Those $%@#$^ fees are blatantly robbing you

high feesHere we are in May already with the elections done and dusted. Everything seems to have gone as expected, and once again we’ve had a mostly safe and fair election. I’m still proud to be living in a country where you can boo the president and not get arrested. So, since I’m happy, and it seems the investors are happy too, it seems to be a good time to put more money to work for me.

Now where are we going to put it? First things first, if you owe money it’s time to rank it in a list. Not in terms of which one you’d like to get rid of, or which has the highest value, but in order of interest rates, from highest to lowest. If you’re a ludicrous spender, or need a fire pool, your list could look something like this:
Wonga loan at 953.49%* Yes that ridiculous number is what WONGA would charge could you keep a loan for 12 months. The generally offer only one month terms so the monthly rate of 21.68% sounds pretty much like a credit card, but don’t be fooled, it really is a Robert Mugabe does our loan calculations style 953% interest. And just note that I’m not singling out WONGA, it’s just that they have the best marketing, all the other micro lenders are just as bad!
Nedbank personal loan at 26%.
Outstanding amount on the Edgars card at 21%.
-ABSA credit card at 21%.
-Wesbank car loan at 12%.
-Standard Bank home-loan at 8%.

Right, if that’s you I have a quick solution. Your left kidney, it’s got to go. Apparently they’re worth over a bar if you have a match with the right donor. Once that’s done cut up all the remaining cards, and give me 1000 lines of “I will not spend money I don’t have any more.“. Seriously though, regardless of the amounts involved you need to pay off any amounts owed from the highest to lowest interest rates. There’s no investment on earth that can beat a 953% interest rate, not even Coronation fund managers, so get that settled pronto. There’s also no investment around that will give you a guarenteed 20%+ rate. The market might, a great share could, but there’s no guarantee. If you have any of those you’re best off paying them as soon as you can. What you’ll notice is that once you start paying off the higher interest rate debt is that you’ll be freeing up far more money every month. This will wipe out the next lowest hanging fruit quite quickly.

The car and home-loanĀ  rates of 12% and 8% does give you some room to play. The market average over the last few years has beaten that, so depending on your appetite to risk you might think about putting it into the market. Personally I’d take a guaranteed 12% at the moment, but that’s just me. Incidently my cheap ass but very reliable car is paid for, so it’s not a decision I need to make.

As you might have guessed from reading above, out of all the above options, the only acceptable options I would say are the home-loan, and in certain circumstances the car loan. Not the “because I want a BMW” circumstance, but the “I can’t get to the office by bicycle because I only have one leg” circumstance. For any other reason you’ll just have to save up until you can get a car.

Ok, so you’ve knocked away all the loans except the home loan, and since you’re young and adrenalin fuelled and happy to start putting money into the market because you’re as optimistic as I am. There are a few ways to get onto the market. You can buy shares in companies directly through a stockbroker account and there are also pure equity based Unit trusts, and there are Exchange Traded Funds (ETFs).

Now I’ve said this before, and it’s an odd thing to say on a market focused forum, but I don’t think I can pick a share. Not better than all the fund managers and analysts out there. I’ve tried in real life with about a 50% success rate, and in the game with more losers than winners. I’d rather not be a gambling man so I’m going to give this a miss personally.

Looking at unit trusts is a far harder thing to do. Firstly you’re trusting someone else to manage your money. These fund managers have a target, often something like “produce a greater return than the JSE top 40 (or all share) index including income“. If they do this they get meaty bonuses. If they don’t, um well they still get quite meaty bonuses. 20% of the time they beat the market, well done guys, but that means that 80% of the time they’re losers. 100% of the time though you get to hand over your had earned cash to them, and this is how they manage to buy big shiny buildings, and hire analysts to help them not beat the market. I’ve seen figures from 2 to 5%. Of course just like interest, fees compound, so give them enough time and you’ll get to hand over a rather substantial fortune!

Let’s look at an example, your fees are a mild 2.5% and the market has done reasonably and gained 15% in the year. We’ll also assume you’ve got a million to invest, and that you have 20 years to do it, all with the market performing at the same 15% per annum. Take a look at the calculator and you can see that without fees you’d have R16,366,537.39 (R5,103,163.72 in today’s money), with fees you’d be on R10,545,093.84 (R3,288,010.11 in today’s money). That gives you a gap of R1,815,153.61 in today’s money. It also means you’d earn a whopping 55% more cash by not paying that measly 2.5% fee when investing. And if your time frame or fees are higher, that 55% would climb even higher. It’s a serious shafting, lubricated with barbed wire and prickly pear thorns. You’d have to be stark raving mad to give someone 55% of everything you’ve slaved away for. And that’s if they meet target, if they beat it you get to pay them higher fees, but don’t worry, it won’t happen often. Usually you’ll give them the 2.5% fee so that they can lose money to the market… Sucker!

So, how do you avoid those fees in South Africa? Well firstly anything which charges an annual percentage is bad news. Even my current advice to someone not savvy enough to manage a stockbroking account, which is to use Satrix, will still take a percentage of your cash. 0.65% per year I believe. That’s way better than any unit trust, but it repeats and it compounds too. Ideally you’ll do your reading and realise that you can handle a stockbroker account. By using one of these you’ll avoid all the heavy fee schemes. With my stockbroker I pay 0.4%, but it’s not an annual fee, it’s once off (Edit: Now Easy equities offers 0.25%, and ABSA ETF only is just 0.2%). There is still the ETF annual fee, but that can be as low as 0.11% a year.

Unusually, I’ve told you how to buy today rather than what to buy. As for the what to buy, there are a few ETFs out there, and since I can’t pick shares, they’re all I can advise on. I personally put all my cash into the Satrix INDI. It tracks the industrial index and has done 25% a year for the last 10 years. Over it’s lifetime it’s done 21+%. Very respectable.

*Please note that by accepting this advice you agree to pay the article provider 1.5% per annum with a performance bonus of up to 3% should I be more entertaining than the average actuary.

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