No one ever does an ultra iron man immediately... you start with a park run, go for 10km, add in other disciplines such as swimming and riding and then train within this race. Nor can you immediately invest the amount you need to or in the range of investments you need to in order to be ready for retirement.
I learnt from my brother that training for an ultra iron man uses the same steps as Long Term Wealth Creation. Listen here to learn how.
We'll discuss how,
like an iron man, you need a unique approach because you have your own risk tolerance
why behavioural economics impacts our investment returns
why changing your plan on race day is a bad idea - and how this is similar in investments
the impact of timing and age on your investment strategy on the retirement you will enjoy
the four types of diversification you need for your investments - what they are and why you need them (at 15'25")
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Hello everybody, and welcome to today's episode of Working Women's Wealth. We're going to chat through a little bit more on advanced investing, and I really wouldn't call it advanced investing. I'd call it the steps that one needs to take to make sure that you are investing correctly, and I think that what I'd like to do is liken it to an ultra iron man. So if episode four was on, how do you take the baby steps to get you towards a 10 kilometer run, this episode is much more about what happens once you've done the 10 kilometer run, and now you want to grow towards an ultra iron man. So I'm very blessed to have my brother as an ultra iron man person. He has a fantastic discipline when it comes to these amazing endurance sports, and when I watch him as he trains, it really is an observation of quite an advanced science.
So he has accountability groups for swimming. He has a swimming coach, he has a running group, he has a cycling bunch that always go cycling together. Then he has the actual iron man people that he does all three disciplines with any other specific iron man coach. And so within each of those disciplines, he has people to whom he is accountable to, and what's amazing is that he can get up for what I think is the middle of the night, and head off on a run where at 4:00 in the morning, I could think of nothing more terrifying than to head out for a run, but these iron man people are highly disciplined in making sure that they exercise every single one of those sports that they're going to go through. And it's not just the sport. So it's not just that you cycle. You do every single small dimension of the cycling.
You make sure you do hills, you make sure you do downhills, uphills, sprint starts. You make sure you train with the pack in the Peloton so that you can understand how that pack works, and within the running, you again, do steeple, chases, hills. You go across different terrain so that you're much more geared towards, your feet are much more used to different terrains. So not only do they train in every one of the disciplines, they also trained within the discipline, and again, they read and spent huge amounts of time trying to understand what the best techniques and what the best science is for every one of those disciplines. But it's not only a thing about the XCEL sport itself. Your nutrition pays an enormous factor in your success in a race, and that's because your body has to be having sustained energy and sustained field through a large portion of time. So a whole day, 10, 12 hours, and with these ultra endurance athletes, there is an amazing science that goes into their nutrition, and the most important thing is that it's personal to you.
So one person's nutrition can totally mess up your own body through that period of time. So there's an enormous amount of science and learning and reading up that goes into understanding how do you start a race? What do you take after the first hour? What lunch do you eat? How do you make sure that that last hour when there's nothing in you, still some energy remains? And so the nutritional investigation was something that I benefited hugely when I was doing my honors in financial planning, where we wrote five-hour case studies, and you weren't allowed to leave through that period of time, and to have sustained brain energy for five hours required me to head off to my brother and plan this with him. And so we planned, and we did a few tests through the various different cycle tests that happened before the exam, and I worked out that I needed bulletproof coffee to start off with, which is high in fat.
And after that I needed nuts, and then I needed date balls that had different types of energy, and right at the end there was an espresso shot that kind of got me through the finish line. And the thing that I learned from him is that you can't play with this on the actual exam day or on the day of the iron man. When the going is really tough, which is the actual event itself, you need to make sure that you're not introducing something new, and I remember he did a small half iron man in Durban once, and he changed his nutrition on the day, and he was severely ill. And so when the going gets tough, you've got to stick to that plan that you've created a long time before. And then there's also sleep, and so it's not just the actual exercise itself, it's not just the nutrition. You also have to make sure that you get your sleep correct and your race days correct so that your body has time to rejuvenate, it has time to protect itself from muscle degradation.
So you need to put all of these factors together in a hugely multilayered way to make sure that you are getting the best chance possible that on the day, you can perform as well as possible. Now, it's also hugely important to understand that you can't just rock up at an ultra iron man, having done a little bit of training the last two weeks, two or three weeks before. With an ultra iron man, the discipline of training has to start long in advance so that your body can slowly get used to all these different sports and the interaction between the different sports. So time training, and also duration of training is hugely important. You can't just train one hour a day. You need to have some elements of long four, five, six hour training sessions through the process of doing the ultra iron man. So I find this whole ultra iron man progression quite a useful analogy to understand long term wealth creation because many of those steps are the same. So the first thing is that there are many different factors that will determine how well positioned you are for retirement
It's not just whether you can run, it's not just whether you save, it's the multiplicity effect is that you put together to make sure that you have a well-diversified and thought-out portfolio. The next element that's hugely important is to understand that you need accountability partners and trainers when you start this process. You can't just hope that your information is sufficient. Your information could be dated, and I learned this a lot. I mentioned to you in my last solo episode that I trained to be a physiotherapist, and 20 years later, I still thought that I had sufficient information to do optimal training, and the reality is that science moves on, and the disciplines move on, and in investing, the products move on/ And so you need to make sure that you have proper accountability partners and training to make sure that you both save the money and commit to saving the money you said you were going to save, but secondly, that you have the right advice that's tailored to you in your personal circumstances.
You need someone to sort through all of the latest research, and work out what is noise and what is applicable for you. Because not only do the products change, but especially the tax laws change, and the way your tax can significantly determined how much money you get at the end of the day. It's no point making an extra one percent in growth, but then being taxed 45 percent on it. So get an accountability partner that helps you to develop a plan that has all the different facets you need, but that is suited specifically to you. The next thing is that you need diversification. So like Nick needed diversification in his trainee, couldn't just train the sport he liked. You need to diversify your assets, and by diversifying your assets, you need to make sure that you have representation in many different asset classes. If all of us could read the crystal ball of the future, we would not need diversification.
We would know before some major shock happened that it was gonna happen, and would be able to sell high and know exactly the day we should sell. But the bottom line is we don't, and stuff happens. The 2007, 2008 crash was a major event that caught many investors off-guard, and if you have all of your eggs in one basket, you risk big fluctuations in the value of your money. And as we mentioned in our last investment show podcast, episode number four, there are various different assets that have different risks associated to it. And those assets range from cash and money market, which are probably the safest assets that you can have, to a slightly riskier bond, which is where you lend money to either the government or investment-grade companies, companies that are almost guaranteed to pay you back.
And then from bonds, you get into shares, and we discussed that the way that you reduce your exposure to buying one single share is to either buy unit trusts or mutual funds that have many shares in a basket, or alternatively, to Biotracker, which has one of every share in either the whole market, or whatever it is that it's tracking. And the reason why you need diversified assets is that over time, your assets produce different performance. So I recently received what we called the Smartie Chart, which basically, the highest performing assets get a lovely green color, and the lowest performing assets get a red color. And then there are these oranges and yellows there that float in the middle, and it looks like a Smartie box. And basically, what it shows is over different periods of time, which assets perform the best. So in November, for the year to date November, the shares have been producing fantastically, especially South African shifts. The challenge is that if you look over a 10 year period, they're not nearly as producing as much return as listed property.
And so you need some shares and some lists of properties to make sure that you're not, in one year, doing very well, and the next year, doing very badly, that you smooth those returns over time, and you reduce your risk. And as we say, the one of the things about investing is that investing is unique to you, and that risk that you are prepared to take is unique to you. And what fascinates me is how often the portfolios that people have don't match their risk tolerance. Behavioral economics shows us that you feel loss as twice as much as you feel gains. So a 10 percent gain will have the same emotional response as a five percent loss. So it is hugely important that you make sure you understand your risk tolerance. And the reason why is because if you're own a very risky asset that goes up and goes down often, you're gonna stress out completely, and what you need to make sure is that if you match your risk tolerance, so it's either big ups and big downs if you can handle high risk assets.
Or if you don't have such a strong risk tolerance, that it's a much smoother kind of pathway. And the reason why it's so important is because what happens is that when trouble hits, people change the plan. And it has been proven to show that more losses come from people trying to time the market. If the market's dropping, they get scared and they sell their shares, and they sell at the worst time possible, and they lose a lot of money. And so the most important thing is that you stick to the plan. The plan that you and your accountability partner have made is something that you need to stick with, even when times are really tough. And in the triathlons and the ultra iron mans, things go bad when the ride is not feeling so good, or there's some unexpected condition that hits the rider, and they changed the plan in response to it. You will more than likely have more success by not adding that extra piece of food than by adding it and then finding out it reacts badly to you.
So investing is unique to you, not only because of the risk factor, it's also because you could have two 40 year old females who own the exact same income, but one has been saving since they were 20 , and the other one hasn't started saving. So the investment strategy for both of them, even if they were absolutely identical in every single way, is changed by the fact that one hasn't yet started saving, and one has, and the one that has started saving almost needs to take more risk to get more return to retire in exactly the same position. And obviously, there's a third alternative. If you want to retire to a tiny little house in the middle of a fishing village, you're not gonna have as many expenses as if you want to retire in New York on central park.
So it's really important that once you have your plan that's tailored for you, you don't deviate and fall prey to a person at a dinner table who tells you that this is what you should do, and this is the latest thing, because the bottom line is it's the one thing you should never do, is change your investment strategy based on someone else's personal circumstances. And then one of the other factors that one should consider is that investing is really like one of the major disciplines of the exercises. But there are other disciplines, and you need to make sure that your estate is structured correctly, such that if you were to become disabled and couldn't work any longer, there is still income that can come in through disability insurance. Because one of the hardest things for a plan is a plan that's going so well, and then something like disability happens and you're no longer really turning an income.
And lastly, one of the things to make sure in terms of longterm creation is that exactly like the training for the iron man, the quality of your retirement, the quality of the goal itself is hugely impacted by both the time you've spent training or investing, and the quantity you have. So if myself and my identical twin, if I had one, invested the exact same length of time, but I had invested a little bit more, that little bit more will compound over time. It'll have that free money on free money such that over time, I'll have more money. So the duration, the time that you have invested in, and the amount is very important. And as I mentioned in episode four, even if you just put the smallest amount of money in, if you put it in consistently over time, you can create huge value.
And lastly, diversification. Diversification is so important. I mentioned it briefly in terms of the fact that it's hugely important to have different asset classes, but asset classes isn't the only element of diversification. It's one of the most important elements of diversification, but it's not the only one, so I want to chat through four different things. The first one is your asset classes. The second one is the diversification of your country exposure. Now, most of us live and earn our salaries and have our primary residence in a country. We live in America, we earn a salary in dollars, and our house is in America. We live in South Africa, we have a salary in rands, and our primary houses in South Africa. And the challenge with it is that that in itself is a risk, and the reason why is because if something politically terrible happens in a country, everything you own is in that country. So if you lived in the United Kingdom and all of your assets were in the United Kingdom, you would have had fantastic wealth until there was this vote for Brexit, and then the currency depreciated the amount of investment in the country stopped, and the uncertainty that has been created by Brexit has meant that the assets that you hold, all of them, your house, your currency, your earnings, your savings and investing has all been significantly impacted. So one of the ways to diversify is to make sure that you invest in global fans or global assets. So the American shares, all the shares in America, is less than half of the global shares available. In South Africa, the shares available are only 0.6 percent of all the worlds shares. So you are having an enormous amount of concentration risk of the shares you're exposed to, even if you're in a tracker which has one of every single share, you are still significantly exposed if it's only in the country you live in.
So it's very important that you make sure that when you invest, you also invest in international offshore shares. And the easiest way to do that is through international trackers. So if you get the MSEI World Index, or the All-Share Index, or the European Index, or the Japanese Index or emerging markets or developed markets or their various different indexes that you can get which help you to get exposure to shares outside of your country, and especially if you're in a huge investing area, for example, like America, you can buy the world index excluding America, because the assumption is that most of your assets are in your own country. So country risk is very important, and all of us have gone through periods where we think our country is going to be wonderful for a long time and then we go through periods where we think, "Goodness gracious me. I can't believe that happened."
The politics at the moment, it doesn't matter which country you're in, almost. There's massive political instability, and those risks, if all of your money is in your country, is too great, and linked to country exposures, also currency exposure. So currencies generally tend to appreciate or depreciate depending on the inflation rates. So let's work through that one. If you are in South Africa with a six percent inflation rate, and let's say America has a one percent inflation rate. In general, theoretically, and we all know that theory doesn't happen in practice, but one of the factors of the exchange rate between the rand and the dollar is going to be the factor of inflation. In the equation, it's one of the big factors. And so currency risk is an enormous element, and sometimes it's either in your favor or it's not in your favor.
So when you choose to have this portfolio of shares, you could choose to have, for example, the exact same thing, the MSEI emerging markets index in both dollars and in ponds. And so what that does is that it then says the actual underlying share is the same value, but I'm going to diversify my risk with respect to the actual currency that it's invested in. So I have assets in South African rands in South Africa, I have assets in British pounds in Britain, but I also have global assets in dollars through global trackers, because I personally am never going to sit and study every single share on the global market. So I never believe that I'm going to have superior information to be able to make the right decision. So I do invest in passive funds overseas in dollars, and I do also invest in extra funds overseas in dollars, because if my flat in London is a physical asset in pounds in a physical country that has currency risk and country risk, so one looks to diversify the risk that we have.
And the last set of diversification, which is hugely important, is tax diversification. And what I mean by tax diversification is that every country has an incentivization around tax, either retirements-based savings or non-retirement based savings, and those are basically where you can put money in today, tax-free, or you get a tax deduction for your contributions. But what happens is that when you retire, you then get taxed. So it's not that you're not getting taxed, it's just that you'll get taxed at retirement. And those do have a lot of pros, and there are also cons of them, and one of the cons is that you have no idea what the tax rate's going to be when you retire. So today, you might be saving yourself a 20 percent tax rate, but when you draw that money out in 40 years time, the tax rate might be 45 percent. So in actual fact, you would have got different growth had you not. So the important thing is to have the choice of assets, and you only create those choices at retirement if, right now, you are investing in different types of investments. So you should have a retirement or 401k, some form of retirement based plan now that you will get taxed at at retirement. But you should also have investments that aren't wrapped in those type of tax incentives, and those investments, you are only withdrawing capital gains. So for example, in South Africa, the highest tax rate is 45 percent. So if you draw today from a retirement annuity, at the maximum rate, you will draw 45 percent. But if you sell assets or sell shares, your capital gains tax is only 18 percent, so you need roughly a third of the money to get a lot more return on that money. So it's very important that you have different types of assets in different types of tax structures, and most countries have a small amount of money that you can save. It's called an icer in the UK, tax-free savings accounts, whatever it is that the money you put in is still after tax. But the growth while you're saving has no dividend tax, no interest tax, no capital gains tax. So it's important that you also maximize and optimize those tax regimes.
So let's recap in terms of advanced wealth creation. The first and most important thing to do is to understand that your wealth plan should be something unique to you, and that you should create the plan in conjunction with someone that has a wide knowledge on financial products and tax. And then secondly, once you've created the plan, that you work with that person to stick to the plan. Obviously the plan needs to adjust as market conditions adjust. But that when there's a massive downturn, you don't get scared and take your money out and solidify all of those losses. Your investment plan needs to be unique to both you, the amount you have saved, the amount you will need, and also your investment risk.
Then you need to make sure that you have diversification, diversification of your assets, because different asset classes do badly or do well at different periods of time. You need diversification of your country exposure because if all of your money is in the country that you live in, when something happens to that country, your value could deteriorate. You need diversification to currencies, and you need diversification to different tax vehicles. And once you've made your plan, and once you have achieved that level of diversification, you need to make sure that you invest as much as you possibly can over as long a period of time as possible to ensure that you get the best growth and the best options by the time it comes to retire. I'm Lisa Linfield, and this is Working Women's Wealth, and I'd love for you to join us next week for another exciting episode. But in the meantime, please do subscribe to our podcast, rate it, share it with your friends, and help us to grow the education of women with regards to money. Take care and have a great week.
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