Question:
I am 65 and have recently retired. I’m trying to determine which investment portfolio has the best chance of providing me with a pension that will sustain my wife and me for, say, the next 20 years.

I agree that a financial advisor can give good advice and that one should spread your investments amongst various asset classes to minimise risk.

Given the current economic climate in world markets and the situation in our own country what type of investment would you have made if it was your money?

Answer:
That’s a good question. The markets are so tenuous at the moment and I am suffering from information overload. I hear the opinions of the best and brightest every day and they can be pretty divergent, so who do you believe?

You are 100 percent correct in stating that your investments must be spread across the asset classes and a financial advisor should be able to help you with the product side.

Here is what the experts are saying:

It is clear that the property market is taking it on the nose, but we should have predicted that. For over 18 months I have been writing about the danger of over-investing in buy-to-let properties. Considering the massive amount of recent ‘distressed sales’ it’s obvious that people did not listen.

Imagine this scenario — Mr. Jones goes out and buys two R1-million properties off plan to rent out. By the time they are ready for occupation interest rates have dropped and with it rental yields. So, Mr. Jones, hoping to cover his bond with rent now has to subsidise these properties to the tune of R3000 per month each.

Let’s say this pinched his cash flow but he is still OK. Shortly after his tenants move in bond rates climb by three percent. This adds another R4300 to his expenses and if he has his own bond to pay maybe another R1000 for good measure. This person is in trouble unless he earns a massive salary. This is happening to many people especially in the R1-million to R1.5-million property range. They will have no choice but to sell and for a lot less than what they were worth last year.

Just last night I chatted to someone who is living in a rented cluster. When he moved it was for available to rent or buy. The rent is R7000 per month including levies and water while the value at the time was R1.2-million. The owner offered to sell the place to him for R850 000.

So, in terms of property, speculators are saying if you have some cash and you factor in another three percent (yes, three percent! ) hike in interest rates then you will be able to pick up properties at bargain prices in the next six months. In addition, rental yields will go up because many people are selling to alleviate bond payments and they have to live somewhere.

One property watcher said that some economists are predicting a 35 percent bad debt ratio in home loans. That is staggering and will make the American sub-prime debacle look tame. The same expert predicts that the CPIX will be at 15 percent by the end of the year and this will exert tremendous pressure on interest rates and consumer pockets.

If you chose to go the property route you have to really scrutinise your prospective tenant. Make sure they have a secure job and sufficient income to pay the rent each month. If they battle to come up with the deposit take it as a warning sign and never negotiate on it as this is your only leverage if they can’t pay.

This past year has seen stocks reduce significantly. Some banking stocks are down by more than 30 percent since their 2007 peak while others, notably resources, are up by the same margin. Just remember, the stock market always bounces back.

Obviously interest based products are looking more attractive as rates increase so having some cash in the money market is not a bad idea. However, having too much in cash can limit your long-term growth so it is advisable to ensure that you stay invested in equities in the long term.

To get a direct answer in terms of how you should invest going forward spend some time with an independent financial advisor. A good one will be able to structure the correct asset allocation for you. Keep in mind that nothing is fixed — you can tweak things as the markets change.

Cees Bruggemans, FNB’s Chief economist has the following to say about the current state of affairs: “A very old European political theory holds that 'progress through catastrophe' is standard procedure. Anecdotally 2008 has seen panic set in. Large numbers of people apparently decided on emigration, getting into dumping mode just as demand appetite vanished, coinciding with the SARB turning up the heat. The equity market isn't in quite the same pickle, as the global economy is holding up, with resource strength an old backstop. But resources' strength must be cold comfort to households deeply in debt acquired when prime was 10.5 percent or at most 12 percent, compared to 15 percent ruling today and 16 percent potentially looming as the SARB apparently insists on imposing discipline, with one beady eye focused on government and the other on labour unions and employers.”

So just how low can the blow get? By all appearances, very low indeed.

Not only is household indebtedness substantial, but there are also whiffs of panic. There is fear of SARB overreacting with interest rates and there is the wish to get out — out of property, out of debt, out of the country, out from underneath crime and the growing incompetence of mushrooming rent-seekers. Apparently this wish is gaining ground across all walks of life, especially among the young and best qualified.

When supply overreacts by doubling up and demand overreacts by drying up, the price effects can become quite violent. Property turnover is apparently already 40 percent down and still falling. The boom-time ranks of real estate agents are now thinning rapidly. House prices are no longer rising, but actually falling and increasingly so as discounts expand.

In 1976 rapid, double-digit inflation came to the rescue, limiting the nominal downside. That wasn’t the case in 1960. Both market corrections ultimately proved short-lived as the worst political expectations didn’t immediately materialize. This time building cost escalation also remains in the double digits (before considering builder profit margin contraction), creating some kind of safety net for property values longer term over and above what the demand backlogs and future urbanization have to offer.

But the political fuse could have more time to run at home, even as Zimbabwe is increasingly getting deeper into the mire with toxic spillover effects as migration surpluses flood in. The global commodity price shock still seems to be gaining intensity. There’s no end in sight for rise in the price of oil and its shocking effect on the cost of food.

Eskom may be winning hearts and minds in government, but not at the SARB. Labour unions see many opportunities in the current environment to advance their own interests and the SARB is now apparently signaling it is prepared to toughen up further. This is exactly the kind of scenario in which heavily indebted consumers can get squeezed badly. The most exposed sectors of the economy are the motor trade, property market, residential building trade, large parts of the retail trade and manufacturers supplying them.

Unless something suddenly lets up, the next twelve months could become very difficult for many. There are daily queries about the likelihood of recession. To go cold turkey from a rise of 15 percent in fixed investments and GDP growth of 5.5 percent as recently as late 2007 to negative growth in 2008 would be dire. But then these are remarkable circumstances.

There is interplay of global and local forces, political and policy implacability and a general incredulity still trying to come to grips with this unexpected tornado. By all appearances these events came out of left field. They always do, at least in sporting analogies.