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Capital July'21

Updated: Jun 30, 2021

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MONEY SMACK DOWN: Top 5 Investing Mistakes To Avoid In 2021

Avoid these 5 investing mistakes in 2021.

Book a free consultation with one of our advisors to expert investment advice to build a perfect portfolio.



Investors are always looking for ways to improve their investment strategy. As we enter 2021, there’s a lot that people will discuss in terms of how to invest and where to invest.


Here is our a list of 5 mistakes we know a lot of investors make: mistakes you can easily avoid!.






1. Investing Without Knowledge

Far too often, salaried professionals have little to no knowledge about investment options beyond traditional financial instruments. If the only investments you know about are Fixed Deposits, Tax-Free Savings Accounts, ETF's and the likes, we believe you need a Financial Advisor & Wealth Coach.


This is due to a lack of financial education and the prevalence of ill-informed advice that is shared between friends and peers. This is harmful to your financial health simply because investing in better options can help you achieve financial freedom.


This is due to a lack of financial education and the prevalence of ill-informed advice that is shared between friends and peers. This is harmful to your financial health simply because investing in better options can help you achieve financial freedom.

2. Poor Choice Of Investments

Similar to mistake #1, using a surface-level understanding to invest in unit trusts, stocks, gold, p2p lending, etc., can lead to losses. Before you choose a stock or unit trusts, find out more about the company, fund manager, business model, top management, etc.


Inexperienced investors also tend to judge the quality of an investment based solely on star ratings or historical returns. These are not the only parameters to consider. Even current performance is not enough to guarantee the success of an investment in the future. Fees also play a major role with regards to investment choices. Cheapest doesn't always offer the best long-term returns. You should consult a wealth coach or a proven financial advisor for this.


3. Investing Based On Emotions

Letting emotions get the better of you while investing may lead to losses. Emotions here could be brand attachment, fear, or greed.

For example, selling stocks in March out of fear of the pandemic may have seemed like a logical option. But stock markets are long term instruments that are known to bounce back over time.

4. Not Diversifying

There’s a difference between having a few good investments compared to a few investments. Different asset classes carry different risks and banking on one asset class with all your savings can be bad.


For example, say Mr Mario was chasing profits and decided to invest in a small-cap stock. In 2010, the stock was giving high returns.


The pandemic rolled around and the stock is now giving negative returns. This is bad for Mr Mario. But Mr Mario could’ve minimized the risk by diversifying his investments into large-cap stocks, mid-cap stocks, debt funds, etc. The solution is to build a Perfect Portfolio that takes into account all your financial goals and needs.


Get Started Now.


5. Trying To Get Rich Quick

Unless you win a lottery, you probably won't become a millionaire overnight. Any investor who falls into the trap of chasing quick returns, investing based on trends or banking on the promise of overnight success may face severe losses.


It’s important to keep in mind that market-based instruments and traditional instruments create wealth over the long term.


Summary

The 5 mistakes you need to avoid in 2021 include:

Lack of awareness of investment options

Investing in options that you don't understand

Letting emotions make its way into your investments

Under diversifying your portfolio

Trying to become rich overnight

Managing your expectations can play a crucial role in steering clear of mistakes.


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What Does It Take to Truly Feel Wealthy?

Even millionaires don’t believe they’re wealthy. Here’s some advice for avoiding the trap of never feeling satisfied with what you have.


Photo by <a href="https://unsplash.com/@jonathanborba?utm_source=unsplash&utm_medium=referral&utm_content=creditCopyText">Jonathan Borba</a> on <a href="https://unsplash.com/s/photos/yatch?utm_source=unsplash&utm_medium=referral&utm_content=creditCopyText">Unsplash</a>
Photo by Jonathan Borba on Unsplash

Many of us have the mindset of reaching toward ever-higher financial goals, which stays with us over the course of our lives. It’s helpful when it comes to paying off debt and building a strong financial foundation. But it also raises the question: How much money is enough to truly feel wealthy?


People’s views on wealth have changed during the pandemic, according to a Charles Schwab Corp. Modern Wealth Survey. In 2020 respondents said $2.6 million was needed to be wealthy, while $1.7 million was needed for financial happiness and $934,000 to be financially comfortable. In 2021, respondents said $1.9 million was needed to be wealthy, $1.1 million for happiness and $624,000 to be comfortable.


To be in the top 1% in the U.S., you need to have a pretax income of about $500,000, according to a Bloomberg analysis from 2020, but this varies by region. Even joining the double-comma club doesn’t do it for most. A 2019 survey by Ameriprise found only 13% of people with $1 million or more believe themselves to be wealthy.


The point is, what it takes to feel wealthy is a moving target. Although it’s wise to think about how to grow your personal wealth, you can spare yourself a lot of anxiety by also focusing on how to find contentment. That’s the only way to get off the hedonic treadmill of never feeling satisfied with what you have because someone else always has more.


Determine the baseline for your desired lifestyle or goals.

In the U.S., a living wage in 2019 was $16.54 per hour, or $68,808 per year, for a family of four (two working adults and two children), according to the MIT Living Wage Data. In expensive metropolitan areas like New York and San Francisco, the living wage figure rose to $93,851 and $94,741.


There is a huge difference between earning enough to live and having your desired lifestyle.


To start thinking about feeling wealthy, determine a specific baseline income needed for you to live the life you want — within reason of what’s possible.


This will evolve over time as your life changes. Marriages, kids, retirement and inflation are all major factors. But ultimately, setting a baseline should be about quieting the noise of external voices telling you what you should value. Instead, focus on what truly brings you satisfaction and happiness, and then you can reassess that number every few years. The pandemic should have given us a chance to reflect on what we value most.


Deal with the comparison trap.

Anytime I hit a significant milestone in my salary or net worth, the dopamine hit would quickly diminish after seeing other people’s income and net worth posts on social media and personal finance blogs.

The comparison trap is a death knell for feeling wealthy.


Identify a scarcity mentality.

One reason you may struggle to feel wealthy is because you don’t trust it’s a lasting situation.


While you might need some good old fashioned financial therapy to truly get a handle on your scarcity mentality, one actionable step is to make sure you’re properly insured and prepared for any financial fallouts. That’s going to vary for each individual, but you can start by making sure you’re covered with health, life, disability and even homeowners insurance policies. Keeping an emergency fund should also bring you some peace of mind.


Credit: https://www.bloomberg.com/opinion/articles/2021-06-24/personal-finance-what-does-it-take-to-truly-feel-wealthy


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Annuities

A successful retirement means that you are able to maintain the lifestyle you've become accustomed to. At retirement, most members use their retirement savings to buy an annuity. This is the income they’ll receive during retirement. We want your employees to feel secure knowing they'll have a regular income during retirement. We offer a full range of solutions to meet different needs and requirements, like:

  • Retirement funds that want to outsource pensioner liabilities to an insurer.

  • Retirement funds that want to provide their members with cost-effective annuity options at retirement.

  • Employers who want to outsource post-employment medical aid obligations to an insurer.

  • Retirees who want to convert their retirement savings into an income stream.

Living Annuities

A living annuity is a market-linked investment that gives pensioners a regular retirement income while at the same time aiming to grow their retirement savings.


  • A portion is withdrawn from their retirement savings each month to provide them with a regular income.

  • The market value will vary, depending on the performance of underlying portfolios and the income drawn by the pensioner each month.

  • Money left after the pensioner passes away will go to their beneficiaries or estate.


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How is Wealth is distributed in South Africa

Photo by Bermix Studio on Unsplash

Global financial group Credit Suisse has published its latest Global Wealth Report for 2021, showing that wealth in the country is becoming increasingly more concentrated at the top – with the country’s richest 1% holding more of the money than before.


According to the group’s Wealth Databook, South Africa’s richest 1% currently hold about 41% of the country’s total wealth – estimated in 2021 at $763 billion. This is up significantly from the 35% recorded in 2019.


This elite group of around 376,000 people – based on the adult population of 37.6 million – control around $311 billion of South Africa’s total wealth. Averaged out, this is $828,000 per person (R11.8 million).


These figures are up from 2019 when the data was last recorded by Credit Suisse, where the average one-percenter was worth $750,000 at the time. Over the same period, total wealth in South Africa declined by around $35 billion.


Breaking down Credit Suisse’s data further, it’s apparent that South Africa’s wealth is highly concentrated among the super-rich. Approximately 80% of total wealth is held by 10% of the adult population – but the biggest chunk of this is held by the top 1%.


This can best be explained on a per-adult basis.


According to Credit Suisse, wealth per adult in South Africa overall amounted to roughly $20,300 (R289,300) at the end of 2020. However, wealth per adult in the top 1% averages $828,000; among the top 10%, it averages $162,000.


Looking at the balance, the remaining 90% of the population controls only 20% of the country’s wealth and has a wealth per adult figure of only $4,500. This aligns with Credit Suisse’s data which records the median wealth per adult in South Africa at $4,523.


Credit: https://businesstech.co.za/news/wealth/500785/this-graph-shows-how-wealth-is-distributed-in-south-africa-and-how-much-the-1-really-control/


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Inflation Panic 2021! What It Means, What To Do

Maybe you saw that inflation numbers were high (really high!) last month. Or that the market went down — and then maybe, so did your portfolio. Here’s how inflation works and what you should do about it.


Photo by Jasmin Sessler on Unsplash

Some people were shocked at the (super!) high inflation numbers that came out recently. Other people waited until the threat of inflation caused the market (and their investment portfolios) to go down before they were shocked. How worried should we be? What’s going to happen?


So earlier this month, we saw an inflation number that shocked everyone. Data showed that US prices in April were 4.2% higher than the previous year.

Safe to say, it freaked people out. What did you think when you saw the numbers?

Well, I have a boring answer: I’m not usually shocked by economic numbers. The world is full of uncertainty, which is why it’s both scary to invest and why you make money when you invest.


But simply speaking, is that a really big number for inflation?

The short answer is yes. The longer answer is that this is just one month’s number, and this one’s a number that’s particularly hard to parse. Inflation is a measure of how much things cost — or, another way of saying it, how far a dollar goes. And a dollar definitely buys less now than it did a year ago. But what that change means is complicated. There was a historic change in spending patterns from last April to this April. People were literally forced to stay home a year ago, which had all kinds of effects on spending. So while the change in how much things cost is big, you have to remember what you’re measuring it against.


On one hand, I wouldn’t say that number is a super accurate picture of what’s going on across the whole economy. But on the other hand, it does make sense that inflation is going up — just the level of stimulus and spending by the government would mean a decent rise. The question is whether the level of inflation is transitory — caused by short-term things like stimulus and how depressed spending was a year ago — or whether it will be more long-lasting.


After the inflation number came out, a lot of people saw the value of their investment portfolios go down. Why does inflation make the stock market go down?

A few reasons. First, inflation is bad for profits because companies’ costs rise, and they often can’t raise prices enough to cover those new costs entirely, so profits go down — and when profits go down, so do share prices. Second, it often leads to higher interest rates, and that makes stock prices go down. Why? Higher interest rates raise the cost of borrowing, which makes people borrow less. Borrowing less means people are spending less, and corporate profits suffer.


How do you figure out if it’s just a blip?

It’s clear that part of the current inflation is transitory. There’s a huge surge in demand from re-opening and Covid relief payments. But there are also some factors that make inflation more of a longer-term risk. It’s generally more accurate to look at two things — the price of inflation-linked bonds and what economists are projecting — than it is to look at monthly inflation data. Right now, both of those indicators are telling us that they expect inflation to have a temporary spike and then, after that spike, to remain higher than it has been in recent history.


If we know inflation is real, what does that mean for the markets? Doesn’t that mean we’re looking at a bear market for equities?

Generally speaking, inflation surprises aren’t great for most financial assets.


But as far as what’s going to happen, remember that markets aren’t really a snapshot of the present. They’re a picture of what people expect to happen in the future. What it means for asset returns depends on how the future transpires relative to what’s expected. And inflation is not necessarily bad if it is being caused by high growth, and an increase in interest rates is just moderating that growth somewhat.


What would you do to your portfolio if you’re worried about inflation? Are there assets people should think about buying (or selling) based on what’s going on with inflation?

The first thing you should do is be clear about your strategy: are you trying to beat the market by predicting inflation? Or are you putting your investments into a diverse set of assets that you hope will perform well over long periods of time? If you’re investing for the long-term, you shouldn’t be surprised that inflation goes up from time to time, and you should probably do nothing.


That said, when people build their long-term investment portfolios, they often build in some assets that traditionally do well when inflation is high: gold, inflation-linked bonds, commodities, and real estate. And it’s important to use a good risk model when you are sizing your inflation hedges because nothing is a pure hedge. All of the hedging assets come with other risks, like interest rate risk or equity market risk, that you need to account for.


If you're concerned about whether your investments and retirement is well positioned to deal with potential coming inflation, book a free consultation with one of our advisors.


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