Educating ourselvesagainst Financial

pornographyBy Linda Stonier, CEO and Head of Advice

Stone Wealth Management

Heart-stopping Headlines

‘Financial pornography’ is a phrase used to describesensationalist media coverage of financial news. After all, themedia’s ultimate goal is to sell papers, and heart stoppingheadlines are the most effective way to achieve that goal.So whether the market is seeing small positive or negativefluctuations, it is the media’s job to make those small changesseem like big news. Makes you think about just how reliablethese headlines are, doesn’t it?

Issue 11 | May 2014

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welcomeMay is a significant

month all around theworld - it signals the

official change ofseason, it’s a time whenold makes way for new.

Make sure that weknow about any newchanges that need to

replace the old in yourfinancial plan! Why notalso take advantage of

the crisp, coolerweather and settle

down indoors toeducate yourself

further on mattersfinancial. Reading

financial books willteach you how to value

investments and notact emotionally.

thelighthouse

continued over the page

2 | a professional approach to preparing your future

continued from page 1

our expertise, your financial future

“Inflammatory” claims

Take the below newspaper article as a case

in point. The headline ‘Global equities sink

as uncertainty in Italy inflames fears’ is a real

heartstopper - even for the most seasoned

investor. But don’t go pulling your

investments yet! Read the content... carefully...

The bare bones of this article

is hardly newsworthy.

• ‘The Dow Jones Industrial average dipped

by 0.27% in mid-morning trading’

• ‘Top 40 Index finished 2.19% higher’

Certainly not worth pulling investments over.

Being human doesn’t help

Research indicates that media coverage of a

financial event can change how investors

respond. Overreaction is a human behaviour

that is notorious for affecting market prices.

All things being equal, in a rational market

the fundamentals of a company determine

its market price, and there should be a clear

relationship between the two. However, risk-

factors such as newspaper and TV news

headlines can be one of the biggest

headwinds facing an investor as they are

constantly filled with doom and gloom.

Headline risk can be grouped in the same

genre as golf course talk, dinner/cocktail

party chatter or the latest best seller whose

author beat the market and ‘can show you

how.’ Although the guiding principles of good

investments have been known for decades,

evidence suggests that most investors do

considerably worse than they could if they

adhered to a few simple principles. And it

seems being human doesn’t help.

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Issue 11 | May 2014

Stone Wealth Management sAdvice

1. Have a financial plan in place that

you understand and have confidence

in. That way you can stick to it and

ignore sensationalised headlines.

2. Ignore the noise and read beyond

the headlines: If it sounds like the

end of the world, it more than

likely isn’t

3. Speak to your financial advisor

before making any big decisions

The following two examples are proof inthe financial pudding

• US Morningstar Study illustrated thatover a 5 year period, average diversifiedfund returned 12.5% p.a. in dollars, butinvestors only achieved 2.2%. Survey -Morningstar Research

• Australian Study by IFR illustrated thatthe average returns from diversified funds10.4% p.a. over 5 years, but investorsearned only 2.4% p.a. Survey - FPGResearch

Researchers at certain universities, includingStanford University, analysed the investmentdecisions made by people with brain lesionsthat rendered them unable to feel emotions,according to a news report on StanfordUniversity’s Web site. The subjects’ IQ’s werenormal as well as the parts of their brainsresponsible for logic and cognitive reasoning.Participants who had brain damage thataffected emotions fared much better thanthe "normal" participants when it came toinvestments.

Evidence shows that when the stock marketdeclines, people tend to shift their long termsavings, like retirement savings, into bonds.According to the study: “Investors are notbehaving in their own best financial interest.Something is going on that can’t be explainedlogically.”

Another co-author of the study, AntoineBechara, called successful investors

“functional psychopaths” - people who are

better at controlling their emotions or do

not feel emotions as intensely as others.

The bottom line

The above case studies are proof of the

corrosive effect of emotion which, in all

likelihood, is fuelled by sensational headlines

that play on fears and cause us to make bad

choices. When decisions depend on

information provided by others, especially

the media, investors are more likely to make

bad choices/imprudent decisions.

The ultimate question

“How do I rise above my emotions and avoid

getting caught in the media’s sensationalised

web of deception?”

4 | a professional approach to preparing your future

The following market review looks at theperformance over the past quarter of localand global asset classes, as well as currencies,and puts this into perspective relative tolonger-term performance. The purpose ofthis review is to provide a context in whichthe performance of the investment solutionsin which you are invested can be assessed.

International

Global financial markets had a rocky start tothe year, as risk aversion spiked towards theend of January. The risk aversion behaviourreflected concerns about the state of someemerging market countries and how theywould fare in an environment where the USFederal Reserve is tapering their quantitativeeasing programme. Tapering has commencedas planned - bond buying by the US FederalReserve is down to USD 55 billion per month,compared to the pace of USD 85 billion permonth prior to the start of the taperingprocess. Emerging market countries that reliedheavily on foreign inflows to fundunsustainably large current account deficitssuffered the most, resulting in a strongdepreciation in their currencies in January.Many of these emerging market countrieswere then forced to hike interest rates, inorder to be more competitive and stem thetide of outflows. A group of these emergingmarkets, namely Brazil, India, Turkey, Indonesia

and South Africa, became known as theFragile Five. Political instability in areas suchas Ukraine has also contributed towardsemerging market volatility. An additionalconcern was the softer economic data in theUS and China. China’s economic activity hasbeen on a steady decline, GDP growth forthe fourth quarter came in at 7.7% comparedto 7.8% in the third quarter. Bad weather inthe US was determined to be the main reasonfor weaker economic data. The US economyexpanded by 2.6% in the final quarter of2013, compared to 4.1% in the third quarter.Unemployment in the US has remainedaround the 6.7% level, very close to theFederal Reserve’s initial 6.5% target. JanetYellen has indicated that they would look ata wider range of data before they start tohike interest rates. The UK has seen animprovement in its economy which has ledto speculation that it may be one of the firstdeveloped market economies to tightenmonetary policy.

In contrast to the US and UK, the Eurozoneis not in a position which favours theconsideration of tighter monetary policy.The Eurozone achieved its third consecutivequarter of positive growth, with GDP growthof 0.3% in the final quarter of 2013. A keyconcern for the European Central Bank (ECB)has been the risk of deflation, with inflationfor the region being far below the 2% target

Economic and Market Overview: Quarter 1, 2014For the period ended March 2014

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Issue 11 | May 2014

for several months. The last reading came inat 0.5%. The policy rate set by the ECB hasbeen at 0.25% since November 2013, whenthe rate was cut by 25 basis points.Speculation of US-style quantitative easingthrough bond buying by the ECB hasincreased.

Global equity markets rebounded after thewide sell-off seen in January. Year-to-date,the MSCI World Index is up 1.4% and theMSCI Emerging Markets is down 0.4% in USD.Despite being marginally down over thequarter, emerging markets outperformeddeveloped markets in March by 3% indicatingthat we may start to see a narrowing of theperformance gap. Bonds and propertydelivered positive returns of 3% and 4%respectively for investors over the pastquarter.

Domestic

South Africa, as one of the ‘Fragile Five’, hasbeen plagued by a large current accountdeficit and the notable depreciation of therand over the past year. The South AfricanReserve Bank (SARB) responded by hikinginterest rates by 50 basis points to mitigatethe impact of the weaker rand on domesticinflation. This was the first interest rate hikesince 2008 and came as a surprise to themarket, despite other emerging marketshaving acted in a similar fashion. SouthAfrican inflation has edged up towards thehigher end of the target band, coming in at5.9% in February. The SARB expects inflation

to breach the upper band and peak at 6.6%in the second quarter, with an average of6.3% for the year. According to SARBGovernor, Gill Marcus, the hiking cycle hasbegun; she adds that the decision to continuehiking rates will be data dependent. Thismessage was expressed after the MonetaryPolicy Committee (MPC) meeting that tookplace in March, where the MPC decided tokeep rates at 5.5%; three of the sevenmembers were in favour of a rate hike.

We are starting to see a slight improvementin the closely watched current accountdeficit, which contracted to 5.1% of GDP inthe fourth quarter of last year from 6.4% inthe third quarter. This is encouraging, but westill have a long way to go. Another crucialeconomic metric, GDP growth, has beensomewhat disappointing - GDP growth for2013 came in at 1.9% compared to 2.5% for2012 - this is perhaps why the MPC has beenreluctant to hike rates too quickly.

The positive asset class returns we see forthe quarter mask the poor returns that wereseen across all domestic asset classes inJanuary, where property was the hardest hit,with a negative return of 7%. All majordomestic asset classes made up the lossesseen at the start of the year, with equitiesleading the pack - up 4% for the quarter.

The tables below provide a review of keylocal and international investment indicatorsfor the past quarter, as well as over longerperiods.

Economic and Market Overview: Quarter 1, 2014market overviewThe tables below provide a review of key local and international investmentindicators for the past quarter, as well as over longer periods.

South African asset classes (in rands)(Performance over periods to 31 March 2014)

Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities All Share Index 4.3% 23.6% 17.6% 22.0% 12.5%

Property Listed Property Index 1.8% 1.1% 18.6% 19.6% 11.%

Bonds All Bond Index 0.9% 0.6% 9.2% 9.0% 6.9%

Cash STeFI Call 1.2% 4.8% 5.0% 5.6% 6.0%

Inflation CPI (one month in arrear) 2.1% 5.9% 6.0% 5.4% 4.9%

Source: I-Net and Nedgroup Investments

Global asset classes (in dollars)(Performance over periods to 31 March 2014)

Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities MSCI World Index 1.4% 19.7% 10.9% 18.9% 10.0%

Property S&P Developed Property Index 3.8% 2.7% 9.1% 23.5% 8.2%

Bonds JPM Global Bond Index 2.8% 1.4% 3.9% 5.7% 4.7%

Cash US 3-month deposits 0.0% 0.1% 0.1% 0.1% 4.0%

Inflation US CPI (one month in arrear) 0.5% 1.1% 2.0% 2.0% 3.1%

Source: I-Net and Nedgroup Investments

Currencies(Performance over periods to 31 March 2014)

Currency Value at 30/09/2012 3 months 1 year 3 years 5 years LT-average*

Rand / Dollar 10.52 -0.4% -14.6% -15.9% -2.0% -5.5%

Rand / Sterling 17.53 -1.1% -25.9% -17.4% -5.2% -3.9%

Rand / Euro 14.50 -0.4% -23.0% -14.8% -2.8% -5.7%

Source: I-Net, Morningstar and Nedgroup Investments

* Updated annually from 1900, or longest available periodReturns for periods longer than 12 months are annualised.

6 | a professional approach to preparing your future

our expertise, your financial future

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Issue 11 | May 2014

Alzheimer s Disease andGeneral Power of Attorney

By Christelle Rodway, Financial Adviser, Stone Wealth Management

When a loved one is diagnosed with Alzheimer’s Disease, it is anextremely upsetting time for the family. The stress of dealing withthe disease is made worse when he or she loses the majority of theirmental capacity, without having taken the necessary administrativeand financial steps to safeguard him or herself, or the family membersthat might be affected by the condition.

Christelle Rodway, Financial Adviser at Stone

Wealth Management, comments, “In terms

of contracts, investments and finances, you

lose contractual capacity as soon as you lose

the appreciation of what you are signing.

This adds unnecessary pressure on the

primary caretaker and makes managing

finances and administrative matters extremely

difficult - particularly if the one diagnosed

with Alzheimer’s has always been mainly in

control of the household finances.”

Here are some of the most common

questions asked of Stone Wealth

Management in this regard:

1) Will I be able to continue acting underGeneral Power of Attorney over my spouse’saffairs once he/she has lost his/her mentalcapacity?

No. A Power of Attorney is invalid once the

person who signed it over is no longer fully

capable of appreciating it. For this reason,

the Power of Attorney is only of use in the

early stages. In many instances, people do

continue to act under such Power, and very

often without consequence. However, if any

actions or contracts are entered into after

the point when the grantor of the Power is

no longer capable of appreciating the power

granted, there is a danger that such actions

or contracts would be set aside if challenged

by a third party.

The South African Law does not yet provide

for what is referred to in some jurisdictions

in the world as an “Enduring Power of

Attorney”. If this concept is introduced into

our Law, you would in that instance be able

to continue to act under such a Power.

2) Will I be able to withdraw funds or make

changes to my spouse’s investment or bank

accounts if he/she is of diminished capacity?

8 | a professional approach to preparing your future

No. As the Power of Attorney has fallen away,

the next step would be for you to make an

application to the High Court to appoint a

Curator to take over his/her financial and

administrative affairs.

3) What is the difference between

“Administration” and “Curatorship”?

(a) Administration

Taking over the “administration” of one’s

affairs applies to persons with capital assets

of less than R200,000 and income of up to

R24,000 per annum. This is a relatively simple

process, and does not require a High Court

application. Should one have assets and

income over this amount, the Curatorship

application will need to be considered.

(b) Curatorship

This refers to a situation where anadministrator, or Curator, is appointed by theHigh Court to take over and manage another’sfinancial and administrative affairs. This isdone by way of an application to the HighCourt, which sets out a three stage process:

(i) to appoint a Curator Ad Litem (one whomanages court proceedings on behalf ofthe patient whilst the application forCurator Bonis and/ or Personae is inprocess);

(ii) to declare the patient of unsound mindand incapable of managing his/her affairs;

(iii) to thereafter appoint a Curator Bonis orCurator Personae or both.

There are two forms of Curatorship and oneor both may be appointed:

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Issue 11 | May 2014

Meet the Team

Christelle Rodway Financial Adviser Post-graduate Diploma in Financial Planning, CFP®

Christelle is a financial adviser and member of the Advice Team. She is passionate about

financial planning and assisting clients in reaching their goals and dreams. She obtained

a post-graduate Diploma in Financial Planning, one of the highest qualifications in the

financial planning industry. Christelle has served her articles and undergone the diligent

training and development process required by all financial advisers.

• the Curator Bonis administers the person’s

property, including their finances

• the Curator Personae takes personal

decisions for the person, ie suitable

accommodation for the patient or

providing consent for an operation

These applications can be time-consuming

and costly (anywhere from R30,000) and

require submissions from two medical

practitioners, one of whom must be a

psychiatrist.

4. Can I be appointed as the Curator Bonus

over my spouse’s affairs?

It is highly unlikely. The Masters of High

Court take this procedure very seriously and

you can understand why - can you imagine

the ramifications of removing somebody’s

contractual status? It is a massive

responsibility and can be open to abuse. It

is therefore necessary to follow a stringent

process to safeguard against abuse. The High

Courts will generally only appoint an

Attorney who has significant experience in

this type of role and who has a proven track

record with the Master relating to other

Curatorships.

Prevention is better than cure

Christelle says that there are steps that can

be put in place before mental capacity is

diminished, in order to avoid this costly and

time onerous exercise.

She explains, “Every client’s situation is

different and can depend on various factors.

Ideally, though, as soon as you are aware that

there is a problem with your or your loved

one’s health, you should contact your

Financial Adviser. They will assess the case

and advise you how to remedy the situation,

taking factors such as tax and estate duty

implications into consideration. As with all

things financial, planning ahead is always

preferable and the most likely way to avoid

stress and nasty surprises.”

10 | a professional approach to preparing your future

TheStone Wealth

ExperienceWelcome

www.stonewealthmanagement.co.za | 11

Issue 11 | May 2014

talk to usThe Stone Wealth

Management teamwelcomes your

feedback.

Email us atadmin@stonewm.co.zaor drop your feedback

into the box inreception.

Stone Wealth Management

a professional approach topreparing your future

68 Old Main Road, KloofPO Box 29275 Maytime CentreKloof 3624

Tel 031 832 4555Fax 031 832 4550admin@stonewm.co.za

VAT reg no 4930234093CK No 2013/020333/07

Stone Wealth Management is a licensed

Financial Services Provider FSP 29494

12 | www.stonewealthmanagement.co.za

we recognise that life is a journey...

and that financial security is

important to that journey

you asked us...

What is the benefit of a

multi-asset fund vs

a multi-manager fund?

A multi-asset fund invests in different asset classes, eg equity,fixed income, property, money market, etc. The advantage isthat an investor gains access to all asset classes through asingle investment manager. A multi-manager fund is one thatcombines different underlying managers across each assetclass into a single product. The advantage of this is that amulti manager can combine specialist managers to create amulti-asset fund.

Do you have any questions that you would like answered?Email admin@stonewm.co.za and will post the answerin the next issue.

did you know?

Fund selection similar to selecting medicines

There are many different funds out there as with medication.Your doctor will prescribe a medication based on his/her  research. He knows,  through experience and testing whatoutcome and result will be produced. Stone wealthmanagement use a similar approach. When it comes toselecting funds from a plethora of funds, we understand thelimitations of our solutions and know what the ‘side effects’will be thus giving us and our clients complete peace of mind.