Money Matters
Issue 43

March 2022 / April 2022

We at Stone Wealth Management are deeply saddened by the loss of life and absolute devastation caused by the recent floods in KZN and parts of the Eastern Cape. Our thoughts are with all those, especially the people of KZN, who less than 12 months after the riots that troubled the province, are now faced with the additional aftermath of an environmental disaster. We hope that aid will be swift and effective so that people can begin to heal and rebuild their lives.

On a positive note, we applaud the announcement made in the Budget Speech of loosening prudential constraints. What started out as a dull speech has in reality created great investment prospects. We have included an article by Nic Andrews where he unpacks how this can benefit you.

Our optimism was somewhat tempered by the Russian invasion of Ukraine and the ensuing market sell-off. Fortunately, the current environment has resulted in high export commodity prices which has contributed to the stabilization of South Africa’s budgetary situation.

Investing is often about managing expectations and an important part of that process is not to expect the average return of indices. The market rarely delivers the average return over a year and you may become deeply disillusioned if your measurement periods are not realistic and your expectations not met. Included is an article where Marius Kilian discusses why you should never expect the average and where you should rather pin your expectations.

Finally, there is much doom and gloom about inflation and interest rates but even if these remain a bit higher for a bit longer than expected, we are comfortable that our clients’ funds are invested in portfolios that are well positioned to exploit opportunities.

As always, our advice remains unchanged – ignore the noise and stick to your investment strategy. I hope that this information helps you in making decisions that guide you towards optimally meeting your investment goals.

The initial response to Finance Minister Enoch Godongwana’s 2022 Budget Speech was “boring but responsible” and “unsurprising”. However, tucked away on page 165 in Annexure F was one paragraph that did not even make the main speech.

Its content was unexpected and far from boring:

“The offshore limit for all insurance, retirement and savings funds is harmonised at 45% inclusive of the 10% African allowance. The previous limits were set at 30% and 40% for different investors.”

Up to now, very few investors had used much of their 10% African allowance so for most this provided the opportunity to increase their offshore portion by 50% – from 30% to 45%.

Considering all the pre-budget negative comments from social media around “prescribed assets” and “tax increases” this was a bold and positive move, which provides investors with a greater investment choice. It also sends a strong message that exchange controls for individuals are no longer a meaningful constraint.

These two sentences, which largely took the industry by surprise, have material implications for individual investors, trustees, financial advisers, and asset managers who need to carefully consider a few key issues.

What portion of my portfolio should I have strategically invested offshore?

The major benefit of increasing offshore exposure is access to a greater opportunity set and the ability to diversify more effectively.

At some point in your life, you probably heard that the stock market generates about 10% annual returns on average. Sounds pretty good, doesn’t it. From 1926 to 2020, the average return for the U.S. stock market was basically 10% per year. Would it not be great if you could simply rely on this 10% return to be dutifully delivered every year?

While that may be true in the long run, the market rarely delivers anything close to an average return in a given year. Understanding and being prepared for the broad manifestation in stock market returns is a big part of learning how to exercise discipline in investment.

Consider the chart below from Ritholtz Wealth Management’s Ben Carlson. It plots the S&P 500’s annual returns since 1926.