Honest Money
Honest Money
Future-Proofing Finances: From Bonds to Global Diversification
In this episode Warren Ingram answers your questions around investing, the importance of financial milestones, the strategic use of tax-free savings accounts and the significance of planning for children's education. Warren also delves into investment strategies, including risk tolerance, asset allocation, the advantages of global diversification and highlights the balance between index investing and active management.
Takeaways
- Paying off your bond is a significant milestone.
- Keeping your bond open can serve as an emergency fund.
- Maximizing tax-free savings is a smart financial strategy.
- Investing for children's education should be a long-term goal.
- Consider contributing to children's tax-free savings accounts.
- Investing 100% in shares can lead to long-term growth.
- Understanding risk tolerance is crucial for investment success.
- Global diversification is important for a balanced portfolio.
- Blending index investing with active management can optimize returns.
- Choosing investments with low fees is essential for maximizing growth.
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The Honest Money podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.
Speaker 2:Honest Money. Myself and my wife recently paid off our bond. I'm 42, my wife is 40. We would like to reinstate our tax-free savings accounts, which we hold with easy equities. We would like to reinstate our tax free savings accounts, which we hold with easy equities. I would like to contribute the full 3 000 rand a month allowance into the msci acqui etf, which is which was launched by satrix.
Speaker 2:Um, I feel that it's a great compliment to my existing provident fund, which is regular regulation 28 compliant, which I have with my employer, profit and fund, which is Regulation 28 compliant, which I have with my employer, and I just feel that the MSCI Acqui Satrix ETF ticks a lot of boxes in terms of emerging and developed markets and it's also a total return ETF. I would also like to reinstate my daughter and my son's education investments using the same ETF. I've always been a fan of trying to keep things simple withholding no more than two funds or ETFs within a tax-free savings account. Yeah, so the MSCI ACWI would complement or be on top of my contributions to my Provident Fund with my employer. Yeah, the strategy would be to hold this ETF for many, many years, as the purpose would be for our long-term retirement, when we retire at 65. Please your advice or opinion on and around investing in the MSCR ACWI ETF.
Speaker 3:Thank you so much for your question on and around investing in the MSCR ACWI ETF. Thank you so much for your question. I mean, firstly, we have to say that it's a milestone in anyone's life when you can pay off your bond. So congratulations. I know how that feels and how rewarding it is, and if you were here I'd do a round of applause. So congratulations. It really is a big thing to be able to have the facility available to use as your emergency fund. Which is my first comment now is I hope that you've kept the facility open on your mortgage, even though it's now paid up, because that's a brilliant place to use as an emergency fund. You're not earning any interest, you don't owe anybody any money, but if you need money in a hurry then you access it there and most likely at probably the best interest rate that you can get. So I just want to stay on that for a second and say, firstly, congratulations. Secondly, keep the bond open while you don't use it and let's hope you never need to call on that emergency fund. Then let's go on to your question around reinstating your tax-free savings. I mean, I think it's an absolutely brilliant idea. You know, I think it's a tricky one for me to answer the question. If someone says, do I pay off my bond and not put money into my tax-free, or do I do both and not put money into my tax-free, or do I do both? And so I think and obviously I mean paying off your bond faster, not just paying off your bond you have to do that. But I think that what you've done is great. I mean to get bond-free and not to have your debt compounding against you. It makes a lot of sense. You're in your early 40s, you and your wife, so that means that you've got time on your side to let the tax-free compound and get to the maximum, remembering that you can do $3,000 a month or $36,000 a year, and then you get to a lifetime limit of $500,000. So your objective is to try and get to the $500,000 as fast as possible and let the capital grow and combine on itself as long as you possibly can before you hit retirement. That means, if it's 42 and you haven't done much into your tax freeze, you're probably going to get to around about age 57, somewhere around there, 55, 57, before you've maxed out your contributions and then you've got a good long period, both leading up to retirement at 65 and then even into retirement where you can let that capital continue to grow. So I think you know no question. I think it's a very good call to maximize the tax fees for you and your wife.
Speaker 3:I want to just jump very quickly to then discussing your children's education as well and your children's savings. Because most of the time parents you know they'll start an education investment for their children and in my experience what happens is by the time they get to school, the kids get to school. The parents then use, you know, use their own salaries and their own cash flow to fund the school expenses and they don't access the education fund. So if that's possible with you you know it sounds to me like you're very disciplined and very controlled with your money then you might want to think about doing something a little bit different, and to me, a little bit different means consider contributing some money. You know it doesn't have to max out, but consider contributing some money to their tax freeze as well, and 100%, you know, putting it into the same investments that you would do makes all the sense in the world to me. So that's just the one tweak I would make If you're concerned that you might want to use the money for their education and you think that that's very likely, then you know, naturally you don't want to put money into a tax-free savings that you know, that you know you're going to draw out.
Speaker 3:So then rather don't do it. But if you think that what I'm saying might sound like you, where you might actually end up building up some extra capital or extra cash and paying school fees yourself, then really consider starting the tax-free for your children. But to me it's also a brilliant thing to do. If they've got grandparents or aunts or uncles or friends or whatever your friends that want to give them gifts every year, telling them to rather put the money into tax-free savings, I think makes a lot of sense. It's a heck of a gift to be able to give your child at the age of 16 or 18, to give them a fully funded tax-free, and hopefully you've given them the education along the way so that by the time they're 40, they could probably stop work, and I think it's a mighty gift to give somebody. So just consider that In terms of what you put into a tax-free savings.
Speaker 3:I'm just going to go through the principles first and then let's get down to the nuts and bolts, because a tax-free really should be a 10 to 30-year-long investment then it does make a lot of sense to me that you allocate 100% to a fund that only invests in shares. So you know, choosing an investment that only invests in a money market or a very low risk balanced fund where you've got 60 or 70 percent in cash and bonds doesn't make a lot of sense to me. The only reason that you would choose a very low risk investment where you've got a very low allocation to shares is because of your own psychological tolerance for risk. In other words, you put everything in shares the market does well, your tax rate goes from 100 to 400,000 Rand over time, and then the stock market takes a nice big hiding and goes from 400 down to 200. And if that causes you to panic and to sell, then you don't have the tolerance for risk for 100% invested in shares, in which case you need to reduce your allocation to shares and upweight your allocation to cash and bonds as a stabilizer and a kind of a shock absorber in the portfolio, like a car. The shock absorber doesn't make the car go faster, it helps it not to crash, and so that's what you're doing with your investments is consider the allocation to shares to be the engine and your allocation to cash and bonds being the shock absorber and the brakes and the suspension and all the things that make the car go around corners and slow down but adds a lot of weight when you're trying to go really fast. So that's about as much as I know about cars, but it does tie up very nicely to investments. So I guess then your decision around, you know, choosing an index tracker makes sense. I mean, I think I'm not too fussy around choosing a global equity unit trust or a global ETF. I think you know both have merit. So if you're fixed in your mind on choosing the MSCI Acqui, then I haven't got a problem with that at all, I think.
Speaker 3:Just to explain for our listeners MSCI is the name of an index company, so it's the Morgan Stanley Capital International Capital Index I can't remember now off the top of my head and what they do is that they just formulate indexes around the world and then what happens is they will allow companies to launch products that track those indexes. And so the ACWI stands for the All Country World Index, and it's very different from the MSCI world. Now, the MSCI world. If you read the label on the box, you would think that that means it's all the stock markets in the world, and that's exactly what it should be, but of course, life is never as simple as it should be. So the world index is actually only developed markets, so it's basically the US, uk, europe, japan, maybe a little bit of ours, but not much else of ours but not much else. And so you lose out when you invest in the world index only. You're losing out on access to India, china, brazil, the whole of South America, the whole of Africa and then also some of the smaller Asian markets as well. So I think you would be losing out potentially on the economies that are going to grow the world's stock markets and economy in the next 20 or 30 years.
Speaker 3:So the All-Country World Index, the ACRI, by contrast, is then all the countries in the world, and what happens is your investments are allocated according to the weighting of those stock markets as a percentage of the world. So, in other words, the US is still the biggest. So, in other words, the US is still the biggest stock market in the world, so it will be the biggest proportion. South Africa will be in there and we'll be on the opposite end of America, so we'll be at point something percent. I don't even think we crack 1% of the ACWI index.
Speaker 3:But the point is, when you're investing for a very long period of time, you haven't got a clue. None of us have got a clue. What's going to happen to the US as a percentage of the world stock market over 20 years? Will Japan continue to do well? Will it shrink? Will the UK implode and become an emerging market? I'm only saying that half-jokingly. I think that they're doing a very good job of destroying their economy, but maybe somewhere like Germany becomes the next powerhouse, or maybe it's India, or maybe it's China.
Speaker 3:The reality is we don't have a clue, and so buying a global index that gives you exposure to all of those countries you know makes a lot of sense. You're always going to have countries that are doing well. You're always going to have countries that are not doing so well. And then just a last point around that is remember that a lot of the time, when you look at companies that are listed in America, you might think that you're actually buying companies exposed only to the American economy, and that's not really true. If you're buying Microsoft, then you're buying a company that happens to be listed in America but it sells products right around the world. The same with Apple, meta, all of those. And so just to know that, more and more as companies globalize, you are really getting exposure to global businesses as well. So I am worried about not being diversified enough.
Speaker 3:But equally, not too stressed when people say, oh, they think America is going to decline. Now that might be, I don't have a clue. But what I know is when you're buying companies that are very large, listed in America, what they have got is usually a global business. And when you're buying into them, what you're buying is access to very high quality management teams that will adapt their companies to the relative economics of each country in which they operate. So if America is not doing well, the likelihood is that they'll sell more products to South America, to Africa and away from the US into the rest of the world. So I'm not too fixated on a 20 or 30-year view about that. I just think it's proper global diversification. I just think it's proper global diversification.
Speaker 3:And equally, just back to why I'm not too fixated on the index versus a general equity unit, trust is, if we look at the state of the world. Now there are some very good companies that are trading at very high prices in the US. Back to NVIDIA, back to Microsoft, apple, meta and those businesses. I think they are fantastic companies. I just think their share prices are phenomenally expensive and when you buy the index, you are going to have exposure to those companies at that very high price. There isn't a mechanism for an index to say I think Microsoft's great, but maybe it shouldn't be 7% of the index, we should reduce it to three just because it's expensive.
Speaker 3:And so when you buy a general equity unit trust, that's exactly what you're paying a fund manager to do is to apply their minds to those companies that are cheaper and to buy more of those and to have a smaller or no exposure to the companies that are very expensive. So for me, very often I would blend the two. I would have half my money in an index because I like indices. I think that they have a very good history of delivering very good returns for us. But equally, when markets get out of kilter and valuations get very expensive in certain parts of the world and in certain parts of the stock markets, I like having a very good equity manager. That obviously must do it at the right price. I'm not interested in overpaying fund managers for a job. I think that they do add value if their fees are reasonable. So that would be my only tweet to your strategy.
Speaker 3:But if you said to me you're happy with just the ACWI index and that's what you want to do by all means, I think it's absolutely a great idea. The trick, then, is just to make sure that the costs and you would usually see it under something called the TIC, the total investment charge Just make sure that that total investment charge is as low as possible. So don't just choose the first one that you see. Make sure that you choose the one that's got the best price, the lowest fees to you. Thank you so much for your question. I'm so chuffed with you for paying off your bond and well done and good luck for the years ahead. And please stay in touch and let us know how it goes. And for the rest of you, please send through your voice notes. We love getting them. It helps me so much to be able to answer your questions and to know what you're interested in. If you're a bit shy around a voice note, then by all means send a WhatsApp. Thank you so much.
Speaker 1:The Honest Money Podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.