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It's My Money with Mags Heystek · Strictly Business Podcast

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
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  for global wealth creation.
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  Welcome to It's My Money.
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  It's My Money is brought to you by Brenthurst Wealth, South Africa's
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  multi-award winning boutique wealth manager.
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  I received a piece from the desk of Mags Haystack from Brenthurst Wealth and it
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  says,
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  Cash is king and then in brackets tantalizingly, but is it?
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  Now, Mags is with me, and Mags...
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  I like cash.
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  I like the idea of having cash in my pocket so that most places, 99%
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  of places, still take cash.
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  One day, the North Koreans or the Russians or whoever are going to hack into the
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  international banking system and close it down for whatever period, and I'll be king
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  because I've got the cash.
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  And it makes me feel tough.
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  And I'm old school, and I'm behind the times.
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  But I imagine a lot of investors look at cash in the same sort of way.
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  It's different.
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  but the same if you see what I mean.
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  Yeah, but Lindsay, thanks as always for having me and giving us the opportunity to
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  just chat and let's
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  say digest some more pertinent topics for investors.
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  And, you know, it's such a, if you want to call it, you know,
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  your run-of-the-mill topic.
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  It's very vanilla.
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  People don't really discuss it all the time.
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  But I've found that it's a...
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  common denominator that most people really generally typically understand.
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  You know, when you're dealing with a bank or perhaps, you know, an asset manager,
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  money market,
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  and that's typically the benchmark that we use for talking about cash is because
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  that's the rate that you can get anywhere,
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  has always been used as such a default benchmark because it's what people
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  understand.
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  They put money into a money market fund or perhaps your bank has a money market
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  account.
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  They know they're going to get a flat rate of X amount and that's the end of the
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  story.
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  But the topic for today is really to dive more into on how
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  cash, for lack of a better word,
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  doesn't really have a place in long-term growth.
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  And that's what I just want to discuss and dissect a little bit more.
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  Okay, well, let's get some stats out the way, first of all, because it is important
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  to compare this asset class and money market and cash is
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  an asset class.
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  What is the opportunity cost of being in the money market or holding cash?
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  Because I saw you had a table up in your article, your excellent article, by the
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  way, that showed,
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  I think it was from 91, shows that over a certain time period, and you'll enlighten
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  me,
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  was something like 7.14% per annum.
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  And some people might say...
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  well, that's enough for me.
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  But clearly it's not.
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  Yes, and just to clarify, 7.14% was the annualized return over 10 years.
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  And essentially, you know, I just provided a very, very simple graph to understand.
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  It basically says, had you put a million rand in 10 years ago,
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  that million rand today would be worth about 1.9, close to 2 million rand.
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  And, you know, on paper, And excuse the pun, it sounds fantastic.
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  You've received a steady amount of growth.
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  You've really made significant gains.
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  And that should be the end of the story.
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  But unfortunately, it's not because there are a few different, let's say,
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  facets that investors don't really take into account when really determining what
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  is the hallmark of
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  a good investment.
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  Now, to break it down quite simply, there are one or two… two things that's kind of,
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  you know,
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  changing the picture for what it really is.
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  Now, if we look at everything,
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  we typically talk about returns on gross values and net values.
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  So net really pertains to your investment, and in this case,
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  money markets returns after and after everything else.
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  And what I've, you know, come to find And.
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  over time, you know, investors tend to overlook, you know, one or two very, very
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  important components of, let's say,
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  money market.
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  And that's interest.
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  Now, interest is, from SARS point of view, they treat it the same as income.
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  So what it really means is when you have interest generated,
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  you're unfortunately not going to be liable for income tax on that amount.
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  Now, they are basically annual interest exemptions and...
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  they are not really much to, let's say, you know,
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  they're not really much in the way of the value of the exemption.
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  But for most investors, unless you're under the age of, excuse me, over the age
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  of 75, it's
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  R22,800 a year.
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  Yeah.
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  Now, essentially what takes place when you generate interest, you've got your
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  interest exemption taken into account,
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  you're going to be liable for tax.
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  Now, to make a very, very long story short,
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  when you start adding in the amount of tax that you're liable for and inflation,
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  those money market returns actually start to not look so great.
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  You know, it's so difficult to have a broad explanation for it.
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  every single person because people have different income tax rates, people have
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  different amounts that they're investing, everything else like that.
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  But again, you know, if we look at an assumption of someone who's at a 45%
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  income tax rate,
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  the calculation that I put together, and it's taking taxes paid every year,
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  takes the interest exemption into account, and it takes inflation into account.
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  And basically what I've worked out, if you invested a million rand 10 years ago, and
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  you lumped it into money market,
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  after tax, after inflation, everything, in 20, let's say 2015's value, when you
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  started this investment,
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  that money is worth 977,000 Rand today.
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  So a bit of a mouthful there.
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  I know there's a lot to break down, but the long and the short of it is money
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  market is not...
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  long-term sustainable investment solution if that's going to be the only asset cost
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  you use.
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  So when you have a look at that number of 7.14%, you say, great, it's safe.
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  It's safe as houses.
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  It's highly, highly unlikely that there's going to be any defaults on this sort of
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  thing.
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  So 7.14%, which is what you've used, is not bad.
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  But then you strip away fees, first of all.
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  You haven't mentioned fees, but fees are a small amount.
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  but an important consideration.
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  Then you've got tax and then you've got the inflation rate,
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  which at varying times either is going in your favour because it's falling and
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  interest rates fall at the same
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  time.
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  But when it's rising as it is at the moment, 4% in South Africa, for example,
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  you take that number that I've been quoting and the gains are stripped away
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  quite
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  dramatically, aren't they, Max?
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  Yes, and that's the...
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  if I can call it the irony situation, it's not really gains, it's interest.
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  It's a rate of interest and it's very marginal and it does not provide a
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  long-term
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  sustainable solution for investors.
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  And what also, you know, I just need to indicate, so typically when, you know,
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  as an advisor or fund managers, when they provide rates of return,
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  typically the fees have been taken into accountant and all of that.
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  It's a, let's say, a topic of a conversation that I've found has become,
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  you know,
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  much more prominent.
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  And essentially, it's always used as a default benchmark.
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  Yes, this investment, you know, only performed X amount better than the money
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  market, for example.
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  You know, all the different types of situations.
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  And that actually kind of inspired me to, you know, write an article about it.
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  As to say, well, this is the reality.
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  You know, money markets should be used for short-term cash, you know, maybe for
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  emergency withdrawals,
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  not to keep too much in there, but just to have something that is accessible, that is
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  liquid,
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  and that investors have easy access to.
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  There is definitely an argument for having money market and, you know,
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  those type of assets in a portfolio, but not to a large degree.
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  Okay, so the liquidity factor, very, very important.
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  You're not saying that the money market and cash doesn't have a place in a
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  portfolio because of emergencies.
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  You need to get it out immediately and with other investments, with other asset
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  classes.
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  The liquidation factor and getting your money out factor almost instantaneously is
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  not always there.
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  And, of course, if you're jobbing in and out of the stock market, for example,
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  the tax implications can become quite complicated.
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  So don't dismiss the money market, I think is what you're saying.
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  but don't make it a large percentage of a balanced portfolio.
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  That's correct, yes.
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  So what do we do?
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  I mean, what sort of percentage do you assign to a portfolio?
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  Let's say that somebody's got a portfolio with Brent Hurst of, say, 10 million, for
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  example,
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  and this person is, I don't know, there's no such thing as an average person or an
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  average percentage,
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  but what percentage would you assign to that person?
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  So it's...
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  I'm not trying to give you the usual advisor reply to that where every investor
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  is
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  different.
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  That is the case.
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  It really depends on your level of income.
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  How much income are you needing to withdraw?
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  There are, let's say, better alternatives from a liquidity point of view.
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  There is a very, very large market for income funds.
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  You know, whenever you're dealing with higher potential returns, your risk
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  profile will change per fund.
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  You know, money market, in my opinion, is really possibly preferential for an
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  investor who might have an investment and
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  they might need a withdrawal in the short term future.
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  They might have a higher than recommended level of income.
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  And they just want to have money market as a parking area for the short term.
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  You know, realistically, one to two years max.
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  for any substantial amount of capital.
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  But the real message is investors do need a blend of assets.
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  They need growth assets.
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  And there are many different ways of getting exposure to different kind of
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  assets.
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  But at the end of the day,
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  it's really to say that don't use money market purely for
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  investment growth.
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  No, and again, I mentioned this right at the beginning of the podcast, opportunity
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  costs.
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  but The very fact that you've got money in the money market means that it's not being
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  deployed elsewhere.
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  And therefore, you could be losing out on what has been an extraordinary time, for
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  example, for the equity asset class.
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  And one final question I've got for you, Max.
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  What about behavior of investors?
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  Did you find, for example, after the new tariff regime, so-called liberation day of
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  April of last year,
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  seems like ages away now.
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  But when that happened and the market looked a little bit shaky for a very brief
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  period of time, and when, for example,
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  the US and Israel declared war on Iran and the market shook a bit as well, do you
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  find people phoning you up and say,
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  I want to be liquid, I want to be somewhere safe, get me out of this one, I
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  want to go into the money market?
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  Do people still behave like that?
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  That's such a good question.
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  And the long and the short of it is no, not really.
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  I think...
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  I'm really talking based on experience with some of my clients and they've been
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  with Brentus for many,
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  many years.
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  This has just been another, let's say, bump in the road.
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  We had quite a sizable correction in 2016.
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  We had a massive one-month loss during COVID.
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  We had the time period where U.S. interest rates increased and then the U.S.
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  market capitulated for...
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  Continuous 10 months, dropping a total of about 34%.
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  Then we had tariffs.
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  The tariffs, you know, I think the markets dropped around between 13%, 16% over the
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  course of a week and it recovered.
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  But each of those time periods, the message was the same.
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  We have a strategy.
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  There is, we have, you know, you invested in a certain level of risk that's relevant
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  to your profile.
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  But it was quite...
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  quite refreshing.
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  And yes, of course, people have every right to be concerned and they're worried.
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  And, you know, the message has really, I think,
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  been reinforced so strongly now is that we don't know what's going to happen.
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  But if you have a strategy and if you stick to it, you know, ultimately, it
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  always ends up paying off.
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  It's the age old saying, time in the market is always going to be better than
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  timing the market.
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  Max?
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  Great advice, as always.
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  Thanks so much for your time.
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  Max Haystack is from Brenthurst Wealth, and that was It's My Money.
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  It's My Money was brought to you by Brenthurst Wealth, an award-winning
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  boutique wealth management company.