How to think about risk (#165)

Explicit content warning

09/15/19 • 66 min

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.

what is the cheapest way to get money offshore?
what are the currencies/offshore accounts that you could recommend?
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...

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.

Subscribe to our RSS feed here.
Subscribe or rate us in iTunes.

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.

what is the cheapest way to get money offshore?
what are the currencies/offshore accounts that you could recommend?
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...

Previous Episode

The news and your investments (#164)

If you’re reading this, you are one of the few survivors of last week’s internet dumpster fire. This week, Simon and I spend time putting together a model to help you make sense of the news. We focus specifically on when a news report should move you to action and when you should just walk away.

Here’s the formula we came up with:

Figure out what the claim is.
Find evidence that supports the claim.
Find evidence that disproves the claim.
Ask yourself whether the claim has any bearing on your investment strategy.
Act accordingly.

My thought in choosing this topic was that we’d spend a few minutes discussing some mental models to help us interpret the news and the rest of the episode answering questions. 50 minutes into the discussion, I felt like we had barely scratched the surface. For that reason we didn’t get to a single question this week.

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Win of the week: Adam

I disagree with the consensus on pet insurance. In all honesty this goes against your rules that you cannot abscond on something like this. If you are a serious pet owner (and not just getting a goldfish because meh) then do it the right way. It's the same argument that instead of having health insurance "you save funds into an index tracker" etc. etc.

You are healthy when young, so the likelihood of a serious health issue is small, but you still have health insurance.

Just don't have a pet if you place a financial cost on it like that.

My dog has had two surgeries, but over and above that throw emergency visits to the vet here and there and insurance has us covered (well mostly - they don't cover dog biscuits).

Next Episode

Keeping your living expenses low (#166)

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...