Shaun Harris
TAKING STOCK
There’s a deluge of investment advice available nowadays, so much that ordinary, individual investors probably feel a bit overwhelmed when considering where to put their spare funds.
Much of this advice, however, is aimed at the institutions, particularly advice on equity investments. Stock market shares can be a great investment, but it is hard for individuals to go directly into the market unless they have fairly substantial financial resources behind them. That’s why unit trusts are so popular, and once again there is a confusing barrage of advice available on these funds.
It can be interesting, though, to look at how investment professionals invest their own money. People involved in investment markets on a daily basis have considerable knowledge at their disposal, so they must be among the best informed when it comes to personal finance.
Perhaps, but what these people do at the office and with their money at home can be surprising. And often it’s the simplest, common sense advice that’s the most valuable.
Take Carole Judd, chief investment officer for Old Mutual Asset Managers in the UK.
Judd, whose academic background and business career has been largely in the investment industry, says the bulk of her personal investments have been in property – her own house. Following the age-old adage that one of the most effective ways of deploying additional funds is to pay off a bond early, Judd, her husband and their children are now in the comfortable position of living in a bond-free house near London.
Her early investments, though, were in equities while she worked for asset managers Allan Gray in Cape Town as a research analyst. Judd was born and educated in Zimbabwe before moving down to UCT where she completed a BSc (Hons) in maths and statistics.
“I made quite a lot of money out of shares. One of my first investments was in Waltons Stationery (since unbundled and delisted), and I also did well out of Putco,” she says.
However, that all changed when Judd’s husband was offered a position in London and the couple sold up everything in South Africa and moved overseas. She firmly believes that investments should match your stage of life and focus on your priorities. As a couple with young children starting from scratch in a new country, owning a house was the priority.
“I haven’t invested directly in equities since I left for the UK. When I arrived in London the most important thing for me was to ensure that the roof over the children’s heads was secure, so all my spare money went into the mortgage.”
Location, as they say in the property industry, is everything, and obviously the value of residential property as an investment will vary between the UK and South Africa.
One important factor that makes property in the UK relatively more attractive is the low real interest rates. With only a small differential between the rate of inflation and the interest rate a bank will charge on a property loan, investors are basically getting better value for their money if they have to borrow to buy a house.
In South Africa, high real interest rates mean a large portion of bond repayments go towards servicing the interest component of a home loan before any dent is made in the capital amount.
Property values in absolute terms are a different matter, and a strong case can be made for the comparative value of property here if the investor does not have to borrow. That, together with the value of a hard currency, is why so many retiring people from the UK and Europe can sell a modest house in their home country and buy a more comfortable house in South Africa.
Judd, however, had good timing on her side, borrowing at low interest rates to buy a house in a UK property market that was increasing in value. That made the house a leveraged investment, and repaying the bond more quickly than required just added value to the investment.
But the same principle remains true in South Africa. It’s been spelt out countless times, but the fact remains that one of the most efficient investment homes for extra money is in your bond.
The more flexible home loans on offer make accelerated bond repayments even more attractive. A basic strategy is to pay more – even R100 more a month on a R200 000 bond over 20 years will knock about four years off the life of the bond at current rates. And keep paying the same amount when interest rates decline.
Options to access additional repayments can also be effectively used by well- disciplined individuals. For example, lots of provisional taxpayers, typically self- employed people or those who own a small business, conservatively calculate their monthly tax liability and put the money into their bond, thereby reducing the interest bill.
Every three months they withdraw the estimated amount due to the tax man. But if they have done their sums conservatively, chances are they will get a tax rebate at the end of the year, which should then be put back into the bond.
Apart from saving interest, the great reward comes when the bond is paid off early. Now you truly own your home and you’ve probably removed your largest overhead expense. The additional capital that’s been freed up can be used for serious wealth creation.
With her bond paid off, Judd says she has some investments in pooled funds, similar to our investment trusts and unit trusts. She and her husband are also setting up a trust fund for the children to provide for their future needs and also limit the effects of inheritance tax.
Her general personal investment advice is to take a long-term view on investments, and definitely not to risk money on speculative short-term investments. Diversity is important, she says, even if the bulk of investments are in one class such as property. And, if possible, a portfolio should diversify across the economies of different regions and currencies as well.