The Importance of Annual Financial Reviews

Making an annual appointment with your financial adviser is an intentional, proactive process to help you take stock of your current financial situation and if necessary, adjust your plan of action to ensure you remain on track to achieve your investment goals. Most financial goals are by their very nature reasonably long term, whether it is saving for a deposit on a house or investing for retirement. Like any large project, investing becomes more achievable when broken down into smaller units. That’s where the discipline of an annual review with an independent professional adviser can be really helpful, as otherwise the years can slip by without goals being realised and with opportunities being missed.

Annual financial reviews are particularly important as you approach retirement. Regularly checking on income, expenses and investments and inputting all the data into a retirement projection calculation, which your financial adviser should easily be able to perform, can help you develop a clearer picture of where you stand, enable you to formulate a plan and alleviate financial stressors around retirement.

Annual reviews provide clients with a snap-shot of their current financial position and a personalised approach to investment goal setting, taking into consideration available funds, an estimated time horizon and tolerance for risk

You probably have several savings goals and investment policies. Your annual financial review should revisit each of your priorities and your savings and investing strategies for reaching them. If your situation has changed, make adjustments as necessary.

With your financial professional, look at each individual investment and evaluate whether it continues to have a role in your portfolio. It's important to match your investments to certain time frames or specific goals and align them with your personal risk profile, while adapting to any changes in your personal financial situation that occurred in the past year or are expected going forward.

For example, you may take on more risk in saving for retirement that is decades away and less risk when you reach your mid 50’s; or you may want a more conservative investment approach to save for a deposit on a house in 3 year’s time.

When analysing the performance of each investment, it is important to not only take into account market factors but also to look at the effective annual cost (EAC) of the investment. This is especially true of investments on some of the older life platforms.  Also, when considering a retirement product, such as a pension or retirement annuity, it is essential to include an annual escalation so that the investment keeps pace with the cost of living as the years go by.

Make sure you have the most appropriate Risk Cover

There is a frequent misconception that when life cover is in place, it’s there for life. However, there is no such thing as a ‘one size fits’ all for your whole life when it comes to life cover. We regularly find that clients either have too little life cover to maintain the lifestyle they desire for their family, should the unthinkable happen, or they are over insured and applying funds to premiums that could be better invested elsewhere. It’s definitely worth reviewing life policies with your financial adviser on a regular basis and especially at times of life changing events, such as getting married, the birth of a child, employment status or buying a property. At the other end of the spectrum, life cover might ideally be reduced as dependents leave home, houses are downscaled and retirement approaches.

For those of us with dependents, there are huge risks for failing to do proper financial planning. Your financial adviser can assist with budgeting and is qualified to calculate the amount of cover required, so as to avoid over and under insuring.

Are you preserving your Assets for your dependants?

Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation, and makes the best use of the latest estate and tax laws.

It is rare that your financial adviser will be an expert in all areas of financial, estate and tax planning, but he will be in a position to recommend specialists where appropriate.

The importance of sitting down once a year with your financial adviser cannot be over emphasized

A formal review of your overall financial situation is invaluable, providing a comprehensive picture of whether you are on point with your financial plan. Consistently reviewing and updating your financial plan and investment portfolio as your life and goals evolve over time should become an integral part of a fit for purpose financial lifestyle and provide a great source of comfort that plans are on track for retirement.

As far back as 1971, during the Nixon administration, the US Treasury Secretary John Connally shocked the world when, after discussions with a group of European finance ministers, he famously remarked, “The dollar is our currency, but it's your problem.”

Since the Second World War the US Dollar has been the unchallenged global reserve currency, used for nearly all international trade, and the preferred asset for countries, individuals and companies as a store of wealth. However, with so much of the global economy reshaping itself in the post-pandemic landscape, is the reserve status of the US Dollar going to be the next domino to fall?

Having the world's reserve currency has allowed the US to run large deficits in terms of both international trade and government spending. In 2023 the US deficit was a staggering $2 trillion and this level of deficits looks likely to continue. If foreigners no longer want to hold dollars for savings, the US government could face a severe funding crisis.

One of the financial trends that has gained traction over the past few years is the de-dollarization movement. This is an effort by a growing number of countries to reduce the role of the US Dollar in international trade. Countries like India, China, Brazil, and Saudi Arabia among others, are setting up trade channels using currencies other than the almighty Dollar.

If foreigners no longer want to hold US Dollars for savings, the US government could face a severe funding crisis.

The chart below shows China’s holdings of US Treasuries falling steadily since 2014, which is in line with a broader trend of foreign central banks buying less US government debt. Ten years ago, roughly 45% of US treasuries were held by foreign governments, and this has now fallen to below 30%.

China’s holdings of US Treasury Securities

Over the past several years the US has increasingly “weaponized” the US Dollar by imposing sanctions on countries that it disagreed with, and restricting access to the US controlled global foreign exchange markets.  When Russia invaded Ukraine in 2022, the US imposed all-encompassing sanctions against Russia, and froze its foreign reserves. This action has forced many countries to ponder what could happen to their precious foreign reserves if they ever faced a diplomatic or military dispute with the US.

Can the US really just freeze our foreign reserves?

Geopolitics isn't the only issue, however. Inflation and government debt levels are also weakening the standing of the dollar on the international stage. Since the 1980s, the US maintained a low and steady inflation rate, and low debt levels, giving savers around the world the confidence to hold their assets in dollars. In recent years, however, US debt levels have soared to previously unimaginable levels, and together with a resurgence in inflation, this is calling into question the security and stability of the dollar for long-term savings.

Central banks are increasingly turning to gold as an alternative store of value. Gold, the most ancient widely accepted international currency, has chipped away at some of the dollar's dominance, accounting for 15% of reserves, up from 11% six years ago.

Central banks are increasingly turning to gold as an alternative store of value

 
Emerging market countries such as Singapore, Turkey, India, Poland and China have been among the largest buyers of gold over the last decade. Two successive years of over 1,000 tons of buying is testament to the recent strength in government demand for gold. Central banks have been consistent net buyers on an annual basis since 2010, accumulating over 7,800 tons in that time, of which more than a quarter was bought in the last two years. Findings from the Central Bank Gold Survey show that gold’s performance during times of crisis and its role as a long term store of value are key reasons for countries to hold gold.

As the world moves to the age of multipolarity where many nations participate in helping define the economic character of the global economy, trade in currencies other than the US Dollar is accelerating. And much to the chagrin of the US – which saw the US Dollar-based New York Clearing House mechanism as an irreplaceable link in the chain of most global trade – countries are finding that bypassing the US Dollar is surprisingly easy to do. And, what’s more, it is often cheaper too.

Our attention is usually on the developed Western economies which are the wealthiest by most measures. As an illustration of this, the US alone currently makes up nearly 70% of the MSCI World Index for equities. However, trade reflects altogether different realities and is perhaps best captured in the statistic that in 2022 China exported goods and services valued at $3.6 trillion compared to $2.2 trillion by the US.

The economies of India, China and the rest of Asia and the Middle East are larger and growing much faster than the US and the G7. This is starting to be felt in the de-dollarisation of trade.

Countries are finding that bypassing the US Dollar is surprisingly easy to do.

It is important to realise that reserve status is something that, historically, has been gained or lost over long periods. It's unlikely that the world will wake up one day with US Dollars no longer holding international appeal. Rather, in examples such as the British pound, there was a multi-decade process by which it went from the centre of world economics to a second-tier currency.

That said, if the US Dollar gradually loses its place atop the world financial pyramid, it would likely mean for the US, less access to capital, higher borrowing costs and lower stock market values. Having the world's reserve currency was described by the French Finance Minister in the 1960’s as an “exorbitant privilege” and has allowed the US to run massive deficits in terms of both international trade and government spending. This exorbitant privilege may be coming to an end.

 Sources: Bloomberg, Wall Street Journal, Dr Michael Power.

As the pace of life in the 21^st century continues to increase, and technology has enabled access to vast amounts of information, investing has changed. Human emotions, though, remain rooted in our hunter-gatherer past.

24-hour news feeds and relentless advertising have created an environment where people are more anxious about their financial security and become prone to quick fix solutions. Trading platforms have mushroomed and target the human fear of missing out by highlighting the enormous riches to be had from day trading or crypto.

An example is Robinhood which has quickly become one of the most popular brokerages in the US thanks largely to its easy-to-use trading app that makes share trading appear very simple and game-like for users. The app's mobile-first, intuitive interface offers instant feedback, akin to gamification mechanics. Personalized challenges and goals within the app enhance user engagement and satisfaction.

The problem with this approach of ‘gamified investing’ coupled with our modern desire for instant gratification and quick fix solutions, is that the end result is more akin to gambling than traditional investing for the long term.

There are many studies which corroborate the painful truth that the average investor trades too often and at the wrong times. DALBAR, as US based independent investment research company, calculates that the average investor loses 3-4% annually due to selecting expensive products, switching funds, and trying to time the market.

“The stock market is a device for transferring money from the impatient to the patient” WARREN BUFFET 

The chart below shows the average holding time of shares in the USA rising from 1 year in the frenzy just before the 1929 Stock Market Crash, to over 7 years in 1960 and back down to 10 months today.

Warren Buffett has become a legendary investor in part because he ignores market noise and is relentlessly focused on a long time horizon. He once said that “our favorite holding period is forever”.

Investing for the long term is also a core characteristic of successful businesses. Many of the largest companies in the world today are older than you may think. Tech giants Apple and Microsoft are nearly 50 years old while IBM is over 100, the oil majors Exxonmobil, Royal Dutch Shell and BP are all more than 100 years old, while mega-banks JP Morgan, Barclays and Citigroup are over 200 years old.

Both the South African and US stock markets have delivered real total returns of 7% pa since 1900. (This is the return above the inflation rate) A 7% real return would nearly double an investment and its purchasing power, every 10 years.

The first unit trusts were launched in South Africa in 1965. This was a game-changer for investors because instead of having to buy individual shares from stockbrokers, they could now leave these decisions to large teams of investment professionals who have the experience and resources to properly analyse the fundamentals of each share and bond. Over time the number of unit trusts proliferated, so that there are more than 2 500 registered unit trusts in SA today, each with their own specialized focus and views on the markets.

“Our favorite holding period is forever” WARREN BUFFET

Investors saving for their retirement in products such as Retirement Annuities, often fall prey to the attractions of looking to the short term. Switching between funds “because Fund A has performed better than Fund B over the last 12 months” is the most common investor mistake worldwide.

Trading almost never works, while long term investing does. Set up your portfolio well and leave it for the long term. Avoid excess trading – the costs and the time out of the market soon erode precious gains.

Model portfolios, such as our Rutherford Balanced portfolio, have become increasingly valuable because we select a combination of market leading unit trusts that is a best fit for your investing profile. This allows our investors to take a long-term view in the knowledge that their portfolio is structured to meet the opportunities and challenges in the years ahead.

As we approach the end of the fiscal year this February, we remind you of some important opportunities to maximize the benefits of your investments.

A Tax Free Savings Account (TFSA) is truly tax-free – no tax on income or interest, no dividend tax, and no capital gains tax

The end of the tax year is an ideal time to review your TFSA contributions. Remember, you can invest up to R36,000 annually, with a lifetime limit of R500,000. Contributions to your TFSA are not tax-deductible, but all returns within the account - including interest, dividends, and capital gains - are completely tax-free. If you haven’t reached your annual limit yet, consider increasing your contribution to fully leverage this tax benefit.

Contributions to your Retirement Annuity (RA) are tax deductible and the returns you earn while invested are tax-free

For your RA, remember that contributions are tax-deductible. This means you can potentially lower your taxable income by increasing your RA contributions before the year-end. The annual limit for tax-deductible contributions is 27.5% of your taxable income or remuneration, whichever is higher, capped at R350,000 per annum. Reviewing your contributions now could significantly benefit your tax situation.

Both of these investment vehicles offer unique advantages that can be pivotal in planning for your financial future, whether it's for retirement or other investment goals. We encourage you to consider whether you are fully utilizing these opportunities.

For assistance with a tax-free savings account or retirement annuity, please contact your financial adviser or Rutherford Asset Management directly and we will gladly point you in the right direction www.rutherfordam.co.za or 021 879 5665.