A road trip to financial freedom

Book review: Become your own financial advisor

By Lizelle Steyn

25 September 2021

Warren Ingram Become your own financial advisor

Credit: Warren Ingram

US investors have Vicki Robin, one of the founders of the global financial independence movement and author of Your Money or your Life – a US-focused book with practical advice on how to manage your money for financial freedom. South Africans have Warren Ingram – author of three books on investing, of which I recently read Become your own Financial Advisor (2020 edition).

Warren is the adviser of the famous ‘Julia’

If you ever tune in to Bruce Whitfield’s Money Show, you might have heard him mention Julia (not her real name) as an example of how to get your act together early in life. In 2018, 37-year old Julia had 2 children, a paid-off family home, and a share portfolio of nearly R5 million – and had reached her financial freedom goal. Her secret? Saving more than 30% of her income over her career, living in a small apartment while she was still single and driving her small car for as long as possible. Warren Ingram is Julia’s adviser.

Julia reached financial freedom exceptionally early on a good salary, but on p.31 of his book Warren gives an example of how even ‘Joe’ with a starting salary of R15 000 per month can accumulate R3 million over 20 years by consistently saving a third of his income.

Warren and I agree on the most important things:

1 Being wealthy is not the same as being financially free

Someone who has simplified her lifestyle and has monthly expenses of only R10 000, can be financially free with R3 million. On the other hand, someone with R30 million in assets would generally be regarded as wealthy in this country. But if you have overextended yourself in terms of your home, holiday home, and vehicles and have an ‘extravagant lifestyle addiction’, that will not be enough for you to stop working.

2 The golden rule: always spend less than you earn

If you forget everything else you’ve learned about financial freedom, you’re still heading in the right direction if you always spend less than you earn and invest the rest wisely. If you’re OK to work till ‘normal’ retirement age, 15% of your income should be enough. If you want to get to financial freedom within 20 years, you’ll need to save closer to 30% of your income, consistently.

3 Before investing, first settle your debt and set up an emergency fund

There are money gurus – like Robert Kiyosaki – who encourage investors to take on debt to become wealthy earlier. (And maybe that works for Americans who have access to really low interest rates.) But, on this topic, I share Warren’s view instead. Very few investments can return a higher percentage after tax and fees than the interest you’re paying on your South African loan. Putting extra money into your bond or more expensive financing is equivalent to being invested in a fund that gives you a guaranteed after-tax return of whatever your bond rate is at that stage. You might be able to beat that rate with an alternative investment but not without taking on significantly more risk and uncertainty.

The same goes for an emergency fund. It’s a really bad idea to start an investment portfolio if you don’t yet have an emergency fund in a cash-like account. Should you be hit by a large unexpected bill, you will likely need to cash in your share portfolio at a time where you haven’t yet made any money, or have even lost money. Investment portfolios need years to realise their full value and that journey should not be interrupted by an emergency withdrawal.

4 With investing, asset allocation is your most important decision

Investing can be as stressful or as relaxing as you choose it to be. It becomes stressful when you always try and chase the next hot stock or fund – a game which, by the way, not even the top investors in the world get right. A calmer approach is to decide for how long you’re investing and then allocate appropriate portions of your portfolio to the four asset classes:

The shorter your term, the more you should have in the last two asset classes; long-term investors can allocate to the first two asset classes (see my word of caution on listed property below) because they have more time to sit out the ups and downs of these markets. Ultra long-term investors should be fine with only an equity portfolio. Julia had only an average performing unit trust in the first few years of her financial freedom journey. She wasn’t trying to chase the next best thing, but importantly her asset allocation was appropriate for her investment term. Once you know what your asset allocation should be, almost any (preferably low cost passive/index tracking) ETF or unit trust in that asset class could get you to your financial goal.

A few debatable points:

1 Portfolio growth is relative to inflation

In one of his first examples of how to become a millionaire (p. 9) Warren works on the assumption that a share portfolio grows on average by 13% per year. Influenced by the book Triumph of the Optimists, I prefer to always base my growth assumptions on inflation. The authors of Triumph of the Optimists looked at more than 100 years of data and found that most stock markets across the world grow by about 7% more than inflation. If you consider that SA’s inflation target is currently 3-6% with a mid-point of 4.5%, I wouldn’t expect long-term growth in our stock market to exceed 11.5%. Subtract the taxes and fees on low-cost index tracking funds and 10% would be a more realistic net projected growth rate. That’s what I use for most of my calculations in this blog.

2 Your house is not THAT bad an investment

Later in his book (p. 76) Warren does provide a table with the inflation-linked growth of each SA asset class and here he notes that shares beat inflation by about 7% per year – agreed. But his low figure of inflation + 1.5% for residential property is problematic. The Absa House Price Index doesn’t take into account the ‘income value’ you get from living in your own home. That value is the same as the rent you would have paid to live there minus the running costs of owning the property. By not paying rent because you’re the owner, it’s the same as receiving the going rental every month in your pocket, but you are responsible for the house bills, maintenance and interest on your bond if you didn’t buy it cash or it’s not yet paid off. If you had a bond, the ‘income value’ may be low in the beginning but over time as the interest portion of your loan repayment becomes less and the rental prices in the neighbourhood rise, the income value could become substantial. Your growth rate – capital appreciation of your house + ‘income value’ - will likely never beat that of shares, but should lead to a significantly higher figure than 1.5% - probably closer to 4% more than inflation over a few decades of home ownership.

But I agree with the message that Warren wants to get across: if you’re on the road to financial freedom, don’t overextend yourself in terms of a bond and a larger-than-needed home. Choose a small place and use the extra money to invest in the stock market, the proven long-term outperformer.

3 Careful of listed property

In the same table as mentioned above (p. 76) listed property (companies that invest in mostly commercial properties) is still recorded as having a growth of 6.5% above inflation. Become your own financial advisor was revised just before the world went into lockdown and changed fundamentally. Office vacancies have since soared and are unlikely to return to pre-pandemic levels; instead of visiting malls, consumers have accelerated their shift towards online shopping. What is to become of all these commercial properties? My own listed property allocation has lost 7% per year on average over the past 5 years. While I have no reason to believe that future long-term share performance will differ much from that of the previous decades, the same cannot be said for listed property. The fundamentals of this asset class have changed forever and we might need to temper our growth expectations. Listed property has a place within a diversified portfolio, but don’t overdo the size of your allocation.

4 Low-cost retirement annuities are great for high tax payers

On page P.29 Warren introduces readers to retirement annuities (RAs), but starts off by painting an unflattering picture of RAs in their previous-century guise: insurance products. In my mind there are two investment products in which all tax-paying South African residents should ‘wrap’ their funds:

So, unlike Warren, I actually wax lyrical about the tax and other benefits of a retirement annuity, particularly the large range of low-cost RAs currently available.

5 Link your offshore allocation to your future offshore expenses

Warren and I have a slightly different approach to helping investors decide how much of their portfolios to allocate to offshore asset classes. For Warren (p.112), the bigger your portfolio, the more you should take offshore, particularly if you have more capital than you would need during your lifetime. I would suggest that you look at the likelihood of incurring most or part of your expenses outside of SA in future, and scale your offshore allocation accordingly. Irrespective of the size of your portfolio. But if Warren’s working from the assumption that investors with large portfolios would leave that to the next generation who has a bigger chance of living abroad one day, perhaps our approach is not that different. We just word it differently.

6 Watch out for ‘upfront fees’ of ETFs

Warren is a fan of ETFs. So am I. But ETFs are often idealized as an alternative to unit trusts, when the latter can actually work out cheaper overall for the same index. Warren mentions that there are no upfront fees on ETFs. Not in the fund, yes. But you always pay an ‘upfront’ fee via your trading platform – the brokerage and spread charged for buying the ETF. Likewise, you will also pay ‘exit fees’ when you sell them via your trading platform. A full explanation of the difference between ETF and unit trust fees is available.

7 No need to pay more than 1.2% p.a. total fees

On p.131 Warren gives 2.5% as the maximum fees you should ever be paying for the platform, the fund, and the adviser combined. That’s too much. In my own portfolio on the Allan Gray platform, even with my legacy actively managed funds, I’ve managed to bring down my total annual fees to below 1.3% per year by blending in enough low-cost passively managed (index tracking) funds. And that’s still expensive compared to what is available in the TFSA, RA and preservation fund space. If you go with low-cost passive funds only and manage your own portfolio without paying commission to an adviser, you shouldn’t be paying more than 1.2% per year in total.

Overall rating of Become your own advisor

Several sections of the book call for more visual explanations and tables to provide structure. Chapter 9 in particular calls for a strong editorial intervention, using structure and hierarchy to help investors understand the layers of investment choices: 1) asset classes, 2) the ETFs and unit trusts that contain them, and 3) the wrappers that go around the ETFs and unit trusts, e.g. retirement annuities and TFSAs. As it stands, everything is listed as a glossary, providing little insight into how these investment options connect. Also, I would prefer more references to other books and blogs for further investigation and to the sources of important information/figures used in this book. Still, writing a book that contains everything you need to know to become your own adviser is an ambitious goal and Warren Ingram did a great job at providing a high level picture in under 200 words that’s accessible to anyone who’s starting their quest for financial freedom.