Investing 101

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Helps to start by a brief definition right? Shares/equities/stocks/securities give you part ownership of a company that is listed on the stock exchange.  The more shares you own, the greater your portion of ownership in that company.

Shares are bought through a stockbroker. In NZ, here is a list of accredited stockbrokers https://www.nzx.com/investing/find-a-participant.

The minimum you can invest for any share depends on its tick size. You don’t really need to know this. Approximately $300 will suffice to get you going on a company of your choice. So if the company shares are trading at say $10 per share, you only get 30 of them, if you’re investing $300.

For owning that part of the company, you are entitled to the company’s dividends – a payment made by the company out of profits to all investors who hold pieces of that company. You are also entitled to capital gains, that is, as the company grows, and gets more opportunities to expand, the portion you invested in the company also grows. For example, if you bought A2Milk last year at $4, your investment would have tripled as the share is currently trading at $12. 

But how do you know which shares to buy? You’ve got to love reading company news. And to know which signs to look out for. Such as :  Is the company doing well? Its management? The strategy they are choosing. Their partnerships? Annual reports? All that and more! Which is why there are financial analysts to do the donkey work for you, finding which stocks are great buys and which are sell ones. And you pay a fee for their services.

(Just a tip here, NZ cab drivers know a lot about shares to buy.  I think airport waits give them ample time to look for company news. Ask them casually which shares they are buying or selling next time you hitch a ride. Then do your own research obviously to see if they are right. It was actually one of them who introduced me to bitcoin long before it was famous. And yet another who told me about trouble at a certain company, before the news was announced. Eavesdropping on their executive passengers I bet! )

However, I should hasten to add that investing also involves risk. Because share prices are always going up and down in response to a whole lot of factors which we cannot go into here.

For example, events such as elections (Zimboz hello) can have either an up or down swing on shares. So be aware that with investment comes risk. And volatility.  By and large though, investing in stocks over a long period of time, if you choose the right shares, should fetch you a reasonable gain. 

There are other ways of investing if you don’t like following news or finding an analyst to help you choose the right shares to buy. Today I’ll just pick Smartshares. Maybe later, we can talk about managed funds and bonds.

You can invest in Exchange Traded Funds. These are called Smartshares in NZ. They are basically baskets of carefully selected shares that you can buy and sell anytime as one share. So instead of choosing which shares to buy, you can just go for a basket of well performing shares, which you buy as one. In NZ you have the choice of buying the 10, 50, 100 top companies as a basket. You can even buy top 500 companies listed in the US, top 200 listed in Australia etc as one share through these Smartshares. See their products here: https://smartshares.co.nz/invest-now#participants.

How much? You can get these with about $500. There is a $30 admin fee. You can then continue to grow your investment with as little as $50 per month. The benefits you ask?

  • Diversification – that it, you have a mixture of shares in your basket. Some will perform well when others are not doing as great. That way your basket is profitable most of the time.
  • Lower fees as compared to other managed funds.
  • Global portfolio – you build your portfolio to include well performing global investments

So without boring you to death, I will end here. The points I make are:

  • with as little as $300 you can buy shares in NZ. I have included the links of brokers for you to check out. Maybe you bank with one of them, and that makes it even easier to start investing. You can do it online as well, once your provider has set up a management account – where you buy and sell your shares from.
  • If you don’t like having to follow the news, go for Smartshares. Remember diversification, global appeal, lower fees. $500 and $50 monthly thereafter and you’re good to go. You can sell them anytime as you wish.

Last year alone, the NZX top 50 companies grew by about 23%. That’s some serious return on investment right there.

Before I go, I’ll share a short personal investment story. I asked my friends, who had offered to throw me a baby shower to encourage my other friends to bring monetary, instead of “in kind” presents. It happened. I invested the cash and have been adding $50 monthly. She’s turning two in a week’s time, and she already has a nest egg from her wonderful aunties and uncles. Now I know some people may feel some type of way about this. But the point being:  find like-minded people who will find no fault in and support your efforts in trying to build wealth for your family.

Till next time, happy investing.

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of bogus funeral plans…

 

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I watched with great sadness the stories unfolding on Facebook, where a number of women residing in the UK recounted cases of financial and emotional abuse that they endured at the hands of fellow Zimbabweans who operate “funeral insurance” companies. These companies are run burial-society style and when the scandal broke many women were shocked to learn that receiving their respective pay-outs that their membership entitles them to were not as automatic as they thought. Issues like missing a monthly subscription, not attending founding member parties and AGMs, not supporting deaths of strangers within your assigned group, not supporting marketing initiatives such as buying company regalia and not addressing the founder, a 40-year old woman as “Queen Mother the Visionary” were plausible reasons to disqualify members from receiving their pay-out entitlements.

The decision as to who is disqualified rests squarely on the Queen Mother as you may have guessed.

One woman who was a member of Madzimai Akatendeka was disqualified from receiving cover for her son because she did not buy T-shirts.

Many women came forward to recount how they joined under the misguided notion that the company was Financial Conduct Authority (FCA) regulated. They were told that there was board within the registered company that sat to make all decisions pertaining to the company.

Turns out, the company has one director, the founder. All the other purported directors were mere Facebook admins. Remember those memes circulating on social media showing admins receiving a giant burger and coke as payment for their services? I think those memes foretold of these particular admins; ndovane chunhu! To keep them happy and sedated ka!

Without boring you to death, let’s look at the numbers:

To register for this plan, one had to pay for the following:

  • somewhere between £100 – £365 joining fee (amount depends on the number of funerals that would have occurred BEFORE your joining as well as your visa status in UK)
  • £18.99 per month as administrative fee and
  • £25 or £100 for each member funeral in your group.

Apparently, there is a sizeable chunk of humans with illegal visa status in the UK, which makes them easy prey for these bogus funeral plans. Needless to say, most of these illegal migrants were threatened with police/immigration action if they demanded their pay-outs.

At the time the scandal became public knowledge, the company had two groups with approximately 200 members each. Each member has 9 beneficiaries under their cover, receiving £5,000 as payout or every death. (I am not clear as to whether the 9 included the main member).

The main beneficiary and their spouse receive a £20,000 payout in the event of death, which would require that members within their group contribute £100 towards main member/spouse funeral. For the other 7 (or 8) beneficiaries, members contribute £25 each for the respective funerals.

In my own opinion, the bait was the £20k/£5k lumpsum that one is entitled to upon their demise or that of their beneficiaries.

It is sad that in an economy with advanced financial products such as the UK, financial abuse of such magnitude can go unnoticed for a long period.

Let me be your big/lil sis for a minute and remind you that personal finance decisions require a take-charge attitude where the individual actively pursues knowledge on where to go and what to do. This is fairly easy in these social media streets!

Failure to take charge of personal finances will lead to impatience (and in the finance world you pay a hefty price for impatience) and signing up for raw deals, as we can see in the case of Madzimai Akatendeka (MA). Their name actually sends alarm bells in my head. Typical case of kuzvifonera, me thinks! Madzimai akatendeka, arasa kutendeka!

As I listened more to the individual cases, I noted some reasons why people joined this plan. I will outline the reasons given and immediately offer general advice on what could have been a better approach to follow. (Here I deliberately avoid recommending any products, for the simple reason that, I do not want to be held accountable for any investment decisions people will make. It is always advisable to seek the services of your bank/financial adviser to help you with investment plans).

  1.       The need for financial backup in the event of death in the family (in Zimbabwe), to cover funeral costs such as burial, food and transport.

There are tried and tested products in Zimbabwe that can offer funeral cover for minimal contributions, far less than what these bogus funeral plans were charging.

  1.       For families living in the diaspora, the ability to get a cash payout in the event of death in Zimbabwe (£5k) would enable them to travel back home to Zimbabwe for burial.

If this is the reason why one would join MA, I’d be a party pooper and let you know right away that what you need is not insurance, but an investment portfolio that can be liquidated fairly easily in the event that you require the funds. It sounds like a feat to build a £5k nest egg, but with money-market savings products ranging from 1.3% p.a to 5% p.a for investment periods anywhere between 1-5 years, this is fairly easy to do if one is truly committed to the process. For starters, just do away with that McD and coffee and see how far you can go with setting a little money aside every month.

  1.       Most single parents with children worry about financial support for their children after they die. I heard one single mum saying that she wanted to secure her children’s lives after her death. And in her mind, a £20k payout would help towards that feat.

This reason can be explained in part by 2 above, but also there are stock and bond market products that can be used to invest in the long term. Currently, UK stocks are on average considered to be cheaply priced. Some of the income stocks in the UK are paying out lucrative dividends. It is time to buy! Go have a chat with your bank to see how you can go about investing in the stock market. Other products to consider are exchange-traded funds which track blue-chip indices, and if you are a risk lover, dabble in cryptocurrency (famous of which is bitcoin).

For reason 3 (and 4 below), it is imperative that I mention that insurance IS NOT investment. As long as God gives you and your 8/9 beneficiaries life, it’s like putting money down a bottomless drain. You get nothing out of your insurance premiums. (Of course, there are some insurances that would give you something out if you’ve not made any claims for stipulated periods of time. But ukaona vakukupa money back guarantee, vanenge vamboluma big time. Insurance is big business. It has some of the best paid executives on the world. And it never fails because tinotya ma unfortunate incidents)

The ultimate goal of any prudent investor is to be able to replace all insurance cover with investment products designed to work for all of your financial needs. Imagine surviving till your 90s, how much you’d have contributed towards insurance if you never take a proactive stance to build your wealth steadily over time?

Which brings me to the only legit reason why one would join MA.

  1.       Illegal migrants would be worried more about being covered when they die or being able to send money home in the event of death of their loved ones.

As an illegal immigrant, the question of travelling back home in the event of death of a loved one is out. However, one is able to send money home to allow for reputable service providers in Zimbabwe to offer their family decent funeral cover.

The only main worry is how they can plan for their death in the diaspora, while being illegal at the same time.

Which makes MA a viable option.

However, with events currently unfolding, I say there is no harm in trying the good old “put your money in a pillow”. Your friends will find it and bury you. Even Ariel Castro, that infamous Cleveland kidnapper-school bus driver, had $22k cash in his house. If he, sick as he was, could do it, we all sure can do the same. On a more serious note, this is one for the policy makers and perhaps my bright friends in insurance product development to have a think about.

 

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On a parting short, if one had invested a lump sum of £365, with £50 regular savings payable monthly (round figure for the £20 you gave MA every month and the extra £25 for one funeral per month) invested for the two years that MA has been in existence, at a rate of 5% p.a that amount would have grown to approximately £2,628. Locking it in for 5 years it would grow to just over £18k. That’s the power of compounding interest.

Always shop around before you commit your finances.

Investing in stocks: Do you know the red-flags?

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Avid water surfers and swimmers will tell you that the first thing they look for before going anywhere near water is the warning signs: dangerous currents, sharks, algae, jellyfish etc. From time to time, there are flags raised to show the level of risk involved with going near water. When a red flag is raised, rough conditions such as strong surf and/or currents are present and so surfers know they are being discouraged from entering the water.

The same applies to investments. Know when the red-flags are raised. Before we can talk about how to dabble in stocks and bonds, we need to tackle the issue of red flags.

Truth be told, your friend who works at the company or your wife at the stock exchange are powerless to do anything if/when the boat is sinking.

To put this into context, I have to share this story. Joan was Feltex Carpets’ board member a year and half before the company went into receivership (it could not meet its financial obligations). Her account of what transpired is what I want to highlight today, in the hope that you and me can smell danger from a mile away. From her story one lesson is clear: When the red flags are raised, no matter how sugar-coated the news appear in media, run! Sell your shares and park them someplace else where there is no noise.

There are 3 red-flags that might have made me take off at the speed of ten dogs:

  1. She was appointed a month before the Feltex IPO. That was way too little time for her to come in and prudentially endorse the whole process. I’d say she came in as a pawn to complete the attractive, forward-looking picture of a carpet company appointing a female director, which was quite rare back then in 2004. (It’s now 2017 and we’re still lobbying for more females on company boards!). She came in merely to rubberstamp processes that were agreed to in her absence.
  2. There was a profit downgrade during her time in the board. Reasons for a profit downgrade can be many and varied. Understandably, the carpet business was in the troughs but the major issue was Feltex had overextended its lines of credit with their banker. And not meeting their profit forecasts (by $9m!) was definitely a very big blow.
  3. Joan then hastily left soon after the profit downgrade. When you see board members stepping down without a word, especially so soon after their appointment; you can be sure that there are squabbles in the boardroom that they are not willing to divulge for the good of their career and/or personal standing.

And sure enough, a mere 15 months after Joan’s departure, slightly over 2 years after their IPO, Feltex carpets failed.

While I commiserate with a fellow woman, I believe it was poor judgement on her part to agree to an arrangement that clearly shows that she was getting on the ride as a second-class citizen. In a way, her opinions surrounding the most crucial process of the business didn’t matter. At least that’s the message I get from this all powerful male delegation hiring her a mere 30 days before the IPO.  And fairly so, NZ courts exonerated from any wrongdoing in the decision that made 8000 investors lose $250m when Feltex went under.

But the lesson is clear for all of us, when you choose to buy shares on the stock market, keep yourself updated on the announcements they make – big and small, and know when it’s time to walk away.

Prepare for retirement in style

 

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That seal in the picture is #goals for me! I see myself one day in my sixties, lying on a beach somewhere fantastic, enjoying the sun, without a worry in the world! It may also be your dream too, but right now let’s face the facts….

One in every three kiwis is not ready for retirement. Alarming, right? You can read more about it here.

Which is why it makes sense to talk about Kiwisaver.

I am not going to bore you with the details, assuming you know the drill, but questions are always welcome.

My emphasis will be on just 3 points that I think are worth repeating, provided you’ve heard it elsewhere:

First – you have the option of choosing your Kiwisaver provider

If you don’t, IRD will allocate your account to one of the 9 default providers. My tip here would be, research how the providers are performing. One good place to start is here.  You are better served moving your account to a winning provider, or one that is reaping better returns on a consistent basis.

Secondly – Choose a fund that will give you expected returns in line with your financial goals

It goes without saying that every investment involves risk. The higher the return you expect, the higher the risk you have to take. The opposite is true.

If you choose the conservative fund, your Kiwisaver investment is growing at a steady but slow pace. On the flipside, if you have chosen the growth fund, right about now, you should be smiling because growth funds have been doing relatively well across all providers, especially the ones that are geared towards global stocks. Compare apples with apples so; whatever fund you choose, compare it with the same fund across all providers.

The longer the time you intend to leave your Kiwisaver untouched (you’re far from retirement, and/or you’re not looking to make a withdrawal for your first home) the better served you are with your contributions in the growth fund.  While it’s purely an individual choice which fund/s you eventually choose and the weightings thereof, I’d like to put it out there that most investment practitioners agree that it’s really not necessary to split your investment across the funds, unless you are really close to retirement.

Thirdly – Start your children early on Kiwisaver

Compounding interest separates the rich from the richer.

The earlier you start, the more opportunity for you to take advantage of compound interest. Here’s a very simple example[1] to show you why starting early is the way to go:

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Assume that Jonathan started investing at 19 years, putting in $2,000 per year (into a mutual fund and assuming a flat rate of 12% per year).  If he does so for only 8 years, he makes $27.5k at the end of the 8th year and if he leaves this money in the account until he turns 65, the compounding interest effect will bring his total investment to $2.3m. Meanwhile, if Ann procrastinates and only starts investing at 27, putting in $2,000 until she retires, she will never catch up to Jonathan unless she increases her annual contributions. And what’s more, Jonathan’s total contribution was $16k compared to Ann’s $78k, yet Jonathan makes more than Ann who put in way more. (I have simplified the math just to drive home the point that starting early is the sure way to win with investments.)

The earlier you start in the investment game, the more the returns you make in the end.

In conclusion, get your Kiwisaver on the winning team (by choosing the best provider and the most ideal fund) and make sure you don’t leave your kids behind.  You can thank me a later.

If you live outside NZ, check your country’s retirement investment schemes and choose one for the win.

[1] Adapted from JP Morgan Guide to the markets, used by many finance practitioners

 

 

Don’t play with fire!

I was fresh out of college when I got my first job, and within the first three months I found myself living in a hotel. Yes, I was actually eating and sleeping in a hotel for many many days; like I got a long stayers’ award at some point. And instead of giving me soap and moisturizer in those fancy small bottles, they started giving me bigger unattractive packages. But I digress…..

When I got in the hotel, a colleague told me to never use the hotel phone for personal calls. The charges were senselessly exorbitant, he had said. I paid little attention to his advice. Needless to say, I had to part with a sizeable amount of money for all the casual calls; spelt bragging; I had made to my sister.

Before we can talk about investing, we need to deal with this big “little fox” that ruins our vineyards that are about to bloom. Debt.

Get rid of debt, especially credit card debt.

Let me be like that wise colleague of mine who tried to warn me off the hotel phone. I can only hope you’re not as foolish as my 23-year-old self.

The credit card is not your friend. Do not use it. It is like playing with fire hoping you won’t get burnt.

The credit card is not a tool to use in emergencies. Truthfully, it is a vehicle through which banks make money off you. It is the only investment with the highest return, only this return goes to the bank and not to you and I. Banks (or any other lender) use what most financial experts call the “screw-you” policy.  They borrow low, but lend high. Like a trader who goes out, buys a mango at $1.75 each but resells it at $22.75

Currently the official cash rate in New Zealand stands at 1.75%. This is the interest rate set by the Reserve Bank and it influences all other interest rates that are charged in the market. In other words, it is the wholesale price of borrowing and lending cash. All other interest rates derive from this rate.

The cash rate is at a record low in New Zealand. And by comparison, mortgage rates have also been falling.

But not credit card rates. They have remained high. The lowest credit card rate in New Zealand is about 12.95%; and that’s at the Cooperative Bank. Most credit card rates are upwards of 15%.

As long as you can repay credit card debt within the zero-interest period, you’re good. But then, life happens even to the best of us.  If you ever fail to clear that credit card balance my friend, you are screwed!

Here’s a tip; a debit card can do as much as the credit card, only that the former is actual cash that you have, that you are spending. And that’s is the number one habit we have to cultivate – spending what we have. What’s more, research has found that people who spend real cash, as in good old dollar bills, spend at least 12-18% less. There’s some psychological explanation to it. Parting with a $100 bill is harder than swiping it off plastic.

Sometimes going back to basics does truly help. Try using cash for your next purchase and see how you feel at the end of the transaction. Plastic is overrated. They say it’s convenient, but for who?

Mirror Mirror On the Wall!

The story is the same with every woman who at least decides to take the mask off and be real with me when we sit down for chats. “Moved to the diaspora for a better life, landed a good job, making a decent salary, but failing to track where it’s all going.” So we all find ourselves in a rat race;  ten, fifteen years down the line, we have nothing to show for the money we have made. But truth be told, many have amassed millions without even knowing where it’s all going. Simple maths guys, if you earn $100k a year as a household, and you’ve been living in the diaspora for ten or more years, then you became what I term a “shadow millionaire” – intangible form of financial prosperity.

Building wealth is a marathon, not a sprint. It’s a slow, continuous and consistent process.

And it becomes a reality when we master the lifestyle and the choices we make. That will not change until we confront our habits. It’s not a witch hunt when we sit down and track where every penny went, it simply makes us wiser with our choices. In so doing we also come face to face with who we really are when it comes to money.

Here it is my goal that we begin to equip each other on how to win with money. Like one great finance motivator says, its 80% behavior and 20% head knowledge. Therein lies the good news guys; we don’t need to know much..

But, there are so many cultural and self-esteem issues that we have to confront head on if we are going to be smart with our money.

So, without wasting much time, lets debunk some “African” myths:

They drive a good car,

They live in a beautiful house

They wear good clothes, always on point

They send their children to expensive schools

They go to expensive destinations for holidays;

Therefore they must be rich!

And because this is the African Dream, or should I say the Diaspora Dream, many of us are under pressure.

Pressure to show that exterior that sends signals as to our wealth status. Pressure to impress people who care nothing about us and whose opinions mean nothing to us.

Don’t wait for a heart attack to tell you that you’re unhealthy, do something before it’s too late.