Podcast: How to set portfolio up for financial freedom - Just One Lap (2024)

I learned a lot of important financial concepts from the FIRE (financially independent, retire early) movement. The most useful is the difference between retirement and financial independence.

The days of companies supporting retired employees in retirement are a distant memory. If you are plugged in to your finances, this is great news. It means there’s no correlation between your age and how long you have to work. We focus instead on financial independence.

All of us have a magic money number. The great news is that our number is entirely in our control, because it’s based on our spending. Simply put, your monthly spending times 300 gets you in the ballpark of your FIRE number.

That formula works because of the 4% rule, which our friend Stealthy Wealth lays out in this post. Basically, 4% is how much of your portfolio you should be able to cash in every year to allow your capital to grow by inflation. That means your portfolio never shrinks, so you never run out of money.

If you accept the 4% rule, you have to reject some age-old ideas about asset allocation as you approach retirement. In retirement planning, we are often advised to deduct our current age from 100 or 120, depending on what you suspect about your longevity. The number remaining is the percentage of your portfolio that should be in equity. Unfortunately that means a person who is 50 years old will have half their portfolio in low risk, low growth assets.

The 4% rule is unlikely to apply to such a conservative portfolio, since it’s unlikely to yield high enough above-inflation returns. Remember, you can only use whatever you earn above inflation to keep your capital in tact. If inflation is 6% and your portfolio only grows at 7%, you can only use 1% of your capital. Unless you have a huge amount of money, that won’t be enough to sustain you for a year.

In this podcast, we brainstorm new ways to think about how to set up a portfolio as you approach financial independence. We work on the premise that you need between five and 10 years’ worth of living expenses in low-risk assets on day one, so you have the option of not drawing down your portfolio during a market crash.

We offer more questions than solutions in this one. We are excited to hear what you have contribute.

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Clean beeped show is as below.

Colin

I signed up for a Just One Lap’s ETF portfolio subscription account over two years ago and have been using the recommendation for my TFSA. There are supposed to be subscription fees payable after the first free year, but I have never been approached to pay any fees to keep my subscription account active and my login still works!

I am concerned however that the portfolios I see when logged in are perhaps not the most current, because I have not paid subscription fees! This concern is brought about by comments I have heard on the Fat Wallet podcasts, that make me wonder whether the current > 10 year portfolio (that has holdings: CSEW40 40%, SYGWD 40%, PTXTEN 20%) is the current recommended portfolio. For example Simon often mentions on the podcast that the Signia MCSI World ETF have much higher costs that the Satrix equivalent, and given Just One Lap’s emphasis on watching and reducing costs where possible, that makes me wonder why the SYGWD is still in the >10 year portfolio and whether I am seeing updated portfolios.

Margaret

The recent discussions about CoreShares changing their index made me want understand more of the underlying methodology of the underlying index.

Indices for one country seem relatively simple (e.g. S&P 500, our Top 40 index), but if you want to go for the one ETF to rule them all strategy you have to have more complexity. I see there’s the Ashburton 1200 and the MSCI world that track the global markets. Could you explain how these indices are created?

Are there any indexes that track emerging markets over the world? BRICS? Latin America and Africa?

Kristia’s ETF analysis checklist:

• Asset classes: are you buying shares, bonds, property or a combination?

• Regional exposure: where the companies in the index operate

• The investment universe: is it the whole market or only a sub-sector of the market, like technology

• Methodology: how the index is weighted.

• Sector exposure: what types of companies are in the idex

• Cost: at the moment TER is the most universal indicator

Philip

A financial adviser suggested we take out life insurance on our parents as a future investment. My parents agreed and I have a little under R5m cover for about R2750 p/m.

The policy is now eight years old and the payment amount only adjusts for inflation. So does the payout.

1. a) It’s my understanding that I will not pay tax on this payout.
2. b) I hope I don’t lose my dear mother for the next 30 years! And even if she lives until 90, my calculation is that the contribution will never exceed the payout.

To me this seems like a good investment as part of a bigger portfolio (RA in addition to my Work pension, Standard Securities -started trading on the lazy system {yay me! I’m a trader!} etc).

Are there any pitfalls I am missing, or can I tell my sister to consider the same type of policy?

I guess I just want a sanity check here.

NC van Heerden

Over the past year I’ve listened to all of your podcasts since inception-sometimes obsessively. Luckily I started listening only a year after I started working before I had the time to make poor financial decisions. Following the great advice you have been giving, I have:

– Started a maxing my TFSA which I spilt 70/30 between STXWDM and STXEMG

– I have created a sizeable emergency fund, which already saved me on one occasion

– Started some discretionary investments in the ETF space

– Moved my RA from a advisor-fee stacked unit trust to 10X. I’ve stopped contributing to this fund to keep the opportunity to move overseas without Mr SARS having his cut – these funds are currently going into my discretionary investment (thank you to everyone who did all those calculations about if the RA vs discretionary)

I currently have a contract until the end of 2019. Thereafter there is a high possibility of hopefully only a few months of (f)unemployment. At that time I am hoping to cover my expenses by working as a locum while waiting for a post to open up. Luckily I have no debts – thank you just one lap.

In preparation I want to try saving a bit more money into my emergency fund this year. I’m currently using FNB’s money maximizer account (decent-ish) interest rates but 100k minimum and monthly fees, but it has easy access via the FNB app (which I use anyway) and I can move money immediately).

Since I will be adding some more money into my emergency fund I was looking at at saving it somewhere with a better interest rate. According to tigersonagoldenleash.co.za at the moment the best interest rate seems to come from Tyme Bank (10% after invested for more than three months and taking a 10 day notice on withdrawal – downside is a maximum investment of 100K).

Does that seem sustainable on business grounds? I always have the uncomfortable feeling that something seems too good to be true (looking at you Absa with 13.5 percent interest and then fine printing it as simple interest). I’m also considering African bank as it seems a bit more established.

Please also advise if you think there would be a better place to park some extra emergency fund money for the next few months.

Rudolph

Do dividend yields rise or fall in a boom or a recession?

Hannes

You’ve mentioned a few times already that buying your house was a mistake and you’d never do it again. I would love for you to elaborate exactly the reasons why you believe it was a mistake, in as much detail as you can.

I find it difficult to believe its a financial mistake when you are planning on paying it off in five-ish years, paying very little interest because of that, and having the benefit of not having a rent / bond payment after said five years. To me the pros of this far outweigh the cons.

The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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