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Around the beginning of every year we notice a strange phenomenon. Energised by the holidays and inspired to turn life into an everlasting vacation, investors start searching for the investment Holy Grail. "What is the one, hot thing that will finally liberate me from the shackles of employment?"

The opportunity that generates the most excitement changes every year, but the pattern is the same. Newbies and impatient veterans alike flock to alternative assets, penny stocks or underdog listed companies believed to be the next hot thing. This is an especially alarming tendency in first-time investors who have no other savings or investments to fall back on.

Some of the questions we've seen this year are:

Is it wise to buy Aveng shares now?
Has anyone invested in the alternative stock exchange on the JSE? If you have, how does it work ?
I'm looking to invest in penny shares through my bank FNB, how do I go about that?
How do you buy "Doge Coin"? I don't know a lot about it but I just wanna try it out.

What makes this question complicated is that there are sometimes hot things that run forever. By the time the rest of us wake up to the opportunity, it's over. How can we tell what has the potential to be the next hot thing and what is sure to wipe out our investment?

Here are a few tips we identified throughout the course of our conversation:

Do you have an investment strategy unrelated to this opportunity?
If you have an existing investment strategy, have you confirmed that this purchase fits into your long-term investment plans?
Why are you considering this? If it's only because someone else said so, do more research.
Can you afford to take this risk? Only consider it if you can afford to lose 100% of your money.
Are you considering this because a company called you about it? If it were really that great, would it need a marketing strategy?
Is it listed?
If it's a penny stock (a stock whose share price is only a few cents), has the price been steadily increasing over a period? Remember, for something to be a ten-bagger, it first needs to be a one-bagger.
What are the fees on this investment? Your fees have to be deducted from your returns before you get your real return.
What is your investment horizon? If this is part of your long-term investment strategy, will this product be around for long enough?
How do you get out of this investment? Some over the counter (OTC) products can only be sold under certain conditions. A 100% profit is worth 0 if you can't cash in your investment.

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Win of the week: Wesley W

Hey Buckles (better combined name than Chubbles...)

If one assumes a dividend yield of +- 2% and you pay foreign DWT of 30%, then the effect would be a DWT of 0.6% (30% of 2%) of your total investment. If you were to have this in your TFSA you could almost treat this as an additional cost to your TER for comparison sake. If the index did poorly and no dividends were paid the extra cost of DWT wouldn't apply, but based on a long-term investment that yields the 2% dividend average, you could factor in what you're losing out in tax as per the below.

E.g if you were choosing between MSCI World vs Ashburton 1200 you could compare the costs as follows:

Ashburton = TER = 0.55% p.a

MSCI World = 0.6% DWT + 0.35% TER = 0.95% p.a

I initially went for the MSCI world in my tax free account based on TER difference and assuming the DWT might be minimal but now that I look at the numbers it seems I might have been mistaken.

Vincent

Will the government increase the 1/3 of the lump sum value withdrawal on maturity of an RA?

What is 500k going to be worth in 40 years? It seems pointless to take out an RA when the withdrawal amount is not adapting with inflation each year or at least increasing to cater for the cost of living?

I'm doing the RA thing, but only until my TFSA lifetime limit is reached via all my rebates from SARS [13 years to go]. Thereafter I'll stop contributing to the RA. RAs aren't podium investments, but should I set the quality of growth in an RA aside and see the tax break as the big win?

Would you say that having an enormous amount of money well distributed in ETFs is the way to go when debts, TFSA, RA and emergency funds are sorted?

You'll have this major asset base ready to sell when the tekkie hits the tar. You'll pay CGT and Dividend tax at most, and both will be lower than your marginal tax rate.

Dividend payouts or general interest/capital gain can be used as your monthly income, versus monthly annuity payouts as you'll probably outlive your RA and never use/see the full value.

Stephen

I see Long for Life have an aggressive share buyback strategy. Berkshire Hathaway and others also utilise this mechanism to boost their share price - I assume.

From my observation it normally illustrates that the company believes their share is undervalued. However, can this not also be seen as insider trading? What's to stop a company initiating a share buyback when they know there is something big in the pipeline? Are there corporate governance processes in place to stop this happening?

I just don't know if we as investors should see a share buyback as a buying opportunity.

Hendrik

I am trying to understand the NFGovi ETF. I am looking for a high as possible risk-free income yielding investment for my in-laws, whose capitec 49-month deposit at 10.25% is about to lapse.

The renew options look very poor under current circumstances and I am struggling to find anything north of 8% that defends capital. I am aware that nfgovi etf does not guarantee capital and there is price movement risk. I would just like to wrap my head around that option and understand all factors.

Wesley

Instead of two RA accounts which was my plan, rather a much larger single account. At 55, immediately convert this large RA to a living annuity. Growth in the account is still tax free, as is income and Dividends.

Adjust asset allocation of this big LA to get more international diversification. (I expect a significant amount of my spending to be in other currencies so global is a basket of currencies, which is ideal.)

If I don't want additional income and tax burden, set the distribution to the minimum percentage allowable eg 1.5%.

Contribute to a new RA account to offset the tax burden of this excess income.

My LA + RA asset allocation in aggregate can have geographic diversification, can be better matched to my spending and I have control of my income / tax.

If the tax free lump amount is adjusted upwards, check if I need to contribute extra so that 1/3 takes advantage of the adjusted tax table, then retire from this RA the following month.

Repeat as necessary.

This will get the significant tax free lump sum(s) out as soon as possible, which seems ideal to me. I can spend this lump sum cash initially while deferring higher withdrawals and therefore higher tax from the LA(s) to squeeze out a bit more tax free compounding.

Craig

Despite my attempts at getting them to increase it sufficiently enough so I don't need to go through it every month, I fail.

It seems it might all be automated with fixed rules, as the "agents" never really seem to read or acknowledge my pleas / questions. They just ask for payslips and bank statements then I get an email saying it's all sorted. Rinse & repeat the following month.

Have you guys heard anything about this process? How would you suggest I explain to them why the percentage they have chosen should not apply to me, as previous attempts of mine have all failed?

I'm wondering if once your portfolio hits a certain size or if your monthly contributions are over a certain size, if it might be better to go with another provider? Do you know if other providers also make you jump through these hoops to spend your money on ETFs?

Brett

I have just been sent an email from the money transfer company I use. I am not sure if this is new regulation that has been put in place. I am a SA tax payer, but am starting to rethink this decision. Can you confirm that this new tax has in fact been put in place?

Finding the next hot thing (#238)