World Debt and Investment: risk and reality

“Everything we get, outside of the free gifts of nature, must in some way be paid for.” ~ Henry Hazelitt ‘One Lesson: The Shortest and Surest Way to Understand Basic Economics’

Debt is a complex issue – and depending on how it is controlled – can have either positive or negative effects. In its simplest form, debt could well look like this: if you owe more money than you earn, you are bankrupt, actually poor. Yet the world seems determined to ignore this reality and continues to spend beyond means and borrow beyond ability to repay. The effect is the same whether you’re an individual, a company, or a country.

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Future Hot Stocks: where the smart money is going

Thus far, through 2017 and as we head into 2018, markets have been in a bull run for nearly nine years. However, it’s not time to lose focus. There are many options to consider as trends and hot tips make the rounds. The pick includes some stalwarts who will still dominate in 2018, but also new choices that may prove valuable while appearing offbeat and somewhat tempestuous.

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Bitcoin: boom, bubble or bust?

“It is time to realize that they (cryptocurrencies) are the real barbarians at the gate.”

Andrew Sheng, chief adviser to the China Banking Regulatory Commission.

The world is changing faster than we can think. Disruption is constantly chipping away at conventional systems and driving change at a dizzy speed. Begun in 2009, Bitcoin was initially taken up by an elite few with the technical skills to dive and dabble in something so fundamentally disruptive, that it has taken several years for the penny to drop on the wider public. After a somewhat bumpy ride, the price of Bitcoin has risen from 0.0001 USD in 2009 to 1 000 USD in 2013, to over 4,000 USD per BTC as of August 2017.

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The Real Value of Advice

In the investment world, where results are measured in percentage terms, it is very easy to lose track of the real value of advice. Of all the participants in the ‘investment value chain’, historically it has been the financial adviser who has most keenly felt the pressure to reduce their fees. Being people centric at heart, quite often they oblige. As it turns out, quite unfairly, as we will explain below.

Consider the illustration showing investor returns:

ComparisonReturn % per annum
Stock market (eg JSE, S&P, Dow Jones)10.0%
Managed Equity Fund (a fund manager)12.0%
Excess Investor Return (Difference between stock market and the Fund2.0%
     Less: fund manager fees (cost of accessing the fund)1.25%
Net return received10.75%
 

At a glance this shows the investor receiving a net 10.75% return from the fund manager for a fee of 1.25%. Seemingly a good deal.

Take then a financial advice fee of 0.75% p.a over and above the fund manager’s fee, and we are back to square one: the stock market return of 10.00%. Many investors do this simple comparison and start to question the value of advice, with the fund manager receiving substantially more gratitude for the returns delivered.

The reality could not be more different. This comparison, while simple, illustrates how the value of advice can get lost in the numbers.

Here’s why…
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