Schaefer Asset Management

Schaefer Asset Management Schaefer Asset Management (SAM) is an independent broad based authorised South African financial ser

Schaefer Asset Management (SAM) is an independent broad based authorised South African financial services company that provides a wide range of financial services to corporate and private clients.

Keeping your premiums lowThe crime wave of the past few years has driven up premiums to the point that insuring your car...
25/09/2017

Keeping your premiums low

The crime wave of the past few years has driven up premiums to the point that insuring your car and personal possessions has become a prohibitively expensive exercise for many people.

Short term insurance premiums are now a major item of expense. Just check your bank statement and see how large your monthly debit order for short term insurance has become. The cost is so expensive that some otherwise responsible citizens may be tempted to cancel their policies to opt for self- insurance.

However, given the crime wave and the appalling standards of driving in South African roads, as well as the fact that more than half the cars on our roads are uninsured, and it is a foolhardy person who takes
the decision to cancel his cover. In any event if you are still paying off your car the financial institution will insist that you maintain comprehensive cover at all times.

There is however a number of practical steps that one can take to ensure that your insurance premiums are kept as low as possible.

First, make sure that your broker has not gone to sleep and that the regularly shops around to ensure that you, the client, are still getting the best possible deal.

Sometimes brokers begin to take their clients for granted and are not proactive in reviewing the client’s situation.

If you suspect that you are not getting a good deal, ask a rival broker house for a no-obligation quote and then compare. Don’t only compare premiums, also check factors such as the excess which you will be called upon to pay in the event of a claim.

Make sure that your vehicles are not over-insured. The value of a vehicle drops each year and in the event of a claim the insurance company will normally pay out “book value”. This is the average between the “trade” and “retail” price of the vehicle.

Be sure that you are not wasting your money by insuring your vehicle for more that it is worth. Normally the insurance company will not reduce the insured value of your vehicle each year unless you or your brokers specifically request this.
On the other hand, make sure that your broker house and household contents are not underinsured. In the event of a claim the insurance assessor will estimate the replacement cost of all of your possessions and if he finds you are underinsured, you will only be paid a portion of your actual claim. This is because in the event of under insurance, you have been paying lower premiums that you were actually liable for. For instance, if you had insured your possessions for R100 000 and the assessor finds that they are really worth R150 000, then you claim will be reduced in the same proportion.

Items such as books, records, CD’s and furniture often have a high replacement value, but as they are unlikely to be stolen, you can bring your premiums down, without risking under-insurance, by instructing that such items be covered for fire and flood risk only and not for theft.

If your car is old, don’t take comprehensive cover. But always ensure that you do have balance of third party, fire and theft cover so that in the event of you being at fault in an accident, the damage to the other vehicle is fully covered.

You should also check whether fitting a good anti-theft system will result in a significant reduction of premiums.

Linked Unit TrustThe South African investors has never has such a wide choice of investment products. This is great if y...
25/09/2017

Linked Unit Trust

The South African investors has never has such a wide choice of investment products. This is great if you make the right selection, but it can cost you plenty if through ignorance or bad advice you invest your money in an in appropriate product.

The good, but slightly daunting news is that the choice of investment products is growing steadily - almost by the week.
It seems that just a few years ago choices for investors were simple, if rather boring. Savings accounts, fixed deposits, life assurance policies and - for the really adventurous - unit trusts.

There were problems with each of these classes of investments:

The after-tax return on savings account and fixed deposits was mostly lower than the inflation rate. Life assurance policies offered better after tax returns, but they were very inflexible and investors found themselves locked in for long periods of time. In addition policy costs were high - particularly if the investment did not run to the contracted maturity date. The small number of unit trusts available offered better after tax returns and were most flexible, but as a result of bad advice - many people bought high and sold low thus losing money.

Today the watchword is diversity, transparency and flexibility and the investment product which is really benefiting from the golden age is the linked unit trust.

Essentially, linked products allow a choice between the full spectrum of 900 plus unit trusts and also give the investor the freedom to make low-cost switches between unit trusts.

This mean that linked products give the investor the opportunity to keep money invested in a spread of the top-performing unit trusts.

Linked unit trusts are useful for the traditional unit trust investor who either has a lump sum or a regular monthly amount to invest. But the same linked concept can also be used by investors seeking the tax advantages of a retirement annuity, a pension or provided fund or an endowment policy.

As a result, investors, fed up with low after tax returns from banks and the lack of transparency and inflexibility of life company saving plans are now pushing a fast growing portion of their available funds into linked unit trust products.

These products are revolutionising the voluntary and retirement savings market and many life companies have now launched their own products in order to defend their market share.
The linked products put control back in the hands of the investor and allow him to pursue an investment-risk strategy best suited to his personal circumstances.

However, with this freedom comes the need for you, the investor, to ensure that you are receiving competent advice as to your selection of unit trusts with in the linked product.

It has never been so important for investors to be sure that their financial advisor really knows what he is talking about; that he is not stuck in the past but is keeping up with fast changing investment world. Getting the wrong advice nowadays can cost
you plenty in lost returns.

Outliving your moneyAs a financial planner I am saddened when I encounter elderly people who have lived responsible, pro...
25/09/2017

Outliving your money

As a financial planner I am saddened when I encounter elderly people who have lived responsible, productive lives, but who have been reduced to near poverty towards the end of their days. These are often people who have saved and been frugal during their working lives, but who, because of the silent thief of inflation, find their standard of living dropping alarmingly as they get older.

The problem is that people are retiring earlier and living longer. Today many retired people literally outlive their money.

With large numbers of middle aged people now opting for early retirement packages, the problem is likely to become even more widespread in the future.

Take the example of a man accepting a retrenchment or early retirement package at age 55. He may well live another 30 years or more - almost as long as he spent working. Many such people will find that unless they are extremely careful, their “large” lump sum package”, or their monthly pension, may seem hopelessly inadequate in even ten years time.

So if you are contemplating retirement, here are some pointers which should help you ensure that you retirement capital lasts as long, or longer, than you do.

First, supplement your retirement income doing some low key job as long as you are able. Not only will this “give you reason to get out of bed in the morning:”, but it will also give your capital a better chance to grow during the early years of retirement.

Second, only invest a small portion of your money at fixed interest - this is your emergency fund. Your credit card or a notice deposit account are suitable vehicles for this investment. Many people invest too much at fixed interest and then find that after drawing their living expenses and paying tax on their interest, that inflation is actually causing the buying power of their capital to shrink year by year.

Third, have a competent financial planner do a “life of capital” calculation for you. This calculation involves looking at your life expectancy (the number of years your are likely to live) and then making some conservation assumptions regarding future investment growth, tax and inflation. Your planner should the be able to tell you whether the income you wish to draw from your capital is reasonable, or whether it is likely to lead to disaster in later years.

Fourth, don’t overlook the fact that your medical expenses are likely to increase sharply in the last years of your life. Look very carefully at what sort of medical cover you have - be it a medical aid or hospital plan. Be sure you understand all of the implications of your medical scheme, particular the question of future affordability. There is not much point in buying expensive health insurance and then find that as you get older and really need the cover, you can no longer afford the monthly payments.

Of course, the only sensible answer is to fund your old age medical needs while you are still young and working. However, if you have not done so, and you are already entering retirement, consider spending less and reserving some of your capital as a medical nest egg. The long queues and chaotic State hospitals are the dismal alternative.

Lastly, don’t be silly and become stupidly generous with your relatives when you receive your retirement package. Remember the old adage: A fool and his money are soon parted. Be hard-headed and businesslike about request for loans - even to your own children. I’ve seen many cases where children, often with the best intentions, borrow parents’ retirement money and then are unable to repay it, thus leaving their parents to face a life of hardship.

Return and Risk? What to watch for“What is a good investment” This innocent question is often posted to financial planne...
25/09/2017

Return and Risk? What to watch for

“What is a good investment” This innocent question is often posted to financial planners such as myself without the questioner being aware of the frustration that such a question causes. This is because there is no such thing as “a one size fits all investment”. A good investment for one person may well be a terrible investment for another.

What are your aims when you invest? Ideally you should aim for the highest return coupled with the lowest risk. However, this statement needs further clarification both as regards return and risk…

Your return from an investment can accrue to you in the form of either a capital gain or taxable income or both. If it accrues as income, you should look mainly at the after tax return as the before tax return is misleading unless you pay tax at all.

From a tax perspective a lower income yield together with a capital gain is more attractive to the investor in a high tax bracket than a high return. Shares, unit trusts, property and investment policies will be attractive to this investor.

On the other hand, the investor in a low tax bracket (this implies that his income is also low) will probably be more interested in a high return rather than capital gain. Tax is not a problem for this investor, but sufficient monthly income is. Fixed deposits and participation bonds and annuities will be attractive to this investor.

We can distinguish between two types of risk.

The first is your risk of losing money – the risk that you will get back less money than you invested or that your capital growth may be unacceptably low. This is known as the “commercial risk”. Many investors discovered to their horror that Masterbond / Supreme bond / Sharemax has a high commercial risk. Unit trusts and shares also have a commercial risk. A good rule of thumb is: “the higher the return the higher the commercial risk”.

But there is another more dangerous risk which is not immediately apparent. You invest R10 000 now; nothing goes wrong and in five year’s time you get back R10
000. But because of inflation the buying power for R10 000 has dropped. This is called “inflation risk” of investment. Fixed deposits and participation bonds have a higher “inflation risk”.

You should keep both kinds of risk in mind when you invest.

Another important aspect is the liquidity of your investment. Liquidity means how soon and how easily you can get to your money should you suddenly need money. You also know what penalties are involved if you cash in you investment early.

Finally you should be able to understand the investment you are making because at the end of the day, you must take personal responsibility for the investment decisions you make. Keep asking your investment advisor questions and if he can’t explain the investment in a way that you fully understand, then you probably need a different type of investment or a better advisor.

Your investment should ideally require the minimum involvement, specialised knowledge and skills from you. Their management and control should not involve too much of your time. This is why, for instance, unit trusts are normally better bet for the average investor that the direct purchase of shares.

Review your Disability CoverDid you know statistically speaking it is much likely that a disabling accident or illness w...
25/09/2017

Review your Disability Cover

Did you know statistically speaking it is much likely that a disabling accident or illness will force you to stop work early than it is that you will die before retirement?

People are often more willing to buy life cover than disability cover and yet the financial consequences of you becoming disabled are normally for more than if you should die. This is because it is very expensive for a family to care for a disabled person. Houses and vehicles sometimes need to be altered and medical and nursing cost can be astronomic. State financial support for the disabled is also shrinking.

And so the question I want to ask you this week is: What would be the consequences for you and your family if today you became either temporarily or permanently disabled?

Young working people in particular need to face this question. Often single working people with no dependents rightly see little need for life cover, but they fail to recognise that along with everyone else, they have a critical need for disability cover should they become paralysed, blinded or similarly incapacitated.

Most people who work for a large corporate employer will probably enjoy disability cover as a multiple of their salary as part of their package. However, be warned that the level of this cover may shrink in the near future as the severe illness pushes up the cost of cover to levels that your employer may find unaffordable.

The most common type of private disability cover is “Capital Disability”. This is basically “accelerated life cover” (also bought as a stand alone) as it is a pay out of all or part of the life cover on a policy in the event of you becoming totally and permanently disabled.

Capital disability lump-sums are intended to pick up the additional costs which follow a disability as well as to provide investment income to partially replace your salary. Another type of disability cover is income replacement assurance. This is a vital product for self-employed. Such cover pays a regular monthly amount in the event of either permanent or total disability. There is always a waiting period after the accident or illness before income replacement cover begins to pay out. Generally speaking the longer you are prepared to wait the lower the premium you will have to pay.

Dread disease cover is another form of disability assurance. Again this is an accelerated or stand alone pay-out of life cover in the event of the life assured contracting one of the defined dread diseases – cancer, heart attack, stroke and so on. (Different life assurers have different definitions of “dread disease”.) The idea is that this pay-out will enable you to pay for your treatment and also to make whatever adjustments are necessary to your lifestyle as a result of the dread disease.

It is vitally important to note waiting periods and exclusions on all cover.

There is an industry-wide agreement that limits capital disability cover to 90 times your gross monthly taxable income and your income replacement cover 75% of your gross monthly taxable income. This agreement takes into account disability cover from most sources including your employer. So make sure you tell your broker or
financial advisor about all sources of disability assurance. If you don’t, you may be paying needless premiums. Life companies are quite flexible in terms of revising these limits and levels so check with your advisor.

This is a convenient time to review the standard disability products available, so that you can consider whether you are adequately covered. If you have doubts on this score, ask your broker or financial advisor to do a full “needs analysis”.

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31 Leadwood Place, Beacon Bay
East London
5241

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