The Fat Wallet Show from Just One Lap

The financial world is filled with dreadful products. Avoiding them all is a tempting strategy, but not feasible for most people. In our first full episode of the year, Simon and I dedicate some time to help you spot a bad product.

Below is a checklist of red flags you should watch out for before investing in these products/

Debt

• Interest
• Balloon payments
• Revolving loans
• Fees

Savings

• TFSA in cash
• Disclosure - 13% compound vs simple
• Fees
• Products that are tied to other products

Insurance and medical aid

• Requirements
• Complexity

Investments

• Promises of above-market reruns
• Non-diversified/concentration risk
• Fees
• Lock-ins
• Is it tied to an insurance product
• Derivative products
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Win of the week: Tafadzwa

I stay in Namibia. Last month I discovered your show. I’ve been teaching myself FI by reading various blogs for 3 to 4 years. I recently turned 41 and your podcast was just the kick up the behind I needed to DO something about my finances.

I am restructuring my life from top to bottom (or vice versa). I reduced my bank charges from 450 to 213 just because I went and raised hell. Guess what, there was a bundled package which suited me to a t. Thanks guys for the proverbial butt kick.

I am working on reducing my debt. Bye-bye to my clothing account in 5 months. Good riddance.

My car loan is much more difficult. The prime rate was reduced from 10.75% +1 to 10.25%+1 in April this year. My installment was not reduced appropriately as was implied in the contract with the bank. I have 18 months left to clear the loan. Is the debt set in stone or can it be reduced through setting early? I need a hack please.

I decided to start investing in ETFs on the NSX. Satrix listed the MSCI World, Nasdaq, Emerging Markets, S&P 500 on the NSX in April 2019. Previously, only commodity ETFs where listed.

There seems to be little awareness about ETFs and possibly very little liquidity in that sector. I am aware that these are global ETFs. Will the lack of liquidity affect me in any way? Easy Equities implied that I can open a USD account. Is it a good option?

I am learning financial literacy with my wife and kids via YouTube and this podcast etc. Am working on my emergency fund (been start - stop) for years.

How viable is it for a contract worker to invest long term for retirement if there is no access to pension, RAs, tax breaks etc.

Jon-Luke

Many moons ago I bought some Choppies shares and some time later I sold with a bit of profit. But I did not sell everything a decided to hold a few thousand shares (they were dirt cheap) on the off chance that the company might turn around.

Now with the company having been suspended for over a year I’m wondering what will happen if it gets delisted. What will the process be? If they delist do they have to pay share holders a nominal amount or do the shares “disappear” and does the value disappear too

I saw a SENS for Choppies saying that they were possibly accepting a sale of all the South African operations... What does this mean for shareholders? Wouldn’t the shareholders usually be asked to vote on a decision like this even if the shares are suspended? (They are not delisted yet). Or is that perhaps the next step in the process?

Stephnie

What if the very nice family member gave the very lucky family member R500K immediately as an interest free loan (payable in full at the end of - say - 5 years, with no monthly payment required), and then every year for the next 5 years reduced the outstanding loan amount by the R100K tax-free 'gift/donation' threshold. This would allow for the immediate transfer of R500K with no tax implication for either party. The risk of course is if the very nice family member passes away in the next five years, the outstanding loan amount would be owed to the deceased estate.

Tax Elf De Wet responds:

SARS would view this as a simulated loan (i.e. actual donation) on the day the loan is made and would levy donations tax on the remaining R400,000.

The downside to doing my job is that I don’t get many opportunities to talk about my own financial insecurities. As with most things, there’s a distance between theory and implementation. I have my bad habits and anxieties around money as much as the next person.

Billy’s question around minimalism and frugality gave me an opportunity to talk about some of the things with which I struggle. An ever-present challenge is finding a balance between spending and saving. I’m always too far in either camp. You can accuse me of many things, but lacking the courage of my convictions is not one.

Far be it from me to tell you what to take from these episodes, but I do hope our conversation sheds some light on the importance of the process. It’s a lifelong journey, full of surprises and challenges and new joys. That’s what makes it fun.

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Win of the week: Billy

I saw Simon in Woolies the other day (I was like a silent groupie lurking in the shadows). Next time, I'll buy you guys a bottle of bubbles to say thanks for the awesome work!

I'm a 30 year old engineer (another one for Kristia's collection!), and in great part thanks to you guys, I recently moved to a smaller place, got rid of a bunch of useless kak, and also scaled down on my car. This also extended to my finances, where I scrutinized all my financial products, cut unnecessary costs, negotiated better insurance premiums, and started to actively put money away in cheaper investment vehicles (such as Easy Equities).

I know that both of you have decided to actively keep your living costs low, and I recently read an article where Simon mentioned that he decided to scale down a lot and move to a smaller apartment with his wife. The idea of having very few possessions to tie me down, whilst having plenty of money put away appeals to me quite a lot. I've realised more and more that having lots of things means having lots more to worry about. Physical clutter, financial clutter and emotional clutter are different sides of the same die. As much as we like to think finances are separate from other aspects of our lives, everything feeds into our overall well-being, freedom and contentedness.

So, thanks to you guys, I've developed a bit of an aversion to unnecessary "kakkies" - specifically financial and insurance products laden with complex "kakkies" that only serve to obfuscate real costs and returns. I like Kristia's idea of investing in one ETF (or at most very few), and not over-complicating my portfolio, as more products could mean more blind spots.

To get to my question: Being minimalist seems like a full-time struggle - an active raging against the beast of financial dependence. What are the principles you both follow to keep your living costs low? What did you cut down on that made the biggest difference? Also, how do you prevent the activity of keeping costs low from becoming a cumbersome penny pinching exercise that ends up defeating the purpose?

Donal

While all this was going on, I was also busy researching possible brokers that I could use to purchase Vanguard All World (taking Patrick McKay's advice!).

I ended up with a company called Degiro. While their fees are low, they are nothing like the "easy" I'm used to with Easy Equities. Their registration process is a bit of a pain in the ass and their online trading platform is not as user friendly.

I jumped through all the hoops and signed up for a Basic Account. I made my first lodgement and did my first Vanguard purchase. I did a small amount first to test the water. All went well and I was ready to plunge all my funds in.

At this point I got a little nervous and did a bit of triple-checking online just to make certain that there were no negative comments out there about Degiro.

Apparently, when you hold a Basic Account, they have the right to lend out your shares to other investors who use them for the purpose of short selling. I guess it's their way of making some cash on the side using my shares. If you don't want to allow this, you need to open a Custody Account, which means that they cannot lend out your shares. The catch is that they charge 3% on all dividend payouts for a Custody Account - compared to 0% for a Basic Account.

Is this type of lending out of shares by a broker commonplace? Do you know if EasyEquities do it? If they do, then I would feel a lot more reassured to carry on with my Basic Account. But if you guys think it's unusual for a broker to do this and it carries a high risk, then I’d rather close my Basic Account and sign up for a Custody Account and take the 3% hit on dividends.

Captain Pants

I plan to pay off my bond wi...

Our first ever paid episode of The Fat Wallet Show is courtesy of the Index and Structured Solutions team at Absa CIB. If you see one of them, show them some love.

In honour of this newfound wealth and the cool products that made them possible, we decided to dedicate this episode to financial risks that aren’t market-related. In November we’ll follow this up with market-related risks and explain how those freaky new ETFs hope to bypass market risk.

We spend some time in this episode on the most sinister of all non-market risks - inflation. We’re all subject to it, yet we so easily forget to account for it. We also cover the risk of losing your income, fraud, counter-party risk, tax, divorce, death, income disparity in households and over-insurance. We offer some ideas to help you prepare for these risks.

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E&H

My partner is in his early thirties and I am in my late twenties and we have some questions about offshore investing.

we like investing passively in the stock market, ie index funds

we try to save aggressively and are inspired by the FIRE movement

we assume that the rand will likely continue to lose value in our lifetime

we plan to emigrate within the next 5-10 years, partly for lifestyle factors, and partly for the purposes of studying and gaining new skills. We might be keen to return to SA later on.

we are hesitant to invest if the investment pays out in rands, and essentially want to start contributing to an offshore fund that we can access in the foreign denominated currency once we've emigrated.

1. what is the cheapest way to get money offshore?
2. what are the currencies/offshore accounts that you could recommend?
3. what is the best way to invest our money to achieve our goals?

Jon-Luke

I’d love to know what you guys think of this offering from Investec:

Guaranteed 40% over 42 months - Effectively 11.43% P/A (not compounding?) - meaning if you invest R10,000 you will make R4,000 profit.

If you were to put the R10000 into African Bank at 9.20% (Compounding) you would make R4 428,16 profit.

So I guess the Investec offering has the possiblity of making quite a bit more - but how is this worked out exactly... And what are the chances of the S&P 500 going up by that much...

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Dhiraj asks us to defend our index-tracking strategy in this episode. It’s hard to do when the theory works but the practice hasn’t delivered the goods in four years. At this point I can only cling to the success others have had with this strategy and hope.

Even index-tracking product providers are increasingly offering products that will give investors an opportunity to outperform the market. The index weighted by market capitalisation has turned into the ugly stepchild that nobody wants to talk about anymore.

Nobody ever knows WTF is going on in the stock market. Lots of people pretend they do, but since they all keep showing up for work instead of retiring in the Bahamas, we can assume they don’t. Maybe the market will do what it’s always done. Maybe we’ll look back at this period in our investment history, discover the yodelling goat formation and know this is when it all ended.

The index-tracking strategy makes sense to me for all the reasons Simon and I discuss in this podcast. However, when that stops being true, I will jump ship. I am not a salesperson for the ETF industry. I’m an investor, and I want to see my money grow above inflation after fees by any means at my disposal.

That said, I also know pivoting an investment strategy every time I don’t feel I’m making money is a surefire way to incur costs. When I got into investments, I knew anything less than five years is not an investment time horizon. Since I’m only at four years (and, to be fair, I’ve pivoted my strategy a few times already), I’ll hold out and see what shakes out.

Dhiraj shared a video.

You make a case for investing in a broad market index fund over the long term for cost effective wealth creation?

This Youtube video makes a case that one must study the intricate details of the share markets and invest in selected shares for best long-term risk/reward trade-offs.

It provides evidence that there have previously been extended periods where the S&P500 produced zero returns.

How would you counter his views on index fund investing?

Christiaan wants to know if it’s a good idea to have his entire portfolio, including his pension fund, in index-tracking funds.

I am a teacher. Through work we are forced to have a pension fund with the ‘Green Monster’. They have recently brought out a Balanced Index Fund with fees of just 0.30% p.a. It’s invested in the FTSE/JSE Capped SWIX Index Fund, which I have never heard of, as well as the expected bonds, cash and property.

Is it a good idea to have all my retirement assets in these, including my company pension fund?

Lady Kabelo isn’t sure what is passive and what is active in unit trusts.

I have an Allan Gray unit trust, and I'm looking to shift towards ETFs. When we talk about actively v passively managed funds, I think of ETFs as passive and unit trusts as active.

In episode 75 Simon talked about being invested in passively-managed unit trusts. I'm no longer certain that my understanding of the distinction is correct. Could you explain the difference between an ETF and a unit trust, and how a unit trust can be passively managed?

Lloyd has a three-month old daughter and would like to know where to save for her education.

TFSAs don’t seem a clever instrument for education investment because it erodes the potential before the real savings kick-in from long term holdings.

What is a better vehicle for me to save for my 3 month old daughter’s education. I am more worried about high school and tertiary so perhaps the investment time could be 10 years or more.

I am thinking the right ETF portfolio. How should I set this up to be best positioned from a tax perspective?

Wins of the week: Dan Gobble wrote a word of encouragement for Mpho and Rinaldo.

We turned the corner at just about three-quarters of R1m in useless debt - not car or home loans. I am talking revolving loans, credit card debt and overdrafts from living expenses and starting a business, which promptly failed. Rinaldo is only dipping into it with his 140k :) We swallowed our pride and went to family for help, now all the debt is consolidated with my in-laws at a ridiculously low interest rate. And we are on track to have it sorted in two years.

Also Mbasa, who is FINALLY starting their TFSA journey in July!

What ETFs would you recommend?

I...

This week, two listeners help Simon score free wine and free petrol using loyalty programmes. Here’s a new Fat Wallet rule: if it gets us free wine, you are automatically the win of the week. No questions asked.

We discuss medical aid and how much to save towards the education of two toddlers. We received a question about the Warren Buffett indicator. I figure out halfway through the discussion that it’s basically the P/E ratio of a country and nearly die of pride. I just love those moments where my brain makes a connection that I didn’t know it was capable of making.

By the way, Craig Gradidge blew my mind this week when he explained a very complicated principle in a way that made it clear as day. This, to me, is the mark of true intelligence.

Jonathan de Freitas found an awesome workaround for price alerts on the If This Then That (IFTTT) service. Check that out here.

Lastly, we read through all of your tips and suggestions in our survey and we spend the episode talking about the things you guys want. We’ve had many requests for show transcripts, for example, to make the site more searchable and help people who are hard of hearing.

We dedicate this episode to the ideas we loved, the suggestions we don’t agree with and our listeners’ wicked sense of humour. Thank you all, one last time, for taking the time to help us serve you better.

Remember to join us IRL on 7 December for our final Power Hour of the year. It is always our favourite event. We can’t wait to hang out with you.

Kris