House News:
On 2 May 2015, Stacey Lancaster said ‘yes’ and she is now engaged to Chad Barron. Along with Mrs Candice van Dongen (nee’ Read), we are delighted to be adding another “Mrs” to our staff, in the not-so-distant future. We have had a busy start to the year and find it hard to believe that the first half of this year is nearly done. We look forward to what lies ahead in the second half.
Behavioural Finance:
There is something most people do when they look for a potential partner: They quickly scan the room (or nowadays, the internet) to identify the most attractive candidates. This means that most of the time, appearance is on the top of the list. Good-looking beats interesting; body beats humour; and lips beat the brain. This process means that the most-promising candidates often get over-looked. This is a bit like investing – people are distracted by appearance (the pretty coloured graphs) and often overlook potential (the positioning of the funds and their objectives). Simply put, we are generally our own worst enemy when it comes to making investment decisions (or looking for a potential partner for that matter!). We need to remember that if we are focused on a long-term goal, the short-term noise is just that – noise.
Numerous studies by psychologists show that although investors’ decision-making is often irrational (we look at beauty before brains), they are irrational in predictable ways. Investors, more often than not, make what is known as an ‘inside view’, which means that they focus on information that is available close at hand – such as investment advice from their cousin given at a family Sunday lunch. Further studies done in the USA and in RSA have shown that the average returns earned by unit trust funds are higher than the returns an individual experiences. This is simply because of investor behaviour: ad-hoc investments, withdrawals and switching, affect the overall return the individual experiences. Buying and selling investments based on everyday events or market moves may cause you to lock in losses that could have easily been avoided. Furthermore, poor performance (normally over the short-term, due to market changes) has been shown to increase the desire to act and this desire to act intensifies after a loss. 2008 is a good example of investors who locked in their losses by selling out of equities – see the line graph below.
As Winnie-the-Pooh famously quoted: “Never underestimate the value of doing nothing.” In investing, selling after a loss is counterproductive – you will only cash in and realise the loss. Investors are also very herd-like in nature, as they are all easily influenced by what they hear about a stock or a fund manager in the news or from a friend. It is difficult to go against the herd and that is what we are here for – to ensure our clients are aware of their long-term objectives and to ride out the volatility with them. We are aware that we are all facing more uncertainty going forward but are confident that you are in good hands.
Tax-Free Savings Accounts:
We are sure most of you are aware that Tax-Free Savings Accounts (TSA) were launced in March 2015 and are savings products on which no income tax, capital gains tax or dividend withholdings tax will be charged. Most unit trust’s (provided no performance fees are charged); exchange traded funds (ETF); savings accounts; fixed deposits; and RSA retail Savings Bonds, meet the requirements for classification as a TSA. Simply put, these are not new investment products, rather the way SARS will treat them is new and so product providers need to keep a record of these to ensure that they remain separate from your other investments. You are allowed to invest a maximum of R30 000 per year into a TSA, subject to a lifetime limit of R500 000. SARS will charge a 40% tax on contributions above these thresholds. If you draw money from your TSA, you will lose the value of that withdrawal from your lifetime limit. That means you should only use a TSA for long-term investments. There is no penalty or tax payable for withdrawing from your TSA. We would encourage our younger investors to use TSAs, as the impact of investing over a 16 year or longer period without any tax is quite significant. The short term benefits are marginal.
Retirement Reform Update:
The May 2014 quarterly newsletter made reference to a few changes 
that were to be implemented with effect 1 March 2015, regarding retirement annuities. Due to pressures and unhappiness from COSATU and other associated unions, many of the changes were placed on hold and delayed until a consensus is reached. The harmonisation across all fund types has not taken effect, neither has the tax capping on annual contributions of 27,50% – this still remains at 15%. The requirement to annuitise at least two-thirds of retirement capital does not apply to all new contributions made to provident funds, as previously expected. The only change which came into effect was the tax-free lump sum which was increased to R500 000 at retirement. We will be lucky if the changes mentioned above take effect by 1 March 2016 but we will inform our clients, should we receive some finality on the above matters.
Conclusion:
Although investors can sometimes act emotionally, it is important to remember that the Fund Managers will manage the day-to-day events and make any required changes to their fund portfolios. Become critical about what you read, see and hear. Don’t let your ‘inside view’ fool you. We are here to ensure that you do not become your own worst enemy
As always please don’t hesitate to contact us for assistance.
Kind regards
Stacey Lancaster – end May 2015.
Finlaw Consulting
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
Warren Buffett