2021 Financial freedom update

By Lizelle Steyn

1 December 2021

Photo credit: Ali Pazani

In June 2019 when I started this blog, I was 52% on my way to financial freedom – having enough in investments to fund a roof over my head and food on the table for life. And to pay for a few other things that I feel give life some juice and me some joy. Like new DIY toys – I mean tools - and more home improvements and seedlings and stuff for my garden and books and nice stationery and cappuccino with almond milk and the occasional bottle of bubbly. Not an austere life. Rather a life of simple pleasures, lived consciously.

How much does one need for financial freedom?

How did I calculate my financial freedom target amount, you may ask. Great question. In my mind, we've reached financial freedom the moment we have enough in our portfolios to cover 300 times our monthly expenses. If you want to, you can read more about this 'magic number', the Rule of 300 and the 4% rule.

Calculating one’s financial freedom amount starts with knowing your expenses. It’s not a multiple of your salary, as some retirement calculators would lead you to believe. Nor does it have anything to do with how much anybody else needed to ‘retire’. We’re all different. So, let’s start this year's update with my current expenses.

Top 10 expenses at end of 2021 (average per month)

1. Food and groceries: +/- R3 500
2. Own medical aid: R1 962
3. Mom’s medical aid: R1 504
4. Municipal account: +/- R1 200
5. Home and garden stuff: +/- R1 200
6. Gifts: +/- R1 000
7. Cleaner's pension: R900
8. Holidays, Cape Town visits and airbnb for visiting family: +/- R800
9. Critical illness insurance: R789
10. Retreats, workshops and books: +/- R750

I’m not going to list all my expenses here, just enough so you can get an idea of what my biggest bills are. Ideally, they should reflect what I currently value in life and I think they do. Overseas travel was much more important to me before the pandemic and when it becomes a priority in my life again, expect the holidays and airbnb line item to climb the ranks.

I also save and invest not a small amount of money every month in different accounts, but they’re not listed here since that’s not expenses, but the building of capital to one day fund all my expenses from my portfolio.

Considering all my expenses, I currently have enough in my portfolio to fund 95% of my current lifestyle. In other words, I’m 95% on my way to financial freedom, assuming my expenses stay at this level.

What investment products are in my portfolio?

In my financial freedom pot I have the following products:

• An Allan Gray offshore account
• Pension fund with my employer
• Allan Gray private retirement annuity (RA)
• Allan Gray unit trusts
• Allan Gray preservation fund
• Allan Gray tax-free savings account (TFSA)
• Easy Equities ETFs – ZAR and USD accounts
• Peregrine conservatively managed hedge fund
• Shyft foreign currency wallet

How did I end up with this portfolio of investment products? To be honest, my product purchases were a bit haphazard and started with a preservation fund in 2007. Also, before 2015 there wasn't such a thing as a tax-free account and the tax-beneficial limit on reirement fund contributions was capped at 15% of your income. So pre-2015 I took a lot of money offshore into fully taxable accounts (that SARS knows of). If you're starting out your investment journey, I recommend that you rather follow this more contemporary and tax-wise 9-step financial freedom roadmap than do what I did. In short, unless you plan to emigrate, prioritise a tax-free account (TFSA) and tax-efficient retirement products like an RA and your company's pension fund before you start investing in fully taxable products.

What is my offshore vs local split?

Because SA makes up less than 1% of world markets, it's important to get some of your money into funds that invest in the rest of the world. My ideal long-term strategic offshore allocation is between 50% and 55% of my portfolio. Read more on how to decide how much money to take offshore . And remember that you don't need to physically take money offshore to have offshore exposure. Choosing a global fund for your TFSA, for example, also gives you offshore exposure without moving your money into dollars.

When throwing all my financial freedom products together and aggregating the asset allocation across them all, I currently have the following offshore vs local split:

• 51% exposed to offshore markets
• 49% to local markets

So, my current geographical allocation is aligned with my long-term strategy. No need to fiddle with that.

How diversified am I across asset classes?

Long-term strategic asset allocation is the key driver of investment returns and it's really important to take stock every year and check that your asset allocation is still within your strategic asset class bands. If you're investing for 10 years or longer, you can afford to be 100% in the highest growth asset class - equities. But it's a volatile asset class and more risk-averse investors opt to bring in some of the other asset classes too - bonds, cash and listed property. (You have no asset class restrictions inside a TFSA - go 100% equities and/or 100% offshore here if you like - but your RA or company pension fund will force you to diversify across all 4 asset classes). This diversification reduces the ups and downs of your portfolio.

My asset allocation at the end of November 2021:

• equities (shares): 70%
• bonds: 8%
• cash: 13%
• listed property: 5%
• alternatives: 4%

Sitting at 13%, my cash allocation is too high for somebody who can afford to take more risk and have more in equities. Deploying more cash into equity ETFs is something I need to work on next year.

Which underlying funds am I invested in?

Inside those products listed above, I’m invested in more than 10 funds for plenty of diversification. My 5 biggest fund allocations as a % of my portfolio:

1. Orbis Global Equity (dollar based offshore actively managed equity fund)
2. Nedgroup Investments Core Diversified (local balanced passive fund)
3. Fidelity European Growth (euro based offshore actively managed equity fund)
4. SIM Moderate Absolute (local balanced actively managed fund)
5. Satrix High Equity Balanced (local balanced passive fund)

Which fund was the top performer?

Just to prove the point that past performance can be a terrible indicator of future performance, my best performing fund over the past 12 months to 31 October (the November figures are not out yet) came from the preceding year’s WORST performer, the Nedgroup Investments Property Fund. Over the past 12 months it gave 60%; the previous year that figure was a negative 40%. Last year was painful, but this fund might – eventually - get to the point where I at least have my capital back. This year most funds in my portfolio gave excellent returns (20% and more over the year to 31 Oct 2021) - along with the markets.

And the best performing fund over the past 5 years? In which I was invested for at least that long? The Orbis Global Equity Fund – 12.7% p.a. in rand terms. I’m happy with the return, but can’t help noticing that it’s significantly less than had I simply tracked the MSCI World Index (17% p.a.) It’s only in the last year that I’ve started investing all new money that I take offshore into passive funds (ETFs and index-tracking unit trusts).

Though fund performance is important, it’s ultimately out of our control. All we can control is:

• our expenses (most of the time)
• how much we invest
• how tax-efficient our chosen investment products are
• how well our underlying funds align with our long-term strategic asset allocation.

After that, it’s up to the markets.