Monthly Archives: December 2016

How to help customers address financial

Mounting financial burdens on consumers has led to a 54% increase in disputed debit order complaints over the past year, says the Ombudsman for Banking Services Clive Pillay.

“It is a worrying sign that so many people are cash-strapped and that so many people are over-indebted,” said Pillay.

According to data from the Payments Association of South Africa (Pasa), around 31 million debit orders amounting to R72 billion are processed per month, of which 1.2 million are unpaid and a further 170 000 are disputed.

There are two categories of debit orders: EFT debit orders, which are processed on the date chosen by consumers and mostly after normal business hours, and early debit orders, which are collected shortly after midnight and immediately after the processing of EFT credit payments such as salary payments, explained Pillay.

He said several complaints lodged with his office centre around non-authenticated early debit orders, whereby transactions are processed prior to the agreed date. Pasa data show that almost 14 million non-authenticated early debt orders worth R9 billion are processed each month, 4 million of which are unsuccessful, with 600 000 disputed.

An estimated 90% of disputed debit orders are for so-called ‘cash management’ reasons, Pillay said, citing Pasa data. “The Payments Association investigates every disputed debit order and often they are legitimate disputes, but there are also ones that are not legitimately stopped. They are done simply because you have to pay five people but you only have money to pay four, so you stop one debit order and then double it up the following month,” he said.

Do Not to Worry About with Investing

Between the confusing jargon, the endless list of mutual funds, ETFs, and retirement accounts to choose from, and the constant ups and downs of the market, it’s easy to feel overwhelmed, confused, and downright anxious about whether you’re making the right decisions and whether you’ll be okay.

 

But today I’d like to give you a little relief. Because there are a lot of things you shouldn’t be worrying about when it comes to your investments, and here are five of the biggest.

 

1. What the Stock Market Has Done Recently

 

The US stock market dropped 24.63% over the first 68 days of 2009 in the midst of the housing crisis and international financial meltdown. Bad sign, right? Sure, except that the total return for the year ended up being a positive 29%.

 

Or how about the two years from September 1998 to August 2000 when the US stock market increased by 25% per year, only to decrease by 21% per year over the next two years.

 

In other words, you shouldn’t spend any time worrying about what the stock market has done recently because it doesn’t in any way predict what it will do going forward.

 

2. What “Experts” Think the Stock Market Is Going to Do Next

 

Did you know that active investment managers underperform basic index funds year after year? Or that “expert” prognosticators are wrong more often than they’re right?

 

Even the experts have no idea what the stock market is going to do next. The less you pay attention to their predictions, the calmer you’ll feel and the more likely you’ll be to succeed.

 

3. What Your Friends Are Investing In

 

It’s pretty easy to read a little bit about something, repeat it to your friends or family, and sound like you know what you’re talking about. I’ve done it. You’ve done it. We’ve all done it.

 

So the next time you hear someone talking about how they’re investing, remind yourself of the following three things:

 

  1. They may or may not know more about investing than you do.
  2. They definitely don’t know about your personal investment goals and the right way to reach them.
  3. Therefore, what they’re saying is completely irrelevant to your investment plan and you can safely ignore it.

Success and good investment in the short term

At some point in the midst of holiday shopping, most of us will dip into our wallets, take out a credit or debit card and make a purchase. Many times, we leave the mall or put down our tablets and phones having spent more money than we intended.
We’re moving into a world where we hold less cash and are increasingly comfortable using cards and electronic payment methods. Before diving into the possible effects this could have, I’d like to point to a famous quote by notorious gambler Julius Weintraub: “The guy who invented gambling was bright, but the guy who invented the chip was a genius.”

 

The psychology of symbolic money
When you go into a casino, you see people throwing chips around: $50 on red in roulette, raising $25 in poker, doubling down $100 in blackjack. Unfortunately, sometimes we can’t afford to lose the money we gamble away. The $100 lost on a double down in blackjack could have been several days of groceries for the family or overdue maintenance on the car. The $10,000 lost on a weekend binge could have been college tuition.
You may be able to relate to these examples personally or through family or friends. One aspect of the psychology of gambling is that people are parting with poker chips, rather than cash in their hand. The chip changes the form of your cash, not just physically but metaphorically, too. It can cause you to justify taking a risk. It can create an excuse so the $25 that was in your pocket is only a green chip on the blackjack table. The monetary value is the same, but your mind is more comfortable separating a poker chip from a bill in your pocket.

 

How it works with credit cards
The technological advances that have accelerated the use of credit and debit cards and other payment options can act in a similar way.
From 2006 to 2014, payment volume for Visa has increased from $2.13 billion to $4.76 billion. Other major credit card companies have shown similar increases. While this may or may not lead to carrying higher credit card balances, it most likely leads to less money in the bank account for the consumer.
In my opinion, we’re likely to spend more money with these cashless payment options. We pull out our cards or phones and make purchases without consciously contemplating the downstream impact as much as we would have if we’d paid in cash. We don’t physically hand the money over. Yes, we may hand a credit card over, but that’s the same motion whether we’re buying a pack of gum or a diamond ring. The rise of mobile payments creates even less friction for purchases, since buyers don’t have to sign anything.
Another consideration is the restriction that cash creates: If you don’t have enough cash to buy something, you can’t make the purchase.
For these reasons, people who use cards and mobile payments may be increasing their purchase frequency as well as the value of their purchases.

 

Ease of purchasing
The ease of electronic purchasing is like living in a consumer world with poker chips. Twenty years ago, we would make conscious decisions to buy albums or movies. Now, at the click of a button — or even a fingerprint — we’ll buy a movie from iTunes or another gadget from Amazon. It’s as if we’re throwing a green chip toward the house at a casino. Would you be spending the same amount of money annually if you had to pay for everything in cash?

What are you choosing invest or put money into your bond

In this advice column Alexi Coutsoudis from PSG Wealth answers a question from a reader who wants to know what to do with a lump sum investment.

Q: I have R100 000 in a unit trust. At the same time I have an outstanding bond. Would it be better to remove the funds from the Investment and offset part of the home loan?

Advisors are frequently asked this question. This often has more to do with personal risk preference than with economic rationality. To answer this question, however, certain assumptions must be made, and I specifically won’t look at tax to keep the answer succinct.

The rational answer

Let us assume that the interest rate on the bond is at the prime lending rate. That is currently 10.50%

The second assumption we need to make is about what the risk level of the unit trust in question is. A money market unit trust has a very different risk and associated return goal than an equity unit trust.

A low-risk money market or income fund aims to beat inflation and offer a real return of 1% per annum. Thus, if the R100 000 is in an income unit trust only yielding 7% to 8%, it would be rational to secure the higher guaranteed return of 10.5% and transfer the funds into the bond.

However, if the money is in a balanced fund which generally targets a 5% real return, it would be more rational to remain invested as the real return is in excess of the bond interest rate.

It is also important not to fall into the trap of looking at the short-term underperformance of equity linked funds in a time like now and compare this to a resilient prime rate. This may result in the wrong decision to sell out at the wrong time. Every situation is unique and the best course of action is to get advice from a financial advisor who will look at the big picture and your individual circumstances.

The subjective answer

The other way I would advise a client on this is a more subjective approach – the sleep test. Quite simply, what makes you sleep better at night? Would that be a bond balance of R100 000 lower than it is now with no funds invested, or the same outstanding bond balance but R100 000 invested?

The answer will be different for each individual and there are a lot of factors that influence one’s financial decision making such as your view of debt as either toxic or as an enabler. For some people having R100 000 invested offshore, for example, gives them comfort. Therefore, because the economic rationality argument is often such a close contest, considering the subjective approach may help make the final decision easier.