Thursday, 28 March 2019

Wrong objective

I was an asset manager trying to beat the market. I learned over time that this was a pointless task. Surely, investors have an objective in mind and a portfolio should be aligned to this objective. Asset managers (active ones, in particular) don't care about investor objectives. The simply want to earn the highest return. This attitude is evident in the standard active manager defense of active investing. Namely, active managers give the usual "you are guaranteed to earn below average returns with passive" and "active gives you a chance to earn above average returns" arguments. I don't buy it.

I read a great article by Craig Gradidge which talks about these defenses. Craig is a financial planner I follow and admire. He calls it like he sees it. His article is aptly titled "How active managers convinced me to invest more in passive funds" and tells the story of the flimsiness of many active managers defenses helped to include more passive portfolios in his client portfolios. In fact, Craig uses both active and passive in client portfolios.

Craig succinctly sums up his views in the last paragraph of his article (text bolded by me):
"The reason active managers convinced me that I needed to increase my clients’ exposure to passive investments going forward, is that it has become clear to me that they do not fully understand my role as a financial adviser. Their responses to the debate were to play down everything that is important to me and my clients; building robust portfolios at a good price in order to achieve clearly defined investment objectives. Active AND passive funds can help us achieve that. No client has ever asked me to outperform the market. They almost always ask how much their investment portfolio will cost."
I could never understand why so many very clever people with lots of Bloomberg screens (portfolio managers and analysts) could never deliver outcomes desired by clients. It's the old client vs fund return argument. The fact that I now understand these clever people are chasing a different objective, makes things a little clearer.

Image result for clever asset manager

Sunday, 10 March 2019

Does the election matter?

I hate election years. Politicians spew more nonsense than usual (as if that is possible). I hope May comes as soon as possible so we can move on with our lives.

The question I want to ask is: Does the election matter? Will anything change? Or will government continue to do what it does best... pretty much nothing. Other than a certain red party gaining a majority one day, I don't think the election does matter. The ruling party will probably continue tripping itself up. The blue party will continue to blame everyone except themselves. The red party will continue to be angry and talk rubbish on social media.

We are not unique. The UK politicians screwed up Brexit and the US president is a mad man. Even the "Saffa safe haven" (Australia) has a new prime minister every other year. My point is politicians and politics are net value destroyers.

Ok. Yes, politicians are my least favourite people but this post is not really about them.

Going back to whether elections matter now. I think if you build or have to change your financial based on what happens in May, you need to have a hard look at your plan. A short term event should not put your entire plan at risk. Repeat after me. This election in May should not cripple my investment portfolio. I'll remind you why:

  • Invest your money in real assets (property, shares etc - if South Africa goes south, ZAR cash isn't going to worth very much. I feel real assets have a better chance of maintaining purchasing power.)
  • Build an offshore store of wealth or investment portfolio (heck, if you want to leave, it can be the start of you saving towards one of those Visa's you can buy in some European countries)
  • Have access to offshore cash in hard currency (USD, EUR or GBP). If you need to get on a plane then you have some rent and food money.
  • Start meditating (I am serious). Learn to deal with stress/anger that uncertainty in South Africa is causing you.
  • Lastly, on a sunny African day go for a walk on the promenade at your nearest beach and wonder is it all really that bad...

Image result for election voting box pictures

Thursday, 28 February 2019

Does Size Matter?

Big or small? That is the question. Let me explain...

Once upon a time in the land of financial blogging experts, Sir Henry Save-a-lot proclaimed that if we focus on not over spending on the big items (cars, houses etc) then we will be on the road to financial freedom. On the other hand, Sir Harold Save-some-more thinks if you forgo your daily coffee and get rid of the small unnecessary expenses then you will experience this magical thing called financial independence.

I read a few personal finance blogs and usually the blogger is in one of the camps above. I don't agree with either. For me it doesn't really matter. Quite simply, spend less than you earn. Sounds simple enough but very few of us do it. I try do it every month and it is very difficult. Lately, I haven't been very successful. It is the usual story. I am married with a kid with more kids to follow at some stage. It certainly makes it difficult but we all have challenges in life. We have to do better.

Here is my list of no-no's:

  • Buying a house you can't afford (big thing)
  • Buying a car you can't afford (big thing)
  • Sending your kid to a school you can't afford (big thing)
  • Eating only at fancy restaurants (small thing)
  • Using retail store credit unless absolutely essential. Do you really need those jeans? Or can they wait until next month (small thing)
  • Trying to keep up with the Joneses (big and small)
  • Buying any of or all of the above and then having nothing left for your savings

Monthly Income = Consumption + Savings 

So, spend less than earn. Repeat that every day. If you find it difficult, look where you are spend money now. Use an app like 22seven if you have to. We often have more wriggle room than we think. Necessities are far often only wants.

And let me be clear. You don't need to be a scrooge. Spend money! Go on holiday! Experience life! Just don't spend more than earn.

What do you think? Are you in the big or small camp or a bit of both?

Image result for expensive car  bmw