains bearish on the weak fundamental picture and lack of room to defend the currency via rate hikes or via forex interventions (forex reserves remain low). External factors will also continue to hold the Rand ransom – potentially weak growth in China is negative for the Rand. South Africa has the largest trade exposure to China within EMEA – nearly 16% of its exports are directed to China. Further, given SA’s dependence on commodity exports, the Rand is particularly vulnerable to weak global growth and its bearish implications from commodity prices.
SA MACROECONOMICS IN Q3… Picture remains bleak
• The fundamental picture in SA remains a bleak one. GDP is growing at its slowest pace since 2009, manufacturing data remains in contractionary territory and business confidence is low. Neither the business cycle nor structural factors are likely to provide much support to growth in the coming quarters. SA is estimated to be 6 – 12 months into a down-cycle which raises concerns over a looming recession, while structural issues (electricity shortages and labour strikes) persist.
• Monetary Policy: In a unanimous and expected decision, the SARB kept rates on hold at 6% in September “for now”, (after July’s pre-emptive 25bps hike) due to domestic economy weakness and tame inflation. The Reserve Bank did however indicate that it remains on a gradual path of policy normalisation should inflation pick up (for example on rand weakness). The Governor highlighted that the Monetary Policy Committee will not have to move rates in tandem with the Fed as domestic conditions differed, although the resultant impact on the Rand would be closely monitored.
• By the time the MPC next meets, on 17-19 November, CPI data for September and October would have been published. Consensus estimates indicate that headline inflation will still print below 5% yoy in September (4.6% in August) and marginally above 5% in October.
• A few economists believe that the Reserve Bank will likely raise interest rates by 25bps on 19 November.
• GDP Growth: the SA economy contracted by an annualised 1.3% in the second quarter over the previous quarter. Manufacturing contributed the most to the contraction, declining for the second straight quarter by 6.3% due to lower production of basic iron and steel, non-ferrous metal products, metals and machinery, petroleum, chemicals and plastic products.
• GDP growth downgrades persist and forecasts range a little above the 1% mark to 1.5% for both 2015 and 2016.
• Inflation remains contained for now. CPI dropped to 4.6% year on year in August (from 5% in July), lower than market expectations and well within the SARBs 3-6% target band. The data suggest that the forex pass-through to inflation remains low, while weakness in fuel prices and consumer demand are weighing on inflation. Inflation is now expected to peak at around 6.7% in 1Q16 with the 2016 projections around 6.2%.
• The current account deficit narrowed to 3.1% of GDP to its smallest gap in nearly 3 years (from 4.7% in Q1), as a rise in the trade balance more than offset a larger gap on the net services and income account. The trade balance improved on the back of stronger exports which benefitted from the weaker rand, whilst the subdued growth in the value of imports also contributed to the improved trade balance. The improvement is expected to be short-lived particularly given SA’s reliance on short-term financing flows.
• Domestic demand remains soft with household spending growth slowing to 1.2% q/q in line with lower disposable income growth. Households continue to delever with outstanding debt easing to 77.8% of disposable income, from 78.7% in the first quarter. Fixed investment spending remained lacklustre, mainly driven by spending by government, and flat in the private sector.
• SA’s macro mix remains unfavourable from an equity market perspective – weak growth, rising inflation, challenging twin deficits, weakening currency, uncertainty over monetary policy, lower commodity prices, depressed business and consumer confidence, and structural issues all weigh on the prospects of the economy and the outlook for equities. The uncertainty around China’s growth outlook is another major impediment for the SA economy and its equity market.
• Furthermore the currency seems likely to remain under medium-term pressure due to both external factors and the challenging cyclical and structural backdrop.
• Lastly a look to valuations sadly does not provide the buffer against the macro backdrop. SA’s 12 month forward PE relative to other Emerging Markets is close to a 20% premium to the ratio’s five-year historical average. This makes SA the second most expensive market within the Emerging Market universe. Even after adjusting for the sector biases (by using a sector neutral PE), SA is trading quite richly compared with other EMs.
• In absolute terms, select SA banks, retailers and industrials are seen as slightly more defensive. Banks dividend yields are healthy and the banks over-capitalised. Loan growth, while slowing is still resilient, nor is credit quality under the kinds of pressure that macro factors might superficially suggest. Select industrial plays – particularly those offshore – are worth emphasising.
THE INVESTMENT CASE FOR EMERGING MARKETS BEING TESTED… requires clarity
• Like beach balls held underwater, risky assets should rise harder and faster under these conditions when the relief rally comes. Nevertheless, risks of powerful structural forces dragging risky assets even further underwater remain. Slower global growth would raise difficult questions about the efficacy of QE, and perhaps trigger a paradigm shift in investor expectations of monetary policy at the zero lower bound. Even if liquidity eases and sentiment improves, growth will still be the largest determinant of longer-term solvency and valuations.
LET’S NOT COMPLETELY FORGET ABOUT THE U.S. …
• With the US Q3 earnings season about to commence, a quick review of the Q2 reported results provides insight into trends and shape to what happened to global markets in the third quarter.
• Overall the basic headline reporting stats were solid in Q2 with Sales and EPS beat rates (results beating expectations) were a bit stronger than for Q1 for all of the major size indices.
• 73% of the S&P500 companies, 69% of Russell Mid Cap companies and 61% of Russell 2000 companies beat consensus EPS estimates, whilst 50% of S&P500 companies, 49% of Russell Mid Cap companies and 52% of Russell 2000 companies beat revenue estimates in Q2.
• There was a skew to sales beats as results for large cap Financials – more domestically focused sectors – were consistently strong, while those for more cyclical and globally exposed sectors were weaker (Consumer Discretionary, Industrials and Materials).
CURRENT MARKET THOUGHTS … Institutional Client Perspectives
Comments and perspectives taken from a Credit Suisse Strategist roadshow
Two words summarize how investors are feeling about markets right now – “lost” and “bearish”. Investors are focused more on risks, which are abnormally high, rather than reward, which is also high, with the Equity Risk Premium for example at 5.8%. However it remains evident that visibility is abnormally low.
PortfolioMetrix (Pty) Ltd is an Authorised Financial Services Provider in South Africa. The information contained is given for information purposes only and is not intended to constitute financial, legal, tax, investment or other professional advice and should not be relied upon as such. Investments can go down as well as up and past performance is not a guide to the future.
When you create an investment one of the first considerations is the topic of risk, which is usually stated as “I do not want to lose money”. This however presents a problem as capital risk is the risk of losing money on your initial investment amount, for example, if you invest R100 and it grows to R200 but subsequently loses 50% (R100) you will be back to R100 and will not have lost capital; you would not have made money at all but neither would you have lost any, or is this the case?
A better adjustment would be to increase your initial capital value by a pre-determined rate or inflation annually; over time inflation will erode the amount of goods that your Rands can buy so earning a rate of return under inflation is also a version of capital loss.
Secondly, when risk is referred to, what exactly is it that you as an investor should be concerned with? The aforementioned risk of capital loss certainly is a big concern however what about the risk of not outperforming inflation, not reaching the required growth rate used in the projections for your retirement calculations or the different risks faced when using active or passive (yes, who would of thought that risk was so extensive – daunting to say the least isn’t it?).
Keeping risk in mind is important, especially if you are going to place a lump sum of money into the market or withdraw a lump sum out. The main concern in this situation is referred to as sequence risk, which basically means that there is a difference between losing money in the beginning or at the end of your investment term and getting a nice consistent average return. The problem is that losing money in the beginning of your investment means your investment now has to make back the money off of a smaller amount (this principle is thought of as Siegel’s paradox), this is one of the reasons why your advisor would either ask you to add more money after a correction or to re- balance your portfolio. Let’s look at an example with two different hypothetical portfolios:
Each portfolio (portfolio A and portfolio B) made an average return over 4 years of 5% but with a difference, portfolio A had a large loss at the start of the investment.
Portfolio A therefore under-performed Portfolio B by R5.63 or, said otherwise, ended up with 4.86% more return. Even though the difference is small in the example above it illustrates the problem with sequence risk perfectly. This should be noted as the more returns you get to keep from your portfolio, the easier it makes it to reach your desired goals. One possible way to reduce the risk of downside losses initially is to consider phasing into the market, this will however not be discussed in this article.
There is one more aspect that we need to consider with sequences, this is what happens at the end of the investment? As your money gets larger in value small percentage changes can have large Rand value changes. Consider the following example:
20% gain on R100 000 = R20 000
2% Gain on R1 000 000 = R20 000
For this very reason you, as an investor, need to make sure that your investment is not too aggressive close to the end of your investment term (i.e. your retirement). It is important for one to make sure that your investment is structured properly at both the beginning and end of the investment term but be careful not to ‘tinker’ too much as more often than not making emotional changes to your investment may lead you to a worse off position.
Robert Starkey RFPTM, MIFM