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To a prosperous 2017!


Firstly, I wish you and your family a prosperous 2017! May it also be a bumper year for your investments.

An intelligent approach to investing cannot be successful without a barrier of sorts between an investor’s emotion and their long-term investment strategy. Multiple and repeated studies demonstrate that individual investors’ returns lag the returns freely offered by the market, with the primary source of this underperformance attributable to emotion-based decisions at inopportune times (e.g. switching into cash during market volatility). An advisor can coach clients to remain disciplined, hence the term “Behavioural Coaching” mentioned below. Source “Brighton Jones”

Looking back at performance

Looking back at events in 2016 – among others, Jacob Zuma’s blunder with Nenegate, Pravin Gordhan’s summons for fraud, Brexit, Trump winning the US election, and their turbulent effects on the markets – 2016 is not a year I would like to repeat!

It will not be forgotten though…as is the case with 2008 (who could forget that financial crisis meltdown) and before that 1999 till 2002 (emerging-market crisis and currency meltdowns). All were appalling years in financial markets.

However; even though it was a horrific year, investment performance wasn’t too bad, after following our strategy to invest in a multi-asset class portfolio, which would have had some protection as opposed to a portfolio totally invested in a single asset class.

Keeping it simple – the best advice, as a behavioural coach, is to repeat and reaffirm that sticking to the original strategy during and despite market volatility will stand you in good stead over the long term. Clients sticking to this advice came through these periods of market instability and extreme volatility relatively unscathed (even if it didn’t feel like it!).

I often get queries about comparisons of money market/home-loan interest savings vs a long-term strategic portfolio, while investors are going through these tough markets. I have always had and will always have the same question – have your strategy and goals changed during the year?

The table below shows asset class returns over the last ten years.

Had I not been an dedicated behavioural coach/expectations manager, and had I succumbed to client and peer pressure, then we would have chased performance in the wrong asset class the following year, destroying much wealth in the process.

Asset class returns ending Q4 2016

Equity | FTSE/JSE All Share TR ZAR
Property | FTSE/JSE SA Listed Property TR ZAR
Bonds | Beassa ALBI TR ZAR
Cash | STeFI Call Deposit ZAR
Global Equity | MSCI World NR ($) index converted to ZAR/Rands (R)
Global Bonds | Citi WGBI ($) index converted to ZAR/Rands (R)
* CPI 2016 Quarter End (QE) based on Morningstar’s calculated 1 month trailing figure synthetic). Calendar year actuals.
Above annual percentage returns (%). Source Morningstar.

Momentum’s Outcome Based Investments is founded on:

  • correlation between various asset classes, investment strategies and managers
  • obtaining the highest level of certainty or probability of achieving a stated outcome; and
  • managing capital risk throughout various economic cycles

Keeping to our strategy

It has been proven many times that an investment in a multi-asset portfolio outperforms an investment in any single-asset class over the longer term. This is all the more reason to stick to our strategy and long-term goals.

Please see the example below where a 50/50 portfolio (SA equities and bonds in this case) is compared with 100% in either SA equity or SA bonds and the long-term investment profile. The variance in expected return will diminish over time.

Below is an extract from conclusions by the Vanguard Centre for Retirement Research on how much additional return (alpha) an adviser can add, over time, by being an effective behavioural coach.

Vanguard’s research suggests that the potential average annualised added value of working with an adviser is around 3%. This figure will vary for each individual client, and the added value will ebb and flow year by year based on circumstances, but over time, Vanguard’s research suggests that this value is persistent and meaningful.

From this research, you will recognise several principles discussed in our meetings, email and/or on the telephone – further evidence that there is method to my madness and my request to stick to our strategy through “thick and thin.”

Looking forward

As at July 2016, the table below is Momentum’s long-term, real-return assumptions (excess return above inflation) forecast.

Important to note … a long-term view is defined as at least five years.

Several other important assumptions enter the model in order to ‘crunch the numbers’. These include:

  • A long-term inflation (CPI) assumption in SA of 5,5%
  • An improvement in overall economic growth to the long-term average of 2,5% with no valuation adjustments, and that a multi-asset, multi-strategy portfolio is more strategic by nature, as opposed to tactical in terms of asset allocation.

Source “Momentum Wealth management”

Retirement annuity top-ups for 2017

Last year we followed old rules in terms of your maximum tax-deductible contributions (15% of gross non-retirement-funding income); however, this year the rules differ slightly and need some clarification.

The total contribution to retirement funds are deductible but limited to 27,5% of the greater of remuneration or taxable income (excluding lump sums). They are capped at an annual limit of R350 000.

Let me refresh your memory of the benefits of a Retirement product:

  • It is tax efficient because you save pre-tax money;
  • A retirement annuity offers protection against creditors;
  • There are no underlying costs when you do changes within your RA funds;
  • There is no capital gains tax (CGT); and
  • Estate duty is not applicable.

I believe that no other investment offers you up to 41% returns in year one, even when the markets are flat – this is really money for jam!

And after that reminder, it is that time of the year again where we need to determine how much you can contribute to your retirement annuity.

To assist you, we will require the following information from you, by no later than 20 February 2017:

  1. An estimated total annual income up to the end of February 2017. (You will have your actual income up to the end of January, so it is really only estimating February’s income.)
  2. Any other retirement savings that you may have, either through your employer, your group benefit scheme or monthly contributions elsewhere.

Your latest payslip would be appreciated.
Those without spare cash can withdraw from their Investment LISP accounts and transfer the money to their RAs – as processed in the past.

Please reply with the information required to implement your RA contribution, and contact  me should you have any questions.

Here’s to a fantastic 2017!

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