BALANCING INCOME WITH SHARE INVESTING
I hear there is great value to be had in investing in shares right now, but I am reluctant to risk tying up most of my money. How do I find the right balance to keep cashflow going but to also make the most of any current opportunities in the market?
Struan Campbell, PSG’s Wealth Manager: Securities of the year from PSG Wealth Umhlanga Rocks Stockbroking responds…
Yes, there is value to be had in shares at the moment, although one could argue that there is always value, provided you are willing to do the hard work to uncover it.
Consider if you are living off your investments, with no active income being earned, then you would be wise to retain at least 12-24 months living expenses in an income fund. That way, sudden market movements, as experienced in March 2020, would have a lesser effect on your very necessary monthly income. You would need to be careful about investing the balance 100% in equities as they are a risky proposition in the medium term.
If you are still actively employed, then keeping a cash safety net of a few months’ income is always a good idea. From there: start dipping your toe into the share market.
If you have substantial funds to invest then retaining the services of a discretionary manager to run a managed portfolio on your behalf will yield the best long-term results.
With small amounts and a DIY strategy then look first to ‘holding company’ stocks, i.e. listed companies that earn their returns through multiple businesses. This inherently creates diversification as the share you are buying is driven by the success of a range of underlying companies. Stick with quality counters. As you gain confidence, slowly pick more focused companies but be very careful on playing the penny stock market with small amounts of money. Trading costs and liquidity constraints can destroy returns.
INSURANCE FOR AN ONLINE BUSINESS
I started an online business from my home. As I don’t have a business premises or intend to get one, do I need business insurance?
Bertus Visser, Chief Executive of Distribution at PSG Insure responds…
Online businesses and those with a physical address face many risks requiring insurance, especially business interruption. Cybercriminals are quick to exploit any opportunities or vulnerabilities making cyber security and insurance critical to the arsenal of any business, or individual interacting online.
Cyber safety must be constant; having virus protection doesn’t mean you should click on something risky. Like you would lock your car every day, you need to lock your data away safely too. Often a secure data back-up and online virus protection are key elements to keep insurance cover in place. A breach could impact your bottom line and stop you from operating, so insurance can be a lifeline.
Do all you can to deter criminals from targeting your business. Just because you are new and perhaps still small, doesn’t mean you aren’t a target; your clients could potentially be of interest to criminals. If you are online, you are exposed, so rather get some advice tailored to your business to properly protect it.
EMERGENCY FUNDS IN A TAX-FREE ACCOUNT
Is it a good idea to have a short-term and longer-term emergency savings fund, the latter being a tax-free investment?
Jan van der Merwe, Head of Actuarial and Product at PSG Wealth responds…
A tax-free investment is a good way to grow your capital over time, especially if you expect you won’t have to tap into your emergency fund for a while. All investment returns in this product are exempt from tax, which will be beneficial in the long run and provided you are getting the right growth/risk ratio within your Tax-Free Savings Account (TFSA), it sounds like a good plan. Make the most of contributions to a maximum of R36 000 per year or R500 000 over your lifetime and remember that once you withdraw money from the investment, you cannot replace the contribution amounts at a later stage. Working with a financial adviser will do wonders as they can check your financial plan holistically, including if both emergency funds are properly structured, as well as to ensure your TFSA and any other investment plans are on track and aligned to your ultimate financial goals.
EMPLOYEE BENEFITS IN A SMALL BUSINESS
I’m a business owner with 10 employees. At what point do I need to get a plan in place for my employees? I’d like to consider offering them benefits like medical and retirement provisions, but I am not sure where to begin.
John Cranke, Principal at PSG Wealth Employee Benefits Midlands responds…
There is no legal requirement for businesses to have retirement fund or healthcare cover in place for employees. However, there are many reasons why it is a good idea to have these sooner than later. Offering benefits of this nature through the employer group immediately makes a company an “employer of choice” owing to the financial protection and peace-of-mind offered.
From a retirement fund perspective, there are significant tax benefits to be had – ranging from the contributions made, through to the tax-free investment returns and favourable tax treatment of the benefits ultimately paid to employees leaving the retirement fund. To reap the benefits of the compounding effect, contributions need to start as early as possible. In addition, group risk benefits are often significantly cheaper than buying the same cover on an individual basis. Moreover, modern day administration systems have the flexibility to allow one to offer investments and / or benefits that are attractive to different profiles of employees in the same arrangement.
My recommendation for a small start-up retirement arrangement would be for the fund to be implemented with minimal risk benefits and retirement contributions at the outset, to which annual adjustments can be made over an agreed period until the benefits and contributions reach the predefined levels.
From a healthcare cover perspective, medical schemes may not differentiate the premiums on any basis other than family size, options selected and income of the member. It might be difficult to negotiate for a group of 10, but depending on the age profile of the group, it could be possible to negotiate an underwriting waiver for the group – which means that any waiting periods and Late Joiner Penalties for employees would be waived.
Importantly, the tax credit in respect of medical scheme contributions paid via payroll deductions, often almost entirely offsets the portion paid by employees participating in options that base contributions on the income of the member/s (also on the assumption that the employer will subsidise a portion of the required contribution). If medical scheme contributions are unaffordable to lower income employees, consideration can be given to making a primary healthcare product available, which affords policyholders the opportunity to obtain their healthcare services for day-to-day needs in a private healthcare setting.
I would strongly recommend appointing an experienced and accredited adviser to help you through the quote, selection, and implementation process.
This feature is sponsored by PSG Wealth. Email your queries to martin.hesse@inl.co.za
PERSONAL FINANCE