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Category Archives: Finance

4 Steps to Merging Finances with Your Partner

1. Focus on Joint Goals, Not Joint Accounts

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

Ignore all of that. It doesn’t matter. At least not at the start.

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

This communication is the real key to successfully merging your finances. All the rest is just logistics.

2. Create a System

There are two main ways you can start sharing those expenses.

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

3. Establish Shared Expenses

Now, about those logistics…

One easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

4. Plan for Extra Money

Here’s something my fiance and I have done that’s helped us a lot.

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.

Financial Education Delivered

Six months after launching, the highly popular Wealthy Ever After financial education course is moving into the corporate market, having delivered 9 000 hours of content to users.

Co-developed by JSE-listed media group Moneyweb and The Money School,Wealthy Ever After is an online financial education course aimed at empowering people to take control of their finances. Used in conjunction with webinars and on-site education sessions, it forms a part of a powerful education tool.

“This course represents a major investment for Moneyweb and it is pleasing to see the take-up of the product by both individuals and corporates,” says Moneyweb Managing Director Marc Ashton. He adds: “Lack of financial education leads to poor money habits and this has a proven negative impact on productivity inside businesses and a direct impact on the bottom line.”

The challenging economic conditions add an extra layer of challenges into the mix, as staff grapple with rising interest rates, a higher cost of living and lower expected investment returns from property and equities.

“As employers begin to see the effects of the macroeconomic conditions filtering down into both the personal and professional lives of their employees, we’re seeing almost daily requests for training and assistance from corporates,” says Money School co-founder Hayley Parry.

“We’ve definitely seen an increase in enquiries within the past two months – including from companies that know that they’re not going to be able to provide employees with increases, or whose employees will be facing retrenchment within the next six months to a year.”

While the tough economy means that many businesses will be tightening their belts, financial education has a proven direct impact on the workforce and should not be ignored.

According to the 2015 PwC Employee Financial Wellness Survey:

  • 35% of ‘Generation Y’ employees find it difficult to meet household expenses on time each month
  • 30% find it difficult to make their minimum payments on their credit cards
  • Less than half (43%) are confident they will be able to retire when they want to

Gary Kayle, Money School co-founder says: “As money coaches, we know that there are many external factors which employers and employees cannot control when it comes to money. But what they can do – is help employees translate their hard work and effort into debt elimination and wealth building activities. That is something that is within their control and there has never been a better time for employers to showcase that they care about their staff’s financial wellbeing.

“You only have to see the testimonials and feedback we receive to understand the massively empowering impact that this has on staff morale and productivity.”

Tips to Save Their Kid’s School Fees for Parent

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Include education funding in the financial plan

It is important that parents include education funding in their overall financial plan. These expenses have to be accounted for as part of the monthly household expenses to determine how it will affect the family’s overall financial position. When it comes to developing financial plans, it is usually a good idea to consult a reputable financial planner who will be able to develop a solution for the client to ensure that they have provided sufficiently for their children’s tuition fees and related education expenses.

With the cost of education increasing every year, parents are faced with increased expenses for the privilege of sending their children to school. School fees are a big financial commitment, but with the right advice, families do not have to see this expense as a financial burden.

The Way to Make Huge Finance Gains

The Power of a Raise

Let’s say you currently make $60,000 per year and you’re able to negotiate a 10% raise (more on how to do this below).

Assuming that 25% of that new income goes to taxes, that means you now have an extra $4,500 to save each year, which is almost enough to fully fund an IRA.

Looking at it another way, that extra $4,500 represents a 7.5% return on investment, which is right in the range of what experts expect from the stock market.

So by negotiating a raise, you’ve given yourself a stock market-like 7.5% return. And unlike the stock market, that 7.5% return will be consistent year after year.

And if you’re investing that $4,500 each year, you’ll earn additional returns on top of your contribution. Assuming a 7% annual return, that investment will grow to $197,393 after 20 years and $454,828 after 30 years.

Plus the increased salary sets a higher baseline for future raises and for your salary at future jobs, making it more likely that your income will increase even further over time.

And all of that comes with pretty much no risk. As long as you present your case respectfully, the worst that happens is you get a no. And even then you’ll have planted the seed, which may make it more likely that you’ll get a raise in the future.

How to Get a Raise

Of course, the trick here is knowing how to negotiate so that you actually get the raise you deserve.

This can be intimidating for a lot of people, myself included! But the good news is that there are some simple strategies you can follow to strengthen your position and even increase your value in the eyes of your employer through the negotiation process.

My favorite resource on this topic is Ramit Sethi’s Ultimate Guide to Getting a Raise & Boosting Your Salary. Yes, the title is a little hyperbolic, but the advice is practical and solid.

And remember, as long as you present your case well, the worst that happens is you get a no. There’s little risk in giving it a shot.

Side Hustle for Extra Income

Getting a raise isn’t the only way to increase your income. People are increasingly turning to side hustles as a way to make some extra money on top of their day job.

There are lots of ways to do this, from dog walking to freelance writing to website design. It doesn’t have to take a ton of time, and even a little extra income can go a long way.

J. Money at Budgets Are Sexy has chronicled over 60 different side hustles real people have used to earn extra money. You can also check out the websites Fizzle and Side Hustle Nationfor ideas, inspiration, and practical advice on how to get started.

Invest in Yourself

Cutting costs is often the easiest first step towards saving more money.

But over the long term you are your own best investment opportunity, and finding ways to earn more money can make a big difference in your ability to reach your biggest goals.

Increase Your Wealth with One Way

What is human capital?

Human capital is the combination of skills, knowledge and abilities you have that will enable you to generate income over your working life. Nearly all of us have an ability to generate some income but very few people consistently invest in themselves so that they can increase their earning potential over time. According to the Federal Reserve of San Francisco, university graduates generate R16 million more income over their careers than non-graduates. This might give some context to the #feesmustfall campaign in South Africa.

If you choose to invest in yourself, you need to ensure that your skills and knowledge remain relevant and adaptable to changing economic conditions and an evolving business environment. You should regularly review whether you need to add to your skills or knowledge-base. Additionally, you need to be honest enough with yourself to be able to decide if you need to change careers if you are in a dead-end street. For instance, I would not consider newspaper printing as a long-term career option!

Specialise but not too much

Some careers reward those who specialise but one should always be careful of becoming too narrowly focused in your career. For example, deciding on an academic career researching the mating habits of albino penguins in the Southern Cape might not ensure a long-term income. However there might be less risk in being the orthopaedic surgeon who specialises in surgery of the shoulder in South Africa. Many young people strive to be a manager in a large corporate. This might be the most risky career choice one can make. Managers are essentially generalists and are often the first people to be fired in a merger or downsizing. If you plan to work in a corporate, you might do better focusing on being a revenue generator or product specialist.

Not only for academics

If you are not academically inclined or you have no interest in tech, you could always consider specialising in old world industries. There is a massive shortage of plumbers, electricians and general handymen. Now that more people work in services industries, there are many fewer people who can work with their hands. This provides an ideal opportunity for reskilling yourself if you have the inclination.

In the age of mass production and “mass specialisation” provided by the internet of things, it should not be surprising that there is a major shortage of people who can build or create objects with their hands. I believe craftsmen who can make handmade items such as furniture or master builders are in big demand. It does not surprise me that craft beer, artisanal baking and coffee are becoming major industries. More people are becoming interested in where their food and drinks are made and this includes where the ingredients are sourced. This is the type of trend that is likely to suit those with old world skills and when skills are limited and demand is increasing, your earning ability increases rapidly.

It does not matter what you do today, you need to be conscious of how you can grow yourself and possibly change course when required. Viewing yourself as an income generating asset that requires work and maintenance is probably your best investment. Charlie Munger said of his business partner: “Warren Buffett has become one hell of a lot better an investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”

Consultant of Financial Planner

On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.

There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.

I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.

By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.

Give the Gift

This time of year sees both children and adults preparing their wish-lists for the upcoming festive season. But as many South Africans continue to grapple with rising debt, now is a good time to shift the focus from giving material items to providing future financial well-being.

Giving a child an investment as a gift will not only promote a culture of saving from a young age, but will also show them how you can make money grow.

There’s a powerful story of one customer’s commitment to leave a legacy for his family, and the value of sound financial advice. In November 1968, a customer made an initial deposit of  R400 into the Old Mutual Investors’ Fund and 48 years later, his investment is today worth over R600 000.

More precious than the value of his money, however, was the culture of saving and the legacy that he passed on to his children and grandchildren. On special occasions such as Christmas and birthdays, he invested a set amount of money on his children’s or grandchildren’s behalf. With this investment, his daughter was able to provide for her daughter’s schooling.

If South Africa is to develop a generation of financially savvy adults, it is crucial to not just talk about it, but actually practise good money habits. It is important to teach your children about money, and the festive season – with the spirit of giving – is a good time of the year for parents to set a good example. Teach your children about the importance of giving within your means, as well as showing them the value of relaxing with family and rewinding after a long, hard year, while respecting the value of hard-earned money.

Families should consider starting a financial tradition of their own. Set a reasonable budget for gift giving this festive season, and instead of spending all your money on gifts that are likely to fade, go missing or be forgotten, speak to your financial adviser about starting an investment in the name of your children.

When children become old enough to understand more about money management, parents should involve them in the process. Teach them the principle of compound interest and explain why putting money away today means they will have more money tomorrow. Help them set a budget for the money they’ll receive over the festive season, encouraging them to spend a smaller percentage today, and investing the rest for the future.

How to Invest the Long Run

Being an optimist myself, I don’t particularly like busting other people’s bubbles — we’ve had enough of those lately. Nonetheless, for my inaugural Long Run column, I have to begin on a negative note: Investing isn’t going to be easy the next few years.”For the long haul, we’re going to be in for a period of fairly tough markets,” says Ralph Wanger, manager of the ( ACRNX) Liberty Acorn fund since 1970. “You’re going to have to have substantial skill to prevail, because you can’t wait for the markets to bail you out.”If you’re still reading — indeed, if you’re still checking out TheStreet.com and other financial news publications — then the bear market hasn’t scared you away. That’s wise, because stocks remain investors’ best bet for the long haul. However, we are in a new era, only not the one people were touting a few years ago.From August 1982 to March 2000 — the greatest bull market in history — real returns averaged 15.6% a year, according to Jeremy Siegel in his book Stocks for the Long Run . That’s more than double the historical rate of equity returns. Regression to the mean hasn’t been fun.This doesn’t mean that you can’t make money. It simply means that the rules of the game have changed — and some tried-and-true rules have returned with a vengeance. Investors who adapt to the changes will fare better than those who are still using the old playbook. The Long Run aims to help long-term investors succeed in this new era, whether the market goes up, down or sideways.In the coming weeks we’ll discuss some smart investing ideas for the long run. But this week, let’s start out by revisiting the Rules of the Game.

Know Thyself

There are plenty of investing strategies out there — buy and hold, deep value, active trading, index investing. The first real step investors should take is determining exactly what type of investor he is.”For a long-term investor, you have to know yourself,” says Michael Mach, manager of ( EHSTX) Eaton Vance Large-Cap Value . “The key is to pair your personality with a logical investing approach. If you apply it consistently, you’ll prove successful.”If you don’t mind taking on a heaping portion of risk — and don’t lose your cool during periods of extreme volatility — you can probably embrace a more risky strategy. Since most investors fall into the uncool camp (myself included), the Long Run will often focus on strategies that avoid undue risk and market-timing, favoring fundamental analysis and longer time horizons.Also, you have to be honest with yourself about how much time you will devote to tracking your investments. It’s best not to take big stakes in a few companies in the rapidly evolving biotechnology industry, for example, if you don’t plan to keep up with sector developments.

Diversify

Diversification is probably the simplest truth in all of investing — and the most often misconstrued. In the 1990s, asset allocation for a lot of people meant 100% stocks, and about 90% of those stocks were large-cap growth.Virtually all investment vehicles have their ups and downs. However, too many individual portfolios consist of holdings that all move up at the same time and back down at the same time.”Investors need diversification, and by that I mean they need to diversify away from large-cap domestic equities,” says Louis Stanasolovich, founder and chief executive of Legend Financial Advisors in Pittsburgh. “Buying three Fidelity funds, two Janus funds, American Funds Growth Fund of America and an S&P 500 index fund is not diversification.”To achieve real diversification, investors need to build portfolios using investments with lower correlations to one another. For example, for your equity holdings, consider paring back your large-cap weighting and boosting exposure to emerging markets, international stocks, smaller-cap stocks and real estate investment trusts. (Using quantitative models, Stanasolovich has designed a well-diversified, “lower volatility portfolio” that returned 22.3% in 2000, a negative 2.2% in 2001 and negative 4.25% in 2002. In a forthcoming Long Run we’ll discuss diversification with him at greater length.)

Reinventing Do-It-Yourself Investing

One of the supposed hallmarks of the bull run of the 1990s was the rise of the do-it-yourself investor. The collapse of the stock-market bubble has led some pundits to declare the do-it-yourself movement dead.This is rich irony. One of the primary reasons why investors got so over their heads the past few years is that the notion of “do-it-yourself investing” was cast aside — or at least poorly redefined. D-I-Y investing doesn’t merely mean watching business news, reading The Wall Street Journal or TheStreet.com, listening to analysts or inside tips from your brokers; it means pulling up your shirtsleeves and doing your own additional research before making decisions. Doing it yourself isn’t buying the stock that a professional or CEO just mentioned on CNBC.To redefine do-it-yourself investing, I’ll defer to the original meaning of the phrase, succinctly put by Peter Lynch in One Up on Wall Street way back in 1989. “Stop listening to professionals! … Ignore the hot tips, the recommendations of brokerage houses and the latest ‘can’t miss’ suggestion from your favorite newsletter — in favor of your own research.”This isn’t to suggest that you disavow all mutual fund managers, stock analysts, business news pundits and all other professionals. There are plenty of intelligent and trustworthy folks who can help you be a better investor — and in the Internet age, you have plenty at your disposal. It simply means “trust, but verify.” Use these resources to supplement your research, not replace it.

Be Passionate About Investing, Not Your Investments

Being a successful do-it-yourself investor involves a lot of fundamental analysis, poring over company statements, analyst reports and online and offline research. You have to be passionate about it. You shouldn’t, however, be overly passionate about the investments you make.”You have to be unemotional about the investments you hold,” says Eaton Vance’s Mach, who studied psychology at the University of Chicago and was a family therapist before managing money. “You don’t want to be driven by emotions like fear and greed.”This always holds true. But it becomes especially important to remember in a topsy-turvy market marked by lots of sudden moves but no sustainable upward trend. Investors need to stick to their guns and not blindly follow.”A lot of people wanted to sell everything in September 2002 because they thought the world was ending, then in October they wanted to buy everything because we were going to the moon again,” Wanger says. “Turns out, neither one was such a good idea.”

The New Era

To get a sense of what the new era might look like, let’s take a quick look past the market peak of 2000 to two previous stock market peaks: 1929 and 1966. Stocks didn’t return to their previous heights until 1954 and 1982, respectively. When you adjust for inflation, make that 1955 and 1994, Wanger says.I’m not sure if it will take a quarter century to get back to March 2000 levels. But I do think investors need to realize that getting rich quick in this market isn’t a recipe for success. I am also fairly confident that overweighting the previous decade’s leaders — technology — isn’t such a hot idea either. The 35-year chart below shows what happened to the energy sector after the energy bubble burst in 1980, and how technology has performed before and after its bubble.

5 Ways to Trim Your Investing Taxes

1. Tax reporting methodology

Tax-reporting methodology refers to how your capital gains from asset sales are reported for tax purposes. There are 12 methodologies; which one your financial services company uses will directly affect the amount of taxes you will owe. Many custodians use the “average cost” or “first in first out” (FIFO) methodologies. But there are other options, such as “high cost long term” (HCLT), that can help you save on taxes.

For example, let’s say you bought five shares of stock at $20 a share. Later you bought five more at $25 a share and then five more at $30. Two years later, the share price goes to $47, and you need to sell three shares to rebalance your portfolio.

You would have the following capital gains using the given tax reporting methodology:

  • Average cost: $22 gain per share. (Your gain is based on the average price of all the shares you bought, which was $25.)
  • FIFO: $27 gain per share (The first shares purchased — for $20 — are the first ones sold.)
  • HCLT: $17 gain per share (The most expensive shares held for more than a year — those you bought for $30 — are sold first.)

Clearly, the HCLT method would result in the lowest taxable gain. Your taxes would be highest with the FIFO method.

Not all custodians make more tax-efficient options available, so be sure to check how your financial services company reports your gains.

2. Tax-loss harvesting

Selling securities at a loss to offset capital gains on other securities is referred to as tax-loss harvesting. Investors often use harvesting to limit the recognition of short-term capital gains, which are taxed at higher rates than long-term capital gains (at least on the federal level). This applies only to taxable accounts, not to tax-deferred accounts such as 401(k), IRA or Roth accounts.

Here’s an example. You have a diverse portfolio of U.S., international and emerging-markets mutual funds. With the recent decline in emerging markets and the stronger U.S. gains from last year, you find your portfolio’s asset allocation is off target. You need to sell some U.S. holdings, which will trigger some gains. At the same time, though, you can sell your emerging-markets funds at a loss to offset the gains. You then buy a different emerging-markets fund in the amount you need to get back in balance. (Check with your custodian to be sure you will not be violating the 30-day wash sale rule.)

3. Asset location

As people build assets for the future, most have a mix of equities (stock) and fixed income holdings (cash and bonds). Many people have a tax-deferred account such as an IRA, 401(k), or 403(b). Some have tax-free Roth accounts, and many have taxable accounts. Where you hold assets among these three types of accounts can make a big difference in your tax burden, particularly if you are in a higher tax bracket.

It is most tax-efficient to have the assets with the greatest growth potential in Roth accounts, so you never pay income tax on all the growth. The next-best option is taxable accounts, so you can take advantage of lower long-term capital gains tax rates rather than the ordinary income taxes you would pay on distributions from a tax-deferred retirement account. Fixed income assets should be in tax-deferred accounts, so that the investment income you are saving for the future isn’t taxed on top of your earned income.

Another reason to keep equities in taxable accounts: Upon death, there is a “step up” in tax basis that can save your spouse or heirs a substantial amount on their tax bill.

Unfortunately, many folks do not even know their target asset allocation, and of those that do, many will have that same allocation in all of their accounts. This can result in a greater taxes bill than if they had strategically located different asset types in the most tax-efficient accounts.

4. Passive vs. active funds

Some equity funds see very little turnover of the securities in the fund over the course of a year. Actively managed funds buy and sell with greater frequency. The added trading often results in capital gains; those gains are reinvested, but you still get a tax bill for them at the end of the year.

For instance, the Fidelity Spartan 500 Index Fund (FUSVX) has a 4% turnover rate per year and since October 2014 has generated only 43 cents of long-term capital gains per share. Meanwhile, the Fidelity Disciplined Equity Fund (FDEQX) has a 191% turnover rate and in the same time period generated $1.16 per share in long-term capital gains and $1.33 in short-term capital gains, which are taxed as ordinary income. Ouch! Avoid actively managed funds in your taxable accounts!

5. Exchange-traded funds vs. mutual funds

Exchange-traded funds (ETFs) are more tax-efficient than mutual funds when held in taxable accounts because of a difference in accounting. When a mutual fund investor sells his or her shares, the fund company must sell securities to generate the cash to fund the redemption. This creates capital gains in the fund for the other shareholders.

However, when an ETF investor wants to sell, the fund company simply sells the shares to another investor like a stock, and thus there is no capital gains transaction for the ETF. (This difference does not apply for a tax-deferred retirement account.)

Advice for a young investor

I am truly sorry to hear of the loss of your father. Taking responsibility for the family’s finances at 22 is no small task. I trust that over time, the pressure of managing your family’s financial matters and completing your studies holds you in good stead in the future.

As you embark on this new journey in the investment world, I want to stress the importance of staying anchored in your financial goals and the investment strategy you choose to use in order to achieve them. If you do not believe in your investment philosophy, your prospects for success diminish and you are at the mercy of emotion.

You should also remain mindful of the following principles: risk and return are related, diversification is the antidote to uncertainty, asset allocation determines the rate of return in a diversified portfolio, and emotion undermines the best investment strategy.

I will address your question pertaining to your investment strategy but I am unable to offer further guidance as I have limited information as to the capital invested as well as your monthly income needs and future goals. You will also need to talk to a professional with regards to the potential tax implications of your decisions.

The main purpose of the MSCI World Index ETF is to track the MSCI World Index. The fund follows a buy and hold strategy, commonly known as passive investing, which results in lower management costs compared to most actively managed funds.

Tracker funds typically offer long term capital growth. If you want to achieve maximum capital growth over the long term, however, re-investing dividends is essential in order to maximise the compounding effect.

That said, there are a number of reasons why I agree on the approach you have described as the launch pad for your investments:

  • By choosing to invest directly offshore via tax clearance, you avoid annual asset swap fees charged when investing in South African-registered foreign investments.
  • At a later stage, being invested directly offshore will give you access to a much wider range of investment options, should you wish to diversify your portfolio.
  • Another advantage of being directly invested offshore is that you will be disinclined to cash in your investment should the need arise.
  • Your choice of an ETF is both simple and very cost-effective. Vanguard in particular is considered to be the leader of index tracking investment options worldwide.
  • You automatically achieve a very wide level of diversification within the asset class you have chosen, which in this case is global equities. The ETF you have selected contains over 1 700 underlying shares spread across the globe.

However, given that you mention that you wish to use the dividends for monthly expenses, you do need to consider that

  • The investment you have chosen is not designed to maximise dividends. If income is therefore your primary goal, this may not be the most effective way of achieving that.
  • The Vanguard MSCI World ETF also does not pay out dividends every month. Distributions are only made quarterly. On top of this it is administratively clumsy and expensive to repatriate dividends every few months to South Africa.
  • Withdrawing dividends is also potentially in conflict with the long term nature of the investment. The reinvestment and compounding effect of the dividends within the investment are important factors in achieving a healthy positive real return over time.
  • Index investments can never take advantage of specific opportunities that present themselves. The return of the investment will always be similar to the index.
  • While the employment of an index-based investment may form part of an overall investment strategy, it should not comprise the sum total of your strategy. Once your portfolio has achieved a certain level of growth, you should diversify into various growth asset classes and sub-classes such as equities in emerging markets, property, bonds and possibly even hedge funds. Within such a strategy, you should employ both passive (index) strategies as well as active strategies in order to achieve maximum returns.