Hard Questions
to help you build your wealth
for generations to come.Meaningful wealth management is about much more than money. It’s about how you see yourself. The impact you want to make. The legacy you want to leave.
What is a Hard Question?
In this series, our team of wealth and investment specialists answer some hard questions about how your money can work as hard as you do to help you build wealth for generations to come. Questions that confront biases and beliefs you may have when it comes to investing and your financial future.
The answers to these questions are based on collective insights and extensive research that considers all facets of your life. Whether your goal is to grow your wealth, generate income or preserve and pass on capital, at Old Mutual Wealth we partner with you to take your wealth further, so that you can leave a legacy for generations to come.
1
Can investing really be a side hustle?
As a starting point, let’s unpack the purpose of a side hustle. A side hustle is something that you do outside of your formal job, or your 9-5, to supplement your income or to help you grow your overall wealth. By nature, a side hustle should not demand too much of your time and attention or detract from your primary source of income. In this context, investing in financial markets makes for a perfect side hustle.
Financial markets can produce generous growth over the long term, provided you are appropriately invested and have:
- Sufficient diversification
- Income in the form of dividends or interest
- Liquidity - you can get capital
- Transparency - you know exactly what you are invested in
In addition, you need to ensure that you invest according to your risk appetite in instruments that can outpace inflation.
Investing as a side hustle allows you to have a share in a business that you don’t have to start or manage, provides exposure to countries that you have never been to, and gives you a stake in cutting-edge technologies that you may never have thought of while you focus on your day job. The time to get started is now!
Investing as a side hustle
1
Where do I start?
The starting point is having a financial plan. Your plan will dictate the strategy you need based on your goals, dreams and aspirations. It will start with where you are now, give you the current state of your finances and together with your planner help you determine where you want to go.
Having a plan is the best way to free up capital through budgeting and selecting tax-friendly investment vehicles like RAs and tax-free investments.
When investing it’s important to have a mix of different asset classes, which are diversified and varied according to your asset allocation. Equities will give you the best opportunity for growth, so it is critical that equities and shares form part of your investment portfolio.
With your surplus income you can start to invest. Unit trusts, which is a collection of companies invested according to a mandate by an investment professional, are the best place to start as invested funds are easily accessible and have a low minimum investment amount. You can speak to a financial planner about incorporating unit trusts into your investment portfolio.
2
How do I make the shares I’ve got work for me?
You may have a few shares as part of a company share scheme, through inheritance, or you may have bought some shares in a JSE listed company through BEE share schemes, and now want to build a proper share portfolio. You’ve done well so far, but with the help of an investment professional you can take this to the next level.
Investing in markets is putting a portion of your money into a business by owning a small share of that business. If something were to happen to that business, you would potentially lose your money. A key component of investing is managing risk through diversification. A financial planner will assist you to diversify your portfolio and mitigate risk, and help you build a share portfolio that is unique to your needs.
3
How do I get cash from my investment portfolio?
An investment portfolio can also create a passive income. That income can be in the form of dividends or interest. Income from dividends does not deplete your capital value as you are not selling shares to receive your income. Dividends are subject to withholding tax of 20% and therefore creates an opportunity to receive an income net of tax. You also have the opportunity to reinvest dividends to acquire more shares enhancing your portfolio to benefit from compound growth.
You also have the flexibility to have your dividends paid out in cash. If you are looking at taking less risk, you can access interest-bearing instruments, which will generate interest income.
4
Could my side hustle go global?
As much as we all love our country, South Africa comprises less than 1% of the global market. By allocating a portion of your investments offshore, you could spread the risk, and enhance the possibility of generating better returns by diversifying. Imagine owning a share in companies that invest in cutting-edge technology, think differently about energy, have self-driving cars and invest in space travel, or imagine investing in a country that’s never heard of load-shedding.
A global investment portfolio gives you exposure to some of the best companies in the world and allows you to invest in different countries that might specialise in specific businesses or have specific resources that are not available in South Africa. Offshore investing also offers a way to protect your investments against the depreciation of the rand.
Investing in financial markets makes for a perfect side hustle.
FIND OUT MORE...
video
Luke Martins: Can investing really be a side hustle?
download
Why Diversify?
podcast
Shivani Naidoo - What steps should I take to start investing?
Learn how you can partner with us to help grow your business.
2
Is my debt helping me create wealth?
Creating wealth from debt might sound counter intuitive however, investors should remember that not all debt is bad debt. Bad debt refers to high interest loan products such as credit cards and higher purchase loans. It is difficult to build up an investment portfolio and grow wealth let alone leave a rich legacy, when burdened with debt, because the high interest rates erode investors’ gains. Therefore, investors are advised to get a clear and holistic view of their debt and requisite interest rates and eliminate the most expensive bad debt first.
On the other hand, good debt is debt that can be used as leverage. Leverage is when you use borrowed money to finance the purchase of an asset or investment. Primarily, investors use leverage because it frees up capital, enabling them to buy more assets than they would if they only used the funds available to them, ultimately making a bigger profit. Importantly though, the opposite can also be true as leverage can also amplify your losses because the exposure is higher.
Leveraging
1
When can an investor use leverage?
The most popular way of leveraging is when buying a home. Most people do not have the capital outlay to buy a house cash and therefore make use of leverage. Leverage allows them to buy and use the asset(house) without the full capital outlay upfront. This type of leveraging is also a form of “forced saving”, as one ultimately owns the house once it’s paid off. As the value of property tends to appreciate over time this is considered good leverage.
From a business perspective, listed property companies do the same on a larger scale. They build property portfolios by partially financing them via leverage. This is called property loan to value (LTV). It is key that this is done through a measured and risk cognisant approach, as it can also work against investors.
2
Are there leveraging products available to investors?
Yes, investors can buy hedge funds which fund managers use to generate returns from both buying and selling various asset classes. In the long-short equity hedge fund space, fund managers can profit from an increase in share prices, and from selling shares that they expect to fall in price, also known as ‘short selling’. This is the key differentiator between hedge funds and traditional or long only asset classes. Unlike traditional asset managers who can only invest in stocks they believe will increase in price over time, hedge funds have the ability to use leverage to also make money from stocks they believe will fall in price, without owning the stock.
3
How does leveraging work when it comes to investing in hedge funds
Essentially, leverage allows hedge fund managers to finance their portfolios with short sales of other positions. Leverage is a tool that both hedge funds and property investments have in common, which they use to amplify profits and grow investor wealth in a risk-controlled manner.
4
How can investors optimise leveraging, considering its risks and rewards?
Besides the benefit one gets through a mortgaged bond, another benefit of leveraging is through investing in listed Reits or listed property as well as a fund of hedge funds. At Old Mutual, we invest in asset classes that make use of leverage but do so in a controlled manner through a rigorous investment process and within the context of a diversified investment portfolio.
5
In what other ways can investors benefit from leverage without the intervention of a third party?
Investors who own a house and have accumulated positive equity in their property can practise leveraging. Given that mortgage loans tend to have lower interest rates compared to other types of debt, one can tap into that equity to finance another asset. For example, instead of financing a car through vehicle finance at possibly higher interest rates, they can access the equity in their house to finance the car at a lower interest rate. By doing this, they can take advantage of the interest rate arbitrage, or differential. But importantly, they would need to have the discipline to pay the money back into the bond over the same period they would have financed the car or shorter.
6
What are the main risks of leveraging?
Using too much leverage. A perfect example is the 2008 financial crisis where banks and lending institutions in advanced economies offered low interest rates on mortgages and encouraged many homeowners to take out loans that they couldn’t afford, which caused them to default on their loans. Households and banks accumulated high levels of debt relative to their incomes and the value of their collateral. It is therefore important to be mindful that while leverage can enable wealth creation, if not used responsibly and in a measured manner it can destroy wealth.
Investors use leverage because it frees up capital.
FIND OUT MORE...
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Busi Ngqondoyi: Is my debt helping me create wealth?
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Investors With Zero Exposure To Hedge Funds Is A Lost Opportunity
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3
How do I build generational wealth?
By definition, generational wealth represents assets passed down from one generation to the next. However, it can include property, money, investments, a tertiary education or even setting up a family trust for future generations. Leaving a legacy for children, grandchildren, or any causes you are passionate about, takes careful planning and the advice of a financial planner to help you craft a financial plan suited to your unique needs.
Craft a financial plan
1
How does your financial plan support generational wealth?
If generational wealth planning is important to you, it needs to be considered within your financial plan. Research shows that one in three South Africans are wedged into the “sandwich generation”, and half of working class South Africans have no financial plan. Only one in 12 working class South Africans has a thought-through plan that they are executing.
So, the question is how are you planning for your wealth goals in your financial plan, specifically with regards to building generational wealth? If your goal is to keep the legacy you’ve built in the family, you need to create a strategic financial plan to ensure your wealth lasts. Equally important is the role of a professional financial planner, who has the expertise and experience to help you accomplish your goals and ensure a smooth transfer of your wealth to future generations.
2
How can integrated wealth planning assist you in creating generational wealth?
A financial plan should speak to all aspects of your life. That’s why we believe in Integrated Wealth Planning. It shifts the focus from planning for your money to planning for you, the person. You dream the destination and together we co-create a roadmap to lead you to the life you want to live and the legacy you want to leave.
Integrated Wealth Planning starts with understanding your current position and then determining your dreams and aspirations, and what amount of assets and risk are needed to achieve that. With this goal in mind, we then consider and model various trade-offs and decide on agreed actions to get you closer to your ideal reality.
The focus is on building trust and confidence to ensure that you feel educated and included in all decisions around your financial plan and have peace of mind knowing your future and that of your family is taken care of.
3
How do I break down my financial plan into four numbers?
Financial planning may seem daunting, but any financial plan can actually be broken down into four numbers. The reason most people do not build generational wealth is due to the fact that they fail to plan for the future. And can you blame them? Financial planning can be complex at the best of times. There are many different factors to consider when planning for your financial future such as different investment structures, tax implications, expense patterns, regulations, asset types, etc. to mention but a few. Also, we have access to so much information and navigating the detail can be quite overwhelming for most people. However, if one looks through all the detail and noise, you can break down any financial plan into just four numbers (whether you have R100 or R100 million to invest).
These four numbers are:
1. Your available ASSETS (such as your pension fund; business, properties or savings)
2. Your desired LIFESTYLE (what do you want this asset base to provide for?)
3. Your RETURN (what return can you expect on your asset base?)
4. Your LONGEVITY (how long can this asset base support your ideal lifestyle?)
You can think of each of these four numbers as “buttons” or “levers” in your financial plan. By pressing each of these “buttons”, you can see the impact on your overall financial plan. The four numbers are unique for all of us as we are all different and have our own unique goals, dreams and aspirations.
Let’s look at the triggers for these four numbers:
1 – ASSETS:
Here we consider the different investment types, e.g. retirement funds versus more liquid investments such as tax-free investments or direct share portfolios and their tax implications both pre- and post-retirement. We also look at choosing between guaranteed and market-linked investments and paying off debt instead of investing. Then there is also the question of investing locally or offshore and setting up different legal entities such as trusts.
2 – LIFESTYLE
It’s important to set aside capital for emergencies and also items such as holidays, vehicle purchases, offshore travel or maybe owning a second property or holiday home. The impact of inflation also needs to be considered by modelling different inflation patterns. Specific generational wealth goals such as saving for your kids and building a legacy are also important considerations.
3 – RETURN
Here we look at how much risk to take and the impact of different asset classes such as equities versus shares. We also delve into the returns on non-investment assets such as properties or business assets. The impact of volatility (upward and downward market movements) over the short and long term is another important factor.
4 – LONGEVITY:
It’s important to prioritise leaving a legacy against funding your lifestyle. We discuss what your family longevity looks like while planning for longer- or shorter-term funding to reach your financial goals. A good financial plan is one where you understand how the different variables impacting your four numbers work together and empowers you to make real-time decisions. It’s about the impact the decisions you make today have on your financial future.
Integrated Wealth Planning starts with understanding your current position and then determining your dreams and aspirations.
FIND OUT MORE...
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Tiaan Herselman: How do I build generational wealth?
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Integrated Wealth Planning Offers Insights For Informed Decision Making
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Simplifying Financial Planning To Improve Retirement Outcomes
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4
When is the right time to start building wealth?
Investing allows families to collectively create wealth for generations to come.
The goal of wealth creation is to be able to transfer it from generation to generation, thereby building lasting legacies. However, creating wealth is not easy, especially when one does not build the habit of investing a portion of your income from day one. The good news is that it is never too late to start investing and NOW is always the best time to start for those who have not yet started. There are a few investment principles that might appear basic but are difficult to implement, track and review especially for those who are not qualified financial or investment professionals. At Old Mutual Wealth we recommend that investors do not take this road alone but acquire a qualified financial planner to help them on the road to transferring wealth. It’s a no brainer, as for all our other professional needs such as physical or mental health we hire professionals.
THE ROAD TO TRANSFERRING WEALTH
1
What are some of the biggest risks to growing my wealth?
Growing wealth allows investors to achieve the financial goals they set themselves. Erosion of buying power caused by price inflation is a big risk to growing wealth. Many investors suffer from “inflation illusion” as they don’t notice how destructive inflation can be over time. A simple illustration - assume that inflation is 6% per annum, in 10 years a consumer would need R10 000 to buy the same amount of goods that costs them R5000 today! The biggest challenge investors face is to beat inflation and preserve the buying power of their wealth. It takes money left in a savings account (cash) 86 years to double in value, whereas the same amount invested in equities would take you only 10 years. This highlights the importance of investing in growth instruments, such as equities which mitigate against the erosion of cash value. In addition, it is also important to ensure that you do not put all your eggs in one basket, as this increases the risk of financial loss in times of market downturn. Therefore, investing in a diversified portfolio ensures that you have exposure to assets that will provide the necessary return while reducing the risk of investment loss.
2
How long should I be invested for?
Another important investment principle talks to the value of time - it is not timing the market, but time in the market that allows investors to get the full advantage of building wealth in growth assets and protecting them through diversification. Consider this, what does the release of Jaws in 1975, 11 September 2011 and the COVID-19 pandemic have in common? Anyone who invested in 1976 and stayed invested through it all would have enjoyed a return of 12.48% per annum. This means that if they had invested R1000 in 1976, it would be worth over R300 000 today! Investors who stayed invested through these crises effectively increased their buying power six times! Understandably, not every investment can be 47 years long. However, to take advantage of investment markets requires time. It is preferable to have a financial plan developed with a qualified financial planner which will be a guide to your investment strategy and plan.
3
How low can I go?
When are the biggest sales made in retail? Is it not during the time when prices are discounted at events such as season ending sales? Investing is no different. As in retail, the time to buy in the stock market is when there is a market downturn as this presents the opportunity to obtain high quality investments at a discounted price. Many investors try to sell when markets are down, thereby locking in their losses. Investors should remember that when markets fall, they have not lost any money until they exit their position or sell. The average investor records on average 3-4% lower return than the S&P500 over time. This was even more pronounced in 2021 when there was large scale panic (and need for liquidity due to lockdown) and investors recorded an average of 18% return, whilst the S&P500 recorded over 28% for the same period. This is because short-term volatility can often lead to investors selling their investments at the worst time. Old Mutual Investment Group has done research that shows that the best days in investment markets come after the worst days. So, selling at the bottom leads to missed opportunities.
Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” Market downturns are inevitable but so are market booms. The important thing is what you do when a significant downturn happens, and that is exercise patience.
4
I have so many responsibilities, how do I prioritise investing?
The important thing is to start investing as soon as possible from your first salary and let compounding do the work. A rule of thumb is that 20% of your income should be allocated to investments and savings. A financial plan developed in conjunction with a qualified financial planner allows you to understand exactly what your financial responsibilities are and how to structure them to ensure that you invest to achieve your financial goals and what investment returns you should be targeting to address gaps. To take advantage of the power of compounding, investors should consider reinvesting dividends that they may receive so that the investment can grow faster until their goals are realized.
Investing has a far-reaching impact than just the individual. It allows investors to positively influence the financial futures of extended family, communities, and our country. At its core, investing allows families to collectively create wealth for generations to come - ensuring rich legacies.
FIND OUT MORE...
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Malika Petersen: When is the right time to start building wealth?
Learn how you can partner with us to help grow your business.
Take your wealth further
Your legacy is about more than just investment returns. It’s about the peace of mind that comes with knowing your investments are in the right hands and that you’ve partnered with an investment manager who has the right skills and experience to grow your wealth.
Old Mutual Wealth is a world class investment destination offering you a wide range of investment strategies and specialist wealth management solutions built around you. Together with your financial planner, we help you to achieve more successful outcomes by focusing on planning for you rather than planning for your money. Whether your goal is to grow your wealth, generate income or preserve and pass on capital, we’re here to partner with you on this journey.
Contact us so that we can help you take your wealth further.
Disclaimer
1
Hard Questions series
Private Client Securities is a division of Old Mutual Wealth Trust Company (Pty) Ltd, a licensed FSP.
Old Mutual Multi-Managers and Tailored Fund Portfolios are divisions of Old Mutual Life Assurance Company (SA) Limited, a licensed FSP and Life Insurer.
Visit Old Mutual Wealth's website for more information about financial products and services.
Learn how you can partner with us to help grow your business.