June 2018: Market update and need for Critical illness cover

Half year market update

Despite all the doom and gloom in 2017, the JSE ALSI returned 20.95% last year. Heading into 2018 there was a sense of excitement with every South African feeling a sense of “Ramaphoria”. Sadly the rally around this new found sense of optimism has seemed to run out of steam. As at the 31^st of May the JSE ALSI had declined by 4.4% giving back a large part of the gains from last year. Along with the drop in the market we have also seen the rather rapid decline in the value of the rand going from almost R12 to the dollar to now almost R14.

The South African market is heavily influenced by world events and all the uncertainty regarding Trade Wars has negatively affected the domestic market. Over the past three years we have been positioning our clients’ funds into more conservative portfolios. These more conservative funds have been far less volatile than that of the market and have given investors a return of between 7 – 10% over the last year. It is very hard to predict what the future; or Donald Trump has in store for us and so we remain of the view that investors should remain cautious in the current investment climate.

Please contact us should you wish to arrange a meeting to discuss your portfolio and its positioning. We will be happy to discuss this over a cup of coffee.

When should you consider Critical illness cover?

Critical illness cover offers you financial protection should you be diagnosed with or require treatment for an illness which is deemed ‘critical’. On average 80% of all claims are from the four major critical illnesses; heart attacks, strokes, coronary artery by-pass graft and cancer.

The benefits of having Critical illness cover in place are that it allows the insured to be able to fund one or more of the following:

Pay for the costs of medical care and treatment
Replace any lost income due to a decreasing ability to earn
Provide the insured with enough funds to cater for a change in lifestyle

Clients often forego Critical illness cover owing to the price of this cover compared with life insurance or disability insurance. However statistics show that a male under the age of 25 who is a non-smoker has a 24% chance of getting cancer, having a stroke or a heart attack before he reaches the age of 65. 34% of all critical illness claims made by males occur before the age of 55.

With the advancement of medical technology, more and more people are fully recovering from these critical illnesses, however the medical bills associated with these illnesses are not always covered by your medical aid. With this in mind it is important to consider how your life would be impacted should you or a loved one be diagnosed with a critical illness?

Fund of the month: Investec Diversified Income Fund

The Fund of this month is the Investec Diversified Income Fund. This is an income generating fund that is suitable for investors whose primary focus is on receiving an income but also looking to maximise capital. This Fund returned 9.5% over the last year and a return of 8.8% over the previous three years.

The link below provides a quick description and investment philosophy of the Fund.

Investec Diversified Income Fund Philosophy

“The question isn’t at what age I want to retire, it’s at what income. “ George Foreman

Investing: Drawdowns, diversification and the impact on your investment

Drawdowns and how they impact your investment?

Drawdowns can present very significant and devastating risks to investor’s portfolios when considering the returns required to fully recover from a loss. The underlying fund in the investment will determine the potential drawdown that an investor may be faced with. It is important to remember that with higher returns comes higher risk and the potential for greater losses.

Let us look at the following example:

Investor A has an investment that declines in value by 20%. In order to for Investor A to get back to his starting point he would require the investment to rise by 25%.

Investor B is invested into a fund that decreases by 50%. Investor B now requires a return of 100% on his current investment value simply to recover from the drawdown he has suffered.

The below graph illustrates just how important it is to avoid substantial drawdowns in your investment.

Diversification

Diversification is an investment risk strategy which manages and blends different investments within a portfolio. Investment managers attempt to construct investment portfolios which are made up of equities, bonds, property and cash instruments to mitigate against the risk of potential drawdowns in a portfolio.

Diversification offers an additional layer of protection as not all assets react the same in similar market conditions. Over the past few years there has been heightened volatility in the stock market which should give investors cause to assess how are their investment portfolios positioned and how they can diversify their portfolio to mitigate against any potential drawdowns.

Investors should consider the amount of risk they are willing to take in their investment and what the impact would be to their future savings goals or plans if the investment were to suffer from a drawdown. It is important to remember that a drawdown does not necessarily imply that there is a loss. Markets go up and down and investors would only realise a loss should they disinvest from the fund. This being said it is very important for investors to try to avoid as much as possible large drawdowns so as to maximise their long term investment returns.

For more information on how to diversify your investments or to find out more about drawdowns, diversification and the impact this can have on the outcome of your investments please contact us to discuss your portfolio.

May 2018: Estate Duty Planning

Estate Duty Planning

Estate duty is payable on the estate of every person who dies and whose net estate is in excess of R3.5 million. Estate duty is charged at a rate of 20%. For those individuals with estates over the value of R30 million estate duty was recently changed to 25%.

Estate Duty comprises the total of all the property (fixed property, business interest and investments) and deemed property (life insurance policies) of an individual less certain deductions.

Below is a basic illustration of an Estate Duty calculation:

Property + Deemed Property – Deductions = Dutiable Estate * 20%

The most common deductions are a Section 4A abatement and the Section 4(q) deduction.

The Section 4A abatement allows for an amount of R3.5 million to be deducted from the net estate of a deceased person.

The Section 4(q) deduction provides that any property that accrues to a spouse is deductible from the Estate Duty calculation. Most spouses typically leave their estates to their spouse. This creates a largely inflated estate for the surviving spouse and merely postpones the tax for when the surviving spouse passes away.

Momentum have introduced a Last survivor death benefit where the two lives are assured at the outset of the policy. Upon the death of the first assured life the future premiums are waived. Once the second life assured passes away the benefit is paid into the estate.

The advantage of this type of a policy is that it provides for liquidity in the deceased’s estate and allows for the beneficiaries to not have to sell assets to pay the tax liability.

The Last survivor death benefit is typically a quarter of the price of traditional life insurance, so this is an excellent way to mitigate against the cost of death taxes.

For more information regarding the Last survivor death benefit you can contact Kevin or Greg on 0027 41 373 0601.