Think of Your Wealth as a Collection of Boxes
Every investment in your portfolio should be able to answer one simple question: what are you here to do? If the answer is “I’m not sure” or “it looked good at the time”, that’s a shot in the dark. You might hit something, but you didn’t aim at anything. Goal based investing is the opposite, there is a reason and a plan behind every Rand you invest.
Every investment goes into its own box, and every box has a label. The label says what the money is for, when the box will be opened and who it is meant for. One box might be your emergency fund, opened at a moment’s notice. Another might be school fees in six years. Another might be your retirement in twenty-five years. These are very different boxes, so they shouldn’t hold the same things.
That’s why every goal needs a date, a goal without a time frame is a wish. The date on the label drives almost every decision we make about what goes inside and it determines the risk you can afford to take. Money needed in eighteen months can’t be exposed to a market that might fall 30% next quarter but money needed in twenty-five years can ride out that fall, and it needs growth assets to give it the best chance of beating inflation over time. It also determines the asset allocation. A short-term box leans towards cash and conservative assets. A long-term box leans towards equity. A medium-term box usually sits somewhere in between. Your emergency box must be easy to open, it determines liquidity. Your retirement box doesn’t need to be, and sometimes it’s better if it isn’t. A box that’s hard to open early protects you from yourself.
Does the box itself matter?
It does. Two boxes can hold exactly the same investment and still lead to very different outcomes. The structure around the investment decides how growth is taxed and who owns the asset. It also decides what happens when you pass away. Growth inside a retirement annuity is tax-free but the same investment held in your personal name is taxed on interest, dividends and capital gains along the way. On death, a retirement structure with a nominated beneficiary generally moves outside your estate, which means no executor’s fees and no estate duty on that capital. The same money in a discretionary account becomes part of the estate and attracts both. The investment is the same, but the box is not.
So when we plan, we don’t only ask what to invest in. We also ask which box it should sit in, given the goal, the tax and the estate plan.
How do we review a box?
We review it against its label. This is where many investors go wrong. A long-term equity portfolio or a retirement annuity cannot be judged six months after you buy it. Markets move, and in any six-month period equities can lag or even fall. That doesn’t mean something went wrong. It means the box isn’t due to be opened for another twenty years. Judging it after six months is like digging up a seed every week to check on its roots.
The same goes the other way. Your cash box shouldn’t be criticised for being “boring” next to your equity box. It’s doing exactly what it was built to do, which is to be there when you need it and a proper review asks different questions. Is the goal still the same? Has the date moved? Are the contributions on track? Is the risk still right for the time that’s left? As a box gets closer to opening, its contents could change. A portfolio that opens in two years shouldn’t look like it did when it had twenty to go.
When every investment has a box, a label and a date, the noise gets a lot quieter. A bad quarter is just a bad quarter. You know what each Rand is for, and you know when you’ll need it.
Reach out to me at ruvan@bovest.co.za and let’s look at your boxes together.
Ruvan J Grobler FSA® (PGDip Financial Planning)
