Danger and Opportunity of Martingale

Posted on July 27, 2020 by PietMar

Many people are always looking for a foolproof system to make money. Easy money and quick wealth will always be a lure for us. The dream of overnight wealth that will solve all our problems.

That is why many people gamble. Over the years I have read many betting systems, but I understand few of them as I do not understand the games. About the only gambling game I understand is Roulette as we used the Roulette wheel  for probability calculations in statistics.

Gambling is a numbers game. If you flip a coin continuously for many iterations, the head/tails will even out to be 50/50. A man with the name Martingale used this bit of knowledge to devise a betting system that is foolproof. You have to win.



 

WHAT IS THE MARTINGALE

Google Martingale and study the system.

The theory goes like this for Roulette.

You put $1 on Red. If you win, you put $1 on Black. Since it is a 50/50 game, the next turn of the wheel should land on Black. If the wheel stops on Red, you lose $1. You now put $2 on Black. If Black wins, you get back $4 for a $1 profit. If the ball again falls on Red, you put $4 on Black. You keep repeating.

WHY IS MARTINGALE DANGEROUS?

On paper it sounds like a foolproof system. In real life it is extremely dangerous. One Sunday afternoon I downloaded a Roulette game and played the Martingale. Just $1. Everything went very well, until I hit a losing run of 101 Reds with my money on Black. That is impossible numbers.

Starting your Martingale with $1, you will loose $549 755 813 888 if you loose 40 times in a row. On run 41 you will have $1 099 511 627 776 and if you win, you will make $1 profit!

The message is clear – stay away from the Martingale. It can ruin you in a few turns of the wheel.

The reason for this post, is because I read an article this morning where somebody wrote very favourably about the “Marty.” It is bad news.

USING THE MARTINGALE TO GROW WEALTH BEYOND MEASURE

If you start with 5c, how many times do you have to double your money to become a millionaire? After doubling it 24 times, you have $838 361. Then you double for the 25th time and you have $1 677 722.

I think I should write the story of how I turned 5c in R35.70 one December holiday.

Why do you not think about it and take the challenge?

For now, just remember this: even if somebody endearingly calls the Martingale “Marty,” it is a dangerous system. But if you use the principle to grow your money, it can make you very rich.


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Financial Planning Step 2 – Then

Posted on July 20, 2020 by PietMar

The first step in financial planning is a bit morbid, focusing on the bad stuff that happens. Unfortunately we have to prepare for the bad stuff, since we have no control over it.

RETIREMENT = FINANCIAL FREEDOM?

We also need to prepare for the good stuff, and we have more control over that. That makes it exciting. Step 2 of financial planning we look at financial freedom and retirement. We prepare for the future we desire.

It is this step that made me leave the financial planning industry. There is a story to it. You can skip the story.

 

THE STORY:

I was helping a single woman just under 5 years from retirement. My advice was to repay her bond before she invested in another endowment policy. I thought she could afford R250/month.  That amount would settle the bond in just under 5 years and she can retire debt free. My reasoning was simple:  paying the bond does not entail commissions and admin costs, she gets full benefit of the R250 and the bond rate was more than she could reasonable expect in a 5 year endowment. She was focused on another endowment policy. It took me 30 minutes before she shifted the focus and understood what I told her. She sat back, eyes shining with a new insight, and said to me:  “This is good advice. How do you get paid for it?”

When I drove away, I realised I am not making money because I am giving advice and not selling products.  That was when I left the industry.

END OF STORY

Disclaimer:

THIS IS MY OPINION. BEFORE YOU DO ANYTHING TO YOUR PORTFOLIO AT ALL, FIRST CONSULT WITH A FINANCIAL ADVISOR. I HAVE SAID IT REPEATEDLY.

CAN YOU SAVE YOURSELF RICH?

I do not think it is possible to save oneself into financial freedom. The financial services industry is focused on investing in endowment policies, retirement annuities, pension funds, mutual funds or unit trusts.

What we are essentially saying is that we take money from our monthly income (salary) and putting it into some form of investment with the dream that the money would grow to such an extent that we can one day use it to generate an income. I just do not see it working.

What is worse, we often invest money into these instruments while paying for debt that has a much higher interest rate than the growth we may expect form any such investment! I see it as borrowing money at a high rate to invest at a lower rate.

Two things:
1.  This is a very narrow perspective – discuss it with an advisor while planning;
2.  I am not against these products, it is rather the order of things that I am challenging.

How do I want to do it?

The Financial Services industry generally wants us to invest for capital growth. That is what any share or stock based investment is. It is a capital growth investment.

But we need income to live! Cash flow is the name of the financial game. When you go to a bank for a loan, they ask about your income, not your assets. In fact, you can get a loan without having assets. The banks know if you have a cash flow, you can repay the loan.

And my question is simple:  if we know we need cash flow to live, why do we invest for capital growth first? Why do we not focus on cash flow and building cash flow through investments? The quicker our cash flow from investments are enough to sustain our standard of living. the sooner we are financially free! That should be the focus.

IN THE PRESENT

What I love about this focus, is that is in the now. When I look at the cash flow from investments, I know what it is TODAY. I do not need to make assumptions about inflation and investment returns, things that I cannot control.

I am not writing here for the CEO’s of big companies who have good salaries, excellent company pension funds and share options. I am writing for people earning a salary in a normal job. Teachers, doctors, shop assistants – people working for themselves, probably 90% of the population!

Here is the thing: if you focus on cash flow for investing before capital growth, you will not need more life- and disability cover every year! Since you have a passive, investment or portfolio income, you do not need insurance products to provide capital to get an income! Over time you will save a lot of money on risk insurance!

I am well aware that stocks or shares pay dividends. Have you ever looked at dividend yields and calculated how much capital you need to get the income you require from dividends? And ask the financial advisor how much capital you need to get the income you need.

What I am saying is: traditional financial planning starts with this question:  “At what age do you want to retire?” Then the planning starts to build enough capital to able to retire at that age. Unfortunately, life happens. People lose jobs, people get sick, markets go up and down. CEO’s of companies commit fraud. The world gets hit by pandemics. And seldomly the plans work as planned.

CHANGE THE FOCUS

I want to change the focus and start with these questions: “How much income do you need today to sustain your standard of living? What can we do now to generate an income to replace your salary?”

Think about it, there is a huge difference. And let’s face it, if you do not have the income that you need, you can never retire.

Now you have lots of questions and few answers. I want it like that. I want you to think about what I said. Think critically. Discuss it with your financial advisor.

And come back here, I will give my ideas in later posts.

 

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Financial Planning Step 1 – NOW

Posted on July 17, 2020 by PietMar

Financial Planning is a three-step ongoing process.

The keyword is PLANNING. As you know, the best plan is worthless if it is not implemented. Planning without action is an absolute waste of time. Need I say more?

I want to list 3 ideas about this step:

  • Protect wealth before you create wealth
  • Somebody always pays for insurance – either you do it or your family does after your death
  • Your health (or ability to make money) is your biggest wealth.

YOUR HEALTH IS YOUR BIGGEST WEALTH

This is very important. You need to protect your health with a healthy lifestyle. Mental, physical, spiritual and intellectual health is important. I believe money and assets are not worth a lot in an unbalanced life. Perhaps with money you can afford a better asylum or hospital, but rather spend the money on a better vacation. Having lots of money and bad relationships does not make sense.

The message is: look after your health in a very holistic sense.

Having said this, sickness can decimate wealth in the wink of an eye. Protect your health with a healthy lifestyle and some form of medical aid or hospital plan.

Be grateful for health and the opportunities it gives you.

Now that the sermon is out of the way, let’s look at the rest.

STEP 1 – Now

Step one of financial planning always look at the present. What will happen financially, if you were to die tonight or become (physically or mentally) disabled?

If you die tonight:

  • what debt will have to be paid (bonds, car loans, overdrafts, credit cards, store cards, etc)?
  • What income will your family need to keep up the standard of living that they are used to? For how long do you want to provide this income? The age of children also plays a role.
  • Will your family need to rent in services to replace you – a good example is a wife who does not work, but drives the children to school, cooks, and generally runs everything. Who will do all of that if the wife dies? That is what you need to consider for both partners.
  • Are there any plans or dreams that you have that you would not like to die with you? Would it need money to realise? Do you want to provide for it? This could be things like a child almost at university age and you provide capital for university fees.
  • How much money will the executor of the estate need to settle the estate? Remember that it costs money to cancel bonds and often there are interim interest that accrues. The executor will also charge a fee.

Adding up all these amounts will give you an idea of the amount of life cover that you need. This is the case for life insurance.

It is best done with the help of somebody who knows what has to be done and how to do it.


What if you are in a car accident tomorrow on your way to work and you are

DISABILITY

Disability comes in many forms, but in every form your ability to generate an income is affected. In some cases people can never work again. Some cases people has reduced productivity and sometimes people can be retrained.

We prepare for the worst.

The questions are more or less the same.

  • How much capital do you need to settle all outstanding debt? You definitely don’t want to be in a situation where you cannot work and your house is repossed by the bank!
  • What will it cost to adapt your house to be wheel chair friendly?
  • Disability has its own expenses – extra medical expenses, care expenses, wheel chairs etc. How much income do need to provide for that?
  • How much income do you need to keep your family on the level that they are used to?

Once again, it is part of life insurance. Ask a financial adviser to help you. I am telling you about this. I don’t know you, so I cannot advise!

LOSS OF INCOME

In my experience, this is the one aspect of financial planning that is the most overlooked.

People get sick or are in accidents and cannot work for months on end. They are not disabled as per insurance definition. They are just sick. Most people will be able to think of somebody who was in an accident, had to spend weeks or even months in hospital and then took more months before they could return to work.

Income Protection protects you against this situation.

Nobody wants to lie in hospital and worry about medical aid premiums. If you cannot pay the medical, you might come out of the hospital a very poor person! Nobody wants to lie in hospital and worry about bond payments, car installments, credit card payments.

Too Summarize

The first step in financial planning is purely to protect your wealth! The products that you use to do that are:

  • Life Insurance
  • Disability Insurance
  • Income Insurance
  • Medical Aid/Hospital Plan

It is important to find the right cover for your circumstances, therefore you should not try to do it on your own. Please find a financial advisor that you can work with to assist you.

When this first step is done correctly, it will lead to a Last Will and Testament. That ties the death planning together.

YOUR OTHER WEALTH

I have referred to bonds and car loans a number of times now. It assumes that you have used some of your money to buy things and (hopefully) assets. I hate doing one thing twice. Replacing something I had because of an accident is not something I like at all. It means working for that same thing again. It means using money I had other plans for to replace something I already had.

Sometimes these things are too expensive to just replace, like cars and houses.

That brings me to the topic of Short Term Insurance.

Just like you cover your own life and health, insure your house, car, clothes, phones and computers, etc against risks such as fire, wind, water, theft, etc.

I will post about this in more detail later.

And the

DISCLAIMER

This is not advice. It is information. Knowing that you need life insurance, for example, is important. Knowing how much life insurance you need is something that a financial advisor must help you. You need knowledge of local laws and circumstances and you need the right tools to do the calculations.

If you start messing with your portfolio based on this post, I surely cannot take responsibility!

 

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Lockdown Day 101 – 5 July 2020 – Benjamin Yorkshire

Posted on July 6, 2020 by PietMar

Lockdown Day 101 – 5 July 20202

Benji Yorkshire

Snug Under Granpa’s Top.

Hi Everybody, I am Benjamin Yorkshire, Piet Maritz’s grandson. When my family moved to Ireland, I moved to my Granpa permanently.

Granpa agreed that I may share my story on his Covid-19 Journal. Here it is.

I love playing with a tennis ball (look at me chasing a ball in the banner photo). I can run after the ball and bring it back for hours at end. When I feel like tearing up a strange dog walking by in the street, I grab my tennis ball and rather take out my anger on the tennis ball. I love lying with Granpa when he works and especially when he plays with my ears or rubs my head. Don’t get me wrong, I will never go as low to wish I were a cat, but when Granpa rubs my ears, I would spin like a cat, if I could.


You may find it strange, but I do not like hugs. When I feel like it, I will jump onto Granpa’s lap and nudge him to scratch me or rub my ears. But no cuddles! Then I get anxious and struggle like a “wild animal” as Granpa says.

Benjamin Yorkshire

A bit tired, sitting on my seat.

But that changed this weekend. Grandpa is good to me. Whenever he can, he takes Chutney, my cousin, and myself with when he drives somewhere. When they go away for the weekend, I hear him ask if Chutney and myself are welcome, or he will not go. When he goes hiking, he takes me with, when he can. He shares his water with me, and I drink from his hand (I have not yet mastered drinking from the bottle, like Granpa, but I try). When I get tired, he carries me. I share this to show that I know I can trust Granpa. But I never wanted cuddles!

Last Wednesday I went for a haircut. It was a much-needed haircut, for not even I could distinguish back from front anymore. On Thursday Granpa put us in the Hilux, we drove a long time and got out in the mountains. We love the mountains and being able to run around freely and all the open space. It also means a lot of walking and hiking.

In the mornings it is very cold in the mountains. I am scared Granpa will go hiking without me if I lie in bed, so I go out with him when he has his coffee on the stoep. With my short hair, it is very cold, and Grandpa saw me shivering. He picked me up, but when he wanted to put me under his top, where Chutney always hides, I became anxious and ran off.

Yesterday morning was very cold. I really shivered and Grandpa picked me up. It was very cold, and I just kept on shivering. Then Granpa put me under his top. It was warm and snug, but I was tense. Then I realised I stopped shivering! I relaxed and lay under Granpa’s top like I often do when I lie in bed with him. It was actually genuinely nice. I enjoyed it. I enjoyed it so much, that when Granpa had to take me out, I struggled to stay inside his top!


Now, looking back, I don’t understand why on earth I never wanted to sit under Granpa’s top. It is warm, it is snug and comfortable (especially with Granpa’s boep!).

Benjamin Yorkshire

Watching the sunrise on Granma’s lap – a rare occasion

This is what I learned: Be adventurous and try new things. Don’t let fear of the unknown or assumptions about things keep you back from new experiences. Don’t worry worry what other dogs may think. Try new things, try new food, try new activities, go new places, read different books, and watch different movies. Dance (naked) under the full moon, sing in the rain, build a rocket bath in the backyard. If you don’t like it, it is fine, walk away, at least you know what you don’t like.

But, like me, you may just discover something that you never thought you would like that you actually love. Life is short – grab the opportunities.

 

With love

Benjamin Yorkshire

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Lockdown Day 95 – 28 June 2020 – SNAKE!

Posted on June 29, 2020 by PietMar

EVE & THE SNAKE

Ever since Eve engaged the snake in a conversation, I think, we have an inherent fear of snakes. Although I will not just kill a snake, I will not play with one. On the other hand, if I saw one, I would whip out my camera and take a lot of photos – from a safe distance.

When God asked Adam about what happened at the Tree, Adam said “It is THAT woman, you gave me!” Indeed. He tried to blame God! Then God asked Eve and she said: “It is the snake!” Putting the blame on the snake! And the poor snake? He did not have a leg to stand on!

The blaming game has never stopped since. We will blame anybody and anything, just so that we will not have to take responsibility!

IF YOU HAVE NOTHING TO SAY

Since I believe if I have nothing to say, I do not have to say it, I have been quiet. Yesterday I read this snake story and …

The story goes a snake slithered into a shed, looking for shelter against the winter. As he went in, he slithers over a saw. The teeth of the saw hurt him and the snake, thinking he must defend himself, lashed out and bit into the saw handle, breaking a tooth. Believing he is under serious attack, he started curling around the saw, trying to smother it with the pressure of his coils. The more the snake applied pressure, the harder the “reaction” from the saw. Eventually the snake was hurt so much that it died.

Food for thought and introspection.

THE SPARROW IN THE MIRROR

I have my own version of this story.  A House Sparrow is a very territorial bird. For its size it is also aggressive. Years ago, I had one that kept on fighting with the sparrow in the side mirror of my bakkie. Not only did it fight the “intruder,” it also messed my bakkie and I had to clean the poop almost daily. Eventually I had enough and settled the battled.

The thing is, the Sparrow was fighting himself. Just like the snake, there was no real danger, only perceived danger. No objective enemy, only a very, very subjective enemy. An enemy conjured up by the imagination.

YET ANOTHER TAKE

I know somebody with a very interesting interpretation of Luke 6:42: “How can you say to your brother, ‘Brother, let me take the speck out of your eye,’ when you yourself fail to see the plank in your own eye?” And I think he is right. He says the only reason one can see the speck, is because you know the plank so well. Because you know the plank so well, you can immediately, without magnifying glasses, recognize the speck! Makes me thought, when he told me that!

AND YET ANOTHER WAY

There is another way of saying this, coming from psychology(?). We react to what other people do because we recognize our own darkness. We are irritated by things other people do because they step into our own internal fights. I often must ask myself the question: “Why does that upset me so much?” Too often for comfort, it is the plank effect! I recognize the speck – the plank is too well known.

IS THERE A BALANCE?

As always, the cross I bear, I do not know where the balance is. Though I believe that we too often react to other people and situations from a perceived attack when there is no real threat, attack or malicious intend. I also think sometimes we have reason to be upset.

In other words, I do not think our reaction always just stems from our own “planks.” I am just not sure when it is justified and when not? Perhaps we need to ask to determine the intention? Perhaps we need to say we feel offended before we go off half cocked?

The message, though, is important. While killing itself because of a perceive attack, the snake might have warped the saw. While fighting with itself, the Sparrow killed itself. Reacting aggressively when there are no real threats can kill relationships, if not yourself. Surely it did a lot more damage to the snake and my Sparrow than to the saw or the mirror!

SOCIETAL SNAKES?

Could there be societal snakes? On a universal level I think there are a lot of snakes and sparrows! If we are not careful, it can take us back to the Dark Middle Ages. Unless we become less sensitive and first make sure that somebody is attacking us, have indeed malicious intend before we are offended. At the same time, perhaps we should become more sensitive. Whatever the case may be, we better sort this out, or we will be in serious trouble.

I am not sure we are going to stem the tide. I think there are too many people with a vested interest in division and aggression.

Then at least, on a personal level, do not be a snake or a sparrow!


And sometimes, we just must accept that some snakes and sparrows are not enlightened enough to understand these stories!

The question is, and it is the BIG Question, am I enlightened enough? Am I mature enough to face my own darkness? Am I mature enough to admit I am contributing to the problem – and to change?

 

 

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Six Things to Do To Become Wealthy & One Not To Do

Posted on June 26, 2020 by PietMar
To Become Wealthy do

Things to Do to Become Wealthty

Building Wealth is not unlike becoming successful in your profession. It is learning, skill, discipline, application, dedication – doing the right things over and over. If you earn an income from working, it implies you have acquired knowledge and skills that added to your value and somebody else pays you for the value that you deliver.

To earn more money, you can improve your knowledge and skills.

I will take this basic premise and explain how the principles apply to creating wealth.

Let me define wealth: To me wealth is a very wide concept that goes beyond money. In fact, money is the means to wealth. Wealth is enjoying your TIME, which means you enjoy the biggest gift of all – LIFE. Wealth is freedom – freedom to choose and live the life you dream of.

This is where money fits in: you need enough money to allow you the time to live. Wealth is Financial Freedom and to me Financial Freedom implies I do not have to work if I do not want to. Financial Freedom implies enough passive or portfolio income to live my life according to my values.

Here are 6 things you can do to become wealthy.

  1. LEARN

This is my niche – sharing knowledge. If you read through my posts, you will learn about the language of money, how interest is the #1 driving force in the economy and finances, you learn about asset classes and yesterday a more in depth view of savings.

You might ask why I am so taken up with knowledge. I worked as Financial Advisor and until about a year ago I taught people how to invest in property. The one thing I realized over and over is that people do not know the basics of money.

People do not understand interest. So how can they harness interest to grow wealth if they do not understand it? They do not understand interest, and fall prey to banks and credit card companies. They stay poor.

Back to my job analogy. The more you know, the more you study in your occupation, the more you understand your field, the more valuable you become and the more income you earn.

I always advise you to use a financial advisor and not make changes to your portfolio yourself. That is good advice! At the same time I am trying to impart the knowledge you need to talk with your financial advisor and work with him or her as a team. Know and understand the language of money! Then you can become a partner in your own financial plan and not another client!

2. HAVE A PLAN

The purpose of using a financial advisor is to craft a plan. A plan implies goals. May I ask you a few questions?

  • How much income do you need to be financially free – investment income enough so you can retire if you want?
  • When would you like to be in that position? What is the time goal to achieve that?
  • What do you have to do now, to achieve that goal?
  • Do you believe that the goal is attainable?

Without goals, a plan and action, all the above will be nothing more than day dreams!

That is why you need to sit down with an advisor.

3. DISCIPLINE

That leads to the next requirement – discipline. Without discipline, action will be very difficult. Without discipline you will do what I continuously warn against – you will change your plans every time you read something somewhere that sounds good.

Without discipline you will put your plan on hold every time there is a difficulty or when it seems that the progress is too slow.

That is why my question above is so important. Do you believe your plan is achievable?

The better you understand the money language, the better you will be able to evaluate and contribute to your plan. That can be very motivating.

4. DEFERRED GRATIFICATION

We live in a society where everything is immediate. “I want it all and I want it now!” And clever entrepreneurs know how to use this to part us from our money! Just charge it to your credit card. Or “with a easy six month payment plan you can indeed have it all now.”

I am embarrassed to say that I often paid for stuff that I forgot I had because of credit card budget accounts! Then I am also proud to say that there were things that I saved for and when I had the money, I realized I never really needed or wanted the item.

The point is, you have to accept the truth of Zig Ziglar’s famous quote: “If you do what you have to do when you have to do it, the time will come that you can do what you want to do when you want to do it.” That helps with discipline, when you think like that.

Here is another perspective, I will not buy this “thing” that I crave today, so that I can enjoy my life 10 years from now without money worries. My plan requires me to save a certain amount every month so I can have financial freedom. I will not exchange that goal for short term joy.

Another way of looking at it. Too often people spend the future for immediate satisfaction. Think about it. To have that “I-must-have-it-now” item, you are exchanging future income for something that may not have any value in the future. It happens all the time and that is why people are poor.

5. THE THING YOU MUST NOT DO

That brings me to the thing you must not do.

BEWARE OF ENTITLEMENT

Entitlement is the attitude that comes out in statements: “I work very hard, I deserve a Cappuccino each morning.” Have you ever calculated what the Cappuccino’s cost you? Especially if you pay with an overdrawn credit card?

“I work really hard for my money, I deserve a luxury holiday for a change.” It is fine, as long as the luxury holiday does not come at the expense of your savings!

We easily forget that small amounts add up to fortunes and in the process we can spend a fortune that could have made us financially free, or at least made us free sooner.

Eradicate any thoughts of entitlement that will jeopardize your financial goals. Especially if it involves any form of deferred payment! We defer gratification, not payment!

6. LIVE BELOW YOUR MEANS

This is a well known rule – do not spend more than your income. Very few people do. Go back in this post and see if you can explain why it happens. Is any of the reasons applicable to you?

Stanley in the Millionaire Next Door (a book I can really recommend) said that millionaires in the USA usually lived in a area where they could be “the Joneses.” Their standard of living was just a little bit better than the neighbors’, but not that much that the neighbors ever thought they were wealthier than the rest of the community.


You don’t need the toys of wealth to be wealthy. In my experience it is the need to show that you are wealthy that keeps people poor. There is nothing wrong with driving an old car. I have seen it often in my life. The people with the flashy lifestyles that many people envy, live on debt. They don’t own anything – they work for the banks. If they miss a day’s income, it is a financial catastrophe.

Then you get these normal people who actually almost look poor and when they open the books, they are multi-millionaires. They did not buy the toys of wealth, the invested in assets that made them independently wealthy.

They enjoy life. They have time and money.

7. SAVE

This is the result of the previous habit. You cannot save if you live above your income.

Everything starts with saving. There is a saying “a penny saved is a penny gained.” That penny that you save, it will become your slave. You have to put it to work so that it earns the maximum returns possible.

That is why I want you to know the language of money, so that when you sit with your advisor you can ask questions, make suggestions and make informed decisions based on a realistic valuation of the advise.

It helps to automate savings with debit orders that go off your bank account soon after your salary is paid. That reduces the risk of spending money that is intended to build your financial freedom.

Be careful not to save borrowed money, though! Too often I have seen people saving money in a low interest account, while spending money on their credit cards and living on an overdrawn credit card! That is borrowing high interest money to save in a low interest account. It is moving backwards financially! It leads to poverty.

CONCLUSION

There is no way to build wealth without doing the things I have listed here.

Having said this, and it is not an excuse to not do these things, do not defer your life to “when I am rich.” It is a balance. Life is precious, we must enjoy it daily.

Find the balance, get the people who walk the road with you involved. Get professional help.

DISCLAIMER:

The only piece of advice in this whole post is just this: DO NOT MAKE CHANGES TO YOUR PORTFOLIO WITHOUT SPEAKING TO YOUR FINANCIAL ADVISOR. I am not a financial advisor. I am trying to share knowledge and motivate you to do what you have to do to secure your financial future. That is a very personal goal and cannot be decided by a blog post.

Please be responsible!

 

 

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Four Asset Classes

Posted on June 24, 2020 by PietMar

Building wealth, is building assets.

Asset Classes

Four Asset Classes

I have already said that it does not matter how you make your money, it is what you do with your money that will make you wealthy. If you want to become wealthy, you have to buy assets with your money.

The four asset classes are Cash, Property, Stocks or Shares and Derivatives.

 

CASH
We start of with cash.
The first reason is that we need an emergency fund. Money immediately available when we need it for some emergency. Since it must be immediately available, we do not want the risk of capital losses. Typically we will save cash for an emergency fund in a bank account or perhaps a Money Market fund.

Cash

Cash – First Asset Class

The problem with cash is that it is low risk and very low returns. So we do not want to have too much money in cash. Too mitigate the problem, we will keep some money in a call account (immediate access, low interest) and some in notice accounts (higher interest, available after a specified time). Money Market Funds will have a higher interest rate and if we need the money, we can have it within seven working days (mostly).

If I had to make a rule, I would say keep as little as possible and as much as needed in cash. Traditionally we keep between three and six months of our expenses in an emergency fund. Optimize the interest that you earn.

We also use cash investments for saving for short term goals, like vacations or special thing we want to do or buy.

Bonds, like Government Bonds, are also considered as cash. Since the capital will fluctuate in correlation to the interest rate, it is not a good investment for an emergency fund. Since the interest is normally high and fixed, once you are invested, it is a good source of retirement income. The Government back these bonds, which also means you will always get your initial capital back at maturity.  Government Bonds are considered risk free.

Property

Recently a 38 year old guy with 107 properties said: “It is always too late to buy properties. It always too soon to sell properties.” Selling my properties when I did was my biggest financial mistake.

Property as Asset Class

Property – Asset Class Two

Property is a long term investment. I am not talking about your own house or vacant land. I am talking about properties that you can rent and earn an income from. If you can earn an income from vacant land, then we can include it.

 

 

 

Property is for most people the key to wealth.


Property has the following benefits:

  • You earn an income from the property when you rent it out;
  • You enjoy capital growth on the property while you own it;
  • You can gear it – in other words, you can BORROW money to buy it!
  • You make money with other people’s money – borrowed money and tenants helping to repay the bond

I prefer to always put property second when talking about asset classes. That is how it was when I grew up. It still makes sense to me. Property is the only asset class where I derive a cash flow that helps me to own the asset.

Think about it – cash investments come from your own pocket. That is why it is so difficult to build up. Stocks and shares comes from your own cash flow. That is why it takes time. Even if you reinvest the dividends, the dividend yields are very low.


With property, on the other hand, you buy an asset with borrowed money. You get returns on the full value of the property. This means you buy a $1oo ooo apartment (if you can find it) and get capital growth on $100 000. Perhaps you invested a $10 000 deposit. Yes, you have to repay the bond, but the tenant will help you with that and in time the rental will cover the bond repayment.

That is the thing with property – you acquire a valuable asset with very little investment from your own pocket.

STOCKS AND SHARES

Stocks and Shares are medium to long term investments.

This is where you can buy a share of good companies and share in their success.

There are different ways to invest in shares, depending on the money you have available and your knowledge.

The main goal with share investing is capital growth. Unlike properties, stocks are very liquid. There is always a market – buyers and sellers – and the price is immediately known. You can put in an offer to buy or sell and the transaction can be concluded almost immediately.

DERIVITAVES

This is not an investment, it is trading. It is a zero sum game. It means when you lose, you lose everything. Gambling is a zero sum game. If you put $50 on a horse race and the horses loses (favorites in horse races only win about 33% of the time and the odds is such that you cannot make up the losses but just betting on the favorites), you lose $50.

BE CAREFUL WHEN YOU GO HERE

Derivatives are what the name says – it is making money on an instrument derived from another, underlying instrument. You do not buy the underlying asset, such as shares, you buy a derived contract based on changes in the price of the underlying asset.

Today the best know derivative is probably Forex trading.

Derivatives

Derivatives and Trading as Assets

These instrument are highly geared, that is why you make money with a small investment. The problem with gearing, is that it goes forward or backwards with the same ratio. It means that you can lose as much as you make!

Do not venture into derivatives without very good knowledge and experience.

 

Trading with derivatives can make you money – like all trading. Drop shipping is also trading, just not as risky. If you know what you do, you can generate good money. But most people lose money. If I can believe the statistics, it is the 20% of traders who make money who get the money of the 80% who lose money – it is always a zero sum game.

DISCLAIMER:

If you have not done so yet, read the post that I linked to – it is very important.

In fact, do not venture anywhere financially without good knowledge and guidance. Please do not rush out and start making all kinds of changes to your portfolio! After reading this, you should have an idea of asset classes and what they do and how they work. Now go to your financial/investment advisor and ask him or her what would be the best way forward for YOU. Remember, financial planning is not a one size fits all. Always, always, use a financial advisor to help you with your planning and implementation.

 

 

 

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What is Financial Planning

Posted on June 18, 2020 by PietMar

DISCLAIMER!

If you have been following my posts (and read the Disclaimers) you would realise that all my disclaimers tell you I am not giving advice. I am sharing from my experience, from my knowledge, from my insights. What I share is information, perspective or educational, knowledge that I believe could help you understand money and finances better.

Every disclaimer advises you to see a financial advisor, financial planner or investment advisor. Every disclaimer warns you not to make haphazard changes to your investments or financial portfolio.

WHY DO I DO IT?

I am not just doing that because there must be a disclaimer! I do not just do it because I must protect me against liability if somebody does something stupid and blames me!

I do it for a particularly good reason. Financial Planning is a process and requires knowledge and experience. It is best done with the help of a professional. If I can compare it to medicine, you may read and know a lot about medicine, but in the end, it is best to have a surgeon do the operation!

The purpose of Financial Planning is to take you from where you are to where you want to go. It should be a holistic process. That means it takes into account all relevant factors of your current situation.

Relevant factors, to name a few, in this planning process is your age, your current income, expected increase in income, disposable income, how much you are prepared to save from your income. What time in your life you would like to be financially independent (retire) and the time to reach that age. In other words, how long do you have to prepare, then we can calculate what you must do. Planning must lead to action.


 

Your financial plan will be influenced by marital status, whether you have children, their ages, your ideals for their future.

Financial Planning process must look at your appetite for risk. Do you prefer low, medium, or high-risk investments? That is not whether you prefer low or high returns, everybody prefers high returns. Risk appetite means can you live comfortably with a loss. Too many people get excited about potential high returns but fall into depression because of a small loss. To do financial planning, you need to establish your risk profile.

Financial Planning would also take into consideration family development, we already mentioned that.  Do you need to provide funds for tertiary education? When will it be needed, because that will have a big influence on the type of investment you can make?

FINANCIAL INDEPENDENCE

Let’s define financial independence. Financial Independence means that the income that you get from investments can provide you with the lifestyle that you desire. This is the thing you will not be able to retire until such a time as have enough passive, portfolio, income to cover at least your basic expenses. That is why it is important to know where you are, where you want to go and know how you will get there!

That is why I keep repeating myself in the disclaimers.

It is very tempting to follow every new idea. It may sound as if every new idea that you read is better than what you are doing and will bring you to financial freedom quicker. That is dangerous thoughts! A straight line is the shortest distance between any two points. Also between where you are now, financially and where you want to be.

That is why it is important to work with the financial planner or investment advisor.

Let me use a silly, male oriented, example. From my house to the nearest mall is 5.5km. Straight line. I get to the stop street and I see this pink Porsche. I follow it to get a closer look. Oops, it turns into a Cul ‘d Sac. I must turn back. At the same stop, there is this beautiful woman, I have to take a closer look. I follow her around. She drives in the opposite direction. When she gets out at the other Mall, I am 15 km away from where I want to go, but I have already driven 10 km’s.

Please note, I never got a Porsche and I did not even speak to the pretty woman. I have wasted a lot of time, fuel and drive a lot further to get where I want to go.

That is what I am encouraging to do. You must stick to your goals. The person who knows your goals and circumstances is the financial advisor. He or she knows your circumstances and will be able to advise you whether this “opportunity” will shorten the line, or just lead to detours.

  • The best thing you can do, is when you read something about an investment or anything related to money, is to study it, so that you understand it thoroughly. Then you go to your financial advisor and tell her you have read about this investment. It seems as if it can work. You think it might fit into your financial plan at this point. What do he or she think? Then you can discuss it. You have enough knowledge and insight to bring valuable ideas, instead of just blindly following. You have enough knowledge to evaluate the advice that you receive.

A SIMPLE GOAL

My message is simple: I want you to have knowledge and understanding, because I believe a client with knowledge is a good client. I believe clients who can ask “Why and how” with insight are good clients.

A good client contributes to the financial planning process, but also trusts and follows the process. A good client buys into the process and the financial plan and takes ownership, because he or she understands.

My sole purpose is to help you understand. Never, ever, will I ever try to advise without a long and thorough interview to determine your needs and desires.

A financial plan can never be one-size-fits all.

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Language of Money: Interest Makes the World Go Round

Posted on June 17, 2020 by PietMar

Are you Interested in Interest?

Every single word that I showed you yesterday when we spoke about the vocabulary of wealth, relates to INTEREST!

For now, we are not concerned with calculating interest. It is enough to understand what interest is and the two forms it takes.

You are, no doubt, aware of the saying “You work for your money, let your money work for you.” Think of interest as the SALARY your money earns while working for you.

 

Simple Interest

Interest in its simplest form is a bank account.

You lend your money to the bank, to make it easy, let’s say $100 for 12 months. The bank says they will return $105 to you after a year. That means the interest rate is 5% per annum. This is called Simple Interest.

The bank takes your $100 and lends it to a client at 5% CAPITALISED MONTHLY. After 1 year the client has to repay $105.12. That $.12 sounds negligible, but it is THE MOST POWERFUL CONCEPT IN CREATING WEALTH.

Compounding Interest

The correct term is COMPOUNDING interest. We just talk about interest on interest. If I may use the analogy of slaves, your money is like a slave, working for you. With compounding interest, the children of the slaves (interest) also works for you. You want that. The more “slaves” you have, the more work can be done. The more “slaves” – wealth – you will acquire.

More complex interest.

If you buy a flat or apartment and rent it out, we will call the interest “rent.” Now it is up to you to ensure that the rent also works for you by saving or investing it.

But here is the good thing of investing. Not only do you earn interest, the value of your apartment will also increase over time. I am not going to bother with calculations at this stage.

For today, I will keep it simple.

All the interests that we have spoken about brings us to a term that is often used in the financial world: ROI.

Return On Investment. If I ask you, what was the return on investment that you lent to the bank? $100 turned to $105.00? The Return on Investment is 5%.

What was the Return on Investment for the $100 the bank lent to a client? $100 turned to $105.12 the ROI is 5.12%. That is why banks are so rich! The know and understand the language of money!

What would the return on investment be on the apartment?

That is a bit more complex and I do not want to make it too complex. In it’s simplest form it is the sum of the monthly rent less expenses plus the capital growth divided by the amount you put in to buy the property. If you bought cash, that is purchase price. If you took a bond, it will be your deposit.

If you want to grow your wealth, your money must work for you. Think of interest as salary and in the same way you think about how you can increase your own salary, think how you can increase the salary on your money.

DISCLAIMER:

DO NOT RUN OUT AND CHANGE INVESTMENTS BECAUSE YOU CHASE HIGHER RETURNS! In the era of slaves, many slaves worked themselves to death. You have to take care of your money, or you could work your money to death, too!

Never make any changes to your financial plan or investments without consulting with a Financial Planner or Investment Advisor. Do not chop-and-change.

I am not giving you advice, I am giving you a perspective and ideas. Implementing them is part of a personal analysis and a personal plan, suited to your circumstances and needs.

 

 

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