- One of SA’s most prominent investors, Andrew Canter, has compiled a handy list of financial guidelines for those who want to get ahead.
- The pointers fill only two index cards, but could save you from serious financial woes.
- For more stories, go to BusinessInsider.co.za.
On two index cards, Andrew Canter has compiled an impressive list of pointers for anyone who wants to build wealth and get ahead.
Canter is one of the most prominent investment professionals in South Africa, having co-founded the asset management business of Rand Merchant Bank in the 1990s. For the past twenty years, he has been the chief investment officer of Futuregrowth, and is currently in charge of an investment portfolio worth R185 billion. In 2016, he famously (and to much controversy) refused to invest client money in the bonds of six state-owned companies due to governance concerns.
When it comes to personal financial management, Canter is similarly unflinching – describing the long-term use of credit cards, store credit and loans as “financial enslavement”.
His recently summarised his thoughts of personal finances on two index cards, calling it “pointers I’d give to a friend”:
“As each of us have our own circumstances, risk-appetite, tax situation and financial literacy, (these index cards) cannot serve as a financial or investment plan. Rather, it is a set of guidelines for those new to the journey of thinking about their life’s financial plan,” Canter said.
He explained some of his key guidelines:
1. Retain some cash for emergencies
Build up some cash to dip into for large expected expenses (e.g. car purchase, holiday, furniture purchase, family wedding) or unexpected expenses (e.g. home repair, a family funeral, changing jobs). A good guideline is to have 2 to 3 months’ worth of your salary available. However, cash in your bank account tends to be easily spent so keep a smaller portion (e.g. 15%-20%) in a bank account, and the larger portion (e.g. 80%-85%) in a money market unit trust.
2. Separate your investment capital from your life expenses
Savings should be sacrosanct, never dipped into for ordinary expenses. It’s best to keep your long-term savings in separate and distinct accounts (and also separate from your emergency cash/liquidity fund). Your long-term savings are for capital investments – which should be income- or return-producing assets.
3. Start a savings habit
Aim to save 5% to 20% of your income, preferably monthly. Start saving early. The more the better. A recurring R100 saved monthly from the age of 20 to 60, invested at a return of 10% per annum, grows to more than R600,000 at the age of 60.
Some research indicates that individuals should have saved 1 to 2 times their annual salary for retirement by the age of 35.
4. Pay off debt and only borrow money for return-producing assets
Borrowing should generally only be used for return-producing investments such as education, housing, or a business. You should never use debt for assets that depreciate quickly or for consumables.
Longer-term use of credit cards, micro loans, personal unsecured loans, furniture loans and store credit are all forms of financial enslavement: They are a trap to be avoided.
Never underestimate the overall cost of having a car. Aside from finance costs, there is insurance, repairs, petrol, and traffic fines. The more expensive the car, the more costly it is to drive, maintain, insure and repair.
5. Buy the necessary insurance cover for health, life, car and house
Insurance coverage you should consider includes health, disability, life, auto, and home insurances. Life, health, “dread disease” cover (which offers payments in cases such as cancer or heart attack), and disability cover (which provides continuing income in case you become disabled and cannot work) are usually part of employer-based insurance schemes, and are often cheaper than you can buy on your own.
Life insurance is most vital when you have dependent children or parents who rely on your livelihood, or to settle your family’s home bond in case of your death. In those cases, it may be worth buying additional life insurance cover through your employer’s scheme.
6. Invest in your and your family’s education
You should assess the cost of studies (and debts you might incur) against the expected return on that investment. Such returns might take the form of higher expected earnings, better career prospects, and greater flexibility in your professional life.
For advanced education the world is quickly shifting toward educational alternatives such as on-line courses and free coursework.
7. Enrol in a retirement plan
You should maximise your use of tax-advantaged savings, such as employer pension/provident savings schemes, retirement annuities, or other long-term tax-free investments. These programmes are supported by government and businesses to encourage saving for retirement.
Most company retirement schemes allow you to elect to save 5%, 10%, 15% or 20% of your salary in retirement savings: You should contribute no less than 10% and, when in doubt, save more.
If you change jobs, do not cash out your retirement savings.
8. Buy a house, but treat it as an investment decision based on rationality and not emotion
Buy a home when you are professionally secure and stable, as well as financially ready to take on the responsibility. You should always view a house as an investment: Buy based on a good price by applying rational (and not emotional) metrics, such as price per square metre and relative price for the area.
9. Always pay close attention to all investment costs and fees
The sections above are your primary long-term savings vehicles – you should establish these and stick to them. But what you really want to know is “How can I get rich quick!?” Making high returns on investments is a tricky affair – despite the success stories you hear (no one tells you when they lose money!). It is suitable to try to make long-term returns by making “discretionary investments”: These are investments you actively choose, by exercising your judgement and taking meaningful risk.
All financial tools/products have some embedded costs and fees – which is reasonable since you are buying a service. As a rule, the more people between you and your investments, the more fees and costs are involved. Investment related costs go on year-after-year for decades, and add up to a big reduction in your investment returns.
Never be shy to ask, “What does it cost?”, “What are the fees?”, “How many layers of fees are there?” If you don’t understand the answers then you should be suspicious.
10. If you have a financial advisor, require full transparency of fees and the disclosure of any conflicts
As with all purchase decisions in life, if you don’t know what you are paying for then you shouldn’t be buying the product. Do not be intimidated!
Generally, you should not pay initial (entrance) fees on unit trust investments (go directly to unit trust managers, not via a broker). Brokerage fees on trading listed shares are negotiable: Shop around.
If you feel you need financial advice to implement your portfolio (e.g. choosing which range of unit trusts to buy), rather pay a fixed, declared fee for the service instead of a continuing (e.g. annual) fee or a “percentage of assets” fee If you decide to have a financial advisor, ask him/her to commit to a Fiduciary Standard, such as:
“All the advice you are giving me, and all the products you offer me, are designed to help me achieve my investment and financial goals; you will tell me about any fees you earn on my investment decisions; and you will tell me about any other potential conflict of interest in giving me advice.”
Once you have the financial foundations in place, Canter also has advice for opening a unit trust account and buying individual shares, as well as more riskier investments like investing in a small business or speculating in commodities or cryptocurrencies.
“But keep in mind that about 95%+ of all start-up businesses fail, and speculations frequently go awry, so your Risk Money pool should be limited to money you can afford to live without (i.e. money you are willing to lose).”
His advice is to avoid anything that seems too good to be true, gambling and extending loans to friends or family. In a detailed article, he also offers his thoughts on legal arrangements for marriage, drawing up a will and making a contribution to society.
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