A simple guide to unpacking your real net worth

Like too many of us, you probably shy away from digging deep into the detail of your financial portfolio and thus miss the opportunity to have it work significantly better for you. Also, the older you get, the more inclined you are to bury your head in the sand, telling yourself it won’t make much difference now anyway. Wrong. The premise for the justification might be true, but the conclusion is well off the mark. Here financial strategist Candice Paine, in the true spirit of fresh New Year beginnings, offers us a practical step-by-step tool to get a handle on our finances, by examining them solo or with expert financial advice; it’s over to you. I’m a member of a creative profession generally notorious for sloppily caring for our long-term financial futures, especially early on, (OK, I speak for myself), yet I can see the huge potential value on offer here. This contribution has made me curious as to how I’ll stack up. I’m questioning the wisdom of holding onto my bought-to-rent properties, even though they’re apparently paying for themselves. You may experience similar head-shaking insights. Definitely worth a read. A story of real service. – Chris Bateman

What is your real net worth?

By Candice Paine*

The only way to understand where you really stand financially is to dig into the detail. Most of us own some assets, have some debt and have a vague idea of where these things are invested, but we’re not sure if the portfolio is really working for us from a growth perspective.

To really understand your finances, you need to look at them holistically. Practically this means looking at all your financial assets and liabilities together to ascertain what exposure you have in the portfolio – and what may be missing.

STEP 1 – draw up a spreadsheet or have someone help you. This must include all your assets. A rough list may look like this:

• Your house (at current market value) less any debt you may still have on it;
• Any other property you own valued as above;
• The value of your pension funds. This includes preservation funds, retirement annuities, provident funds etc. If you have an offshore pension fund include it here;
• The current value of unit trust investments; tax free accounts and stock broking investments.;
• If you hold offshore investments, include these;
• The current balance in your bank account less credit card or store debt;
• Any money market funds, savings or fixed deposit accounts;
• Any alternative assets such as section 12J, hedge funds or private equity investments;
• Your car less debt owed on it. (remember most cars are a depreciating asset);
• Anything else which has material value i.e. jewellery, art, etc

Add up the value of all your assets less any outstanding debt. This gives you your total net wealth. Charting this allows you to visually see the spread of your assets.

For most South Africans, property dominates the portfolio. This is normal as you do need to live somewhere but bear in mind that property is not always the best long-term growth asset. In this example property includes a buy-to-let option which if necessary, could be sold to decrease property exposure.

Outstanding debt is a fifth of the portfolio whilst the total pension funding is substantially less than this.

The value of the car is more or less equal to all other savings (cash + tax free account + unit trusts). Remember a car is usually not an investment.

Also note (and not shown in the chart) approximately 90% of this portfolio is invested in South Africa. Need I say more.

STEP 2 – Now exclude property from the portfolio for the reasons stated above and only look at the investable assets.

Now the debt is almost equal to the amount of investable assets owned. The pension fund is 39%.

STEP 3 – Excluding property and outstanding debt, we look through the categories to determine each asset class’s exposure, both locally and globally.

This portfolio is SA equity heavy with small exposures to other asset classes (bonds, cash and listed property) and very little global exposure. This makes sense as most of the investable assets are invested in pension funds which are subject to pension fund regulations which restricts the investment to 70% invested in South Africa.

With this detailed information about the portfolio – we can see where there are imbalances, unintended risks and over exposures. The most important decision to make is what to do next. This may be ‘do nothing’ or any of the following suggestions and beyond. What you do depends on your needs and your lifestyle.

• You may be happy with these splits as they suit your lifestyle and align with your long-term goals. If this is the case do nothing;
• Are you shocked to see how big a percentage debt is of your net wealth? You know what you need to do now, right?
• Property really dominates the portfolio and in the South African context this makes you uncomfortable. Perhaps consider downsizing or selling the buy-to-let property. Take the proceeds (after all costs) and invest in offshore;
• You thought your tax-free account was invested in rand-denominated offshore funds but now you know it is in an expensive actively managed South African only fund. You can transfer this and get the exposure you want;
• You’ve just realised your mortgage is an access bond and instead of having cash in the bank, you could park that money in the bond reducing interest payments.

I am guessing that you get the point – knowing what you have and where it is invested gives you the power to sharpen your portfolio so it can really start working for you. There is no one way to structure a portfolio and the range of options, products, funds, tax implications, costs etc are endless. If you feel you are qualified to manage this yourself then don’t be complacent and do this exercise at least once a year followed by actually implementing any changes you decide on.

If this feels like a bridge to far but you know it needs to be done, then consult with a financial advisor who can do these calculations for you and work with you on making decisions to grow your wealth.

Do not bury your head in the sand because you find this all too overwhelming. Time really is your best friend in investing so make sure you are using yours wisely and giving your portfolio the time to grow.

• Candice Paine is an independent financial advisor and an asset management consultant.