Silke Financial Monitor, Issue 3

Can you believe it! We are already at the half way mark of this year. Financially - the last two months of buoyancy has taken most of us on a Roller Coaster Ride of highs and lows.

In short:

• Domestic demand is strong
• Manufacturing under pressure in strong rand environment
• Inflation relatively subdued
• Interest rates – there are opposing views, but in general the following should ring true: with a strong rand, a good inflation outlook and the struggling manufacturing sector, there is little reason for the SA Reserve Bank (SARB) to raise rates in the near future.

So, keep to the basics:

• Time in the market and not timing the market is essential to your long term financial security. Not even the experts have any idea on what the market is going to do next; investors should ignore the timing of markets and look for other proven strategies of out performance.
• Always ensure that you receive appropriate advice according to your needs.
• Ask questions.
• Learn.
• Understand YOUR investment allocation.
• Understand YOUR risk profile.

"I regard market timing as the investment management business' answer to the Tooth Fairy." – Roger Kirby

On our side: Assets under Management have grown by 5.4% since we last reported. Mandy will be appointed to a permanent position next month. Trevor and I are still in the midst of our Will and Estate Para legal course. Ken seems younger and even serviced his Gibson Les Paul Guitar recently. Is he staging a comeback? Nicole has had no new movie appearances. Her current position at Silke: Guard dog - but not very exciting for her. Luckily she is not on strike!

Well... that was the Intro. I hope that you will find the rest of your reading compelling and useful. To view any of our other newsletters, I invite you to visit our website at www.silke.co.za

Best Wishes,
Shane Thom

In this issue

1. Articles Planning your Finances Allan Gray Gray Issue – The role of winter in a garden Your Child's Education Global Education Protector Will/Estate Planning
2. Our Sponsorship Program
3. Recommended Resources
4. Silke Range of Professional Financial Services
5. Quote of the Week

Articles

1.1 Planning your Finances

– Shane Thom

A personalised Financial Plan structured by Silke Financial Services will help you achieve control of your money. Easily done, if you can set realistic goals, commit yourself to it and stick to it. In this way you can make steady progress even with ups and downs along the way.

What do you want to achieve?

Would you like to:

• Pay off your credit cards and other niggling debt?
• Buy a home and pay it off quickly?
• Save/protect your children's education?
• Save for your retirement?

These are some typical goals. Write down your own goals as the first step in your plan.

How long will it take to reach your goals?
Estimate how long it may take and note some things to do to get started on achieving your goals. Write down 3 sets of goals; Short Term, Medium Term and Longer Term.

• Short Term goals may be the paying off of credit cards and getting other accounts under control.
• Medium Term goals relate to the settlement of medium term debt and then setting a medium term positive goal such as an educational course, holiday or a special treat.
• Long Term goals are those such as paying off your bond or buying a home or saving for retirement; all of which can be just as important. Because of the cost of delay, the sooner you start working towards them, the sooner you can achieve them, even if you can only spare a small amount of money. It can cost a lot more to do these things later.

How much will each goal cost?
Estimating costs is fairly straightforward for the goals you have already in place in order to pay off debts. You will most likely save a lot of unnecessary interest payments.

The gap between your goals and your savings?

• What is the total cost?
• Subtract the total amount of what you are currently paying off to achieve your goal. This will give you the cost of what you still have to pay for.
• Subtract what you are saving now, this will give you the gap.

With a gap, you can't afford to start everything at once, but you can afford to do some things that will close the gap within a fairly short time. Closing that gap, means finding ways to free up cash that you can devote to your other goals.

Usually, a top priority is paying off high-interest loans. When you achieve that goal, you can channel the extra money you save into your next goal, and so on.

In the next issue I will discuss Budgeting and Dealing with Unexpected Events.

1.2 The role of winter in a garden

(www.allangray.co.za)

In the longer run an occasional recession is necessary for sustained economic growth. Recessions play the role of winter in a garden. Good times follow bad times, like summer follows winter. A recession eliminates economic inefficiencies and bad practices that develop in the good times and form a base for renewed upturn.

Developing countries experienced a major downturn in 1997-98 and the OECD in 2001. We are now experiencing the benefit from these periods of adjustment and are enjoying one of the strongest periods of global growth that has ever happened, despite systemic risks such as the overheated US housing market and the US current account deficit. China and India both reported annualized GDP growth rates in excess of 10 per cent in the first quarter of this year. The Japanese and European economies are growing again after a long period of stagnation. Throughout the world corporate profits are at record levels and are providing abundant liquidity to power both the economic boom and rising asset process. It looks as if we are in the early stages of a wave of corporate mergers and acquisitions. Typically such activity characterizes market peaks.

Commodity prices are high, but given the strength of the global growth, could well remain stronger for much longer. This has allowed South Africa to enjoy its greatest period of prosperity in the 50 years. Initially the spending boom was concentrated on housing but now it is most visibly manifest in vehicle sales. After running at about 30,000 vehicles per month, they soared in 2004 and 2005 to reach 56,000 in March 2006. This is typical of what has happened in the economy as a whole. VAT collection, most reliable indicator of spending, increased 17.4 per cent in 2005. Spending has slowed somewhat but is still very strong. In dollar terms imports, which have increased from $2.2 bn per month in 2002 to $4.6bn last year. Foreign investment inflows, which exceeded R100bn in the past year, have financed a growing current account deficit, now running at 4 per cent of GDP. Ultimately such large deficit is unsustainable and will cause a significant weakening of the rand, but the favourable combination of high commodity prices and strong foreign investment could sustain the current exchange rate for a long time yet. However this does constitute a growing investment risk.

Inflation remains well within the 3 to 6 per cent target. Over the past six months the annualized growth in CPIX has been 2.5 per cent. There are few signs of secondary inflationary pressures due to high oil prices. However the Reserve bank is becoming increasingly concerned about the rapid growth in consumer indebtedness and the impact of strong domestic demand on the current account. Accordingly it is holding interest rates steady.

The way in which high commodity prices have powered the South African boom is yet another reminder that our future is inextricably linked to global developments and the sustainability of the global boom.

Commentary by Sandy McGregor, Allan Gray Limited

Allan Gray Investment Services is an authorised administrative Financial Services Provider. Collective Investment Schemes in Securities (unit trusts) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Unit trust prices are calculated on a net asset value basis, which is the total value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from Allan Gray Unit Trust Management Limited. Commission and incentives may be paid and if so, would be included in the overall costs. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. A prospectus is available from Allan Gray Unit Trust Management Limited - a member of the ACI.

1.3 Your Child's Education: What to do

– Shane Thom

As a parent - the educational cash black hole never ceases. It's the hidden costs that get to me. Ballet, hip-hop, tuck-shop are but a few. If you do the maths, it is unlikely that you will be able to afford the little luxuries in life and buy your next set of golf clubs from Cash Crusaders! Educating your child is expensive – but it is most probably the most important thing you can ever do for your child.

So how does one do it? Don't panic. Take the stress out of it. Look at it as you would bread and milk. A commodity that is a household must and budgeted for. I am not trying to make light of it – but far too many people are scared into the thought that they need to save for their children's education and get sold down the path of non-performing educational policies (which are just plain endowment policies with one or two extra benefits. In my opinion, rubbish!)

Firstly, protect your Child's educational costs from today! Discovery Life's Global Education Protector will do this. This product enables you to protect your child's education in global terms and thus meet the actual costs of your child's education, in South Africa and internationally in the event of the death, disability or severe illness of the life assured. This even covers Bishops and other private schools!

The Global Education Protector is added onto a regular life policy and will cover you in the event of death, disability or a dread disease. Discovery will then take over any educational costs, at private tuition rates and up to the third year of university. All costs will be paid directly to the school or university of choice.

I personally think that this is a brilliant product as you can take comfort in the fact that no matter what happens to you, your child's education will be ensured at private rates. Costs of the benefit will differ, but should not be more than R130 a month.

Secondly, use all additional money to pay off your debt. Done wisely, you could be bond free quickly, besides the obvious fact that you will be saving thousands of rand.

The money used to pay off the bond could now be used to invest in your Child's future tertiary education and/or any entrepreneurial idea that he or she might have. A word of caution – don't leave saving for this too late. I worked out – that the cost of a three-year Degree for my daughter in 2019 will be approximately R243 000. Do the maths!

What to invest in for your children? Invest in unit trusts. Make sure that you put together a well-diversified portfolio. Most importantly, DO NOT TOUCH this money – it's not yours. Remember that it is your child's future education savings.

1.4 Will / Estate Planning

– Ken Silke

What is Estate Planning?

• You have the cash to pay outstanding debts
• You can provide an income (and capital if required) for your dependants in order to that they maintain their desired standard of living after your death
• The estate is distributed according to your wishes
• You protect any business interests you may have
• You pay as few taxes as possible (e.g. estate duty and income tax)
• Your estate planning is flexible enough to accommodate changes in the economic and legal environment as well as your personal financial circumstances.

The most important aspect of estate planning is to structure your estate so that you get the most enjoyment out of it while you are alive, and your beneficiaries get the maximum benefit from it when you die.

Do you need a Will?
If you do not have a will, or would like to review your will, we encourage you to contact us as we have a fully-fledged Wills and Estate Administration Division.

A will is a record of your wishes after you are dead. It is one of the ways you have of controlling what happens to your estate. A will is therefore an essential part of estate planning. The two key elements of a will are:

• To ensure that your estate is distributed according to your wishes
• To ensure that your estate is effectively administered after your death (such as payment of debts and estate duty)

There are a number of ways in which you can make a bequest to your beneficiaries. These include trusts, usufructs, fideicommissums or direct bequests. Each has different tax, costs and practical implications. This is a specialised area of financial planning and it is worth seeking our professional assistance.

Silke Sponsorship Program – Ikwezi Art Centre

We are proud to be the Main Sponsors to the Ikwezi Art Centre situated at the Montebello Design Centre in Newlands, Cape Town.

Please feel free to contact Joel Zwane, manager, should you require any further details. Cell: 073 608 9984. Bring this Newsletter to get a 10% discount at the Ikwezi Art Centre.

Recommended Resources

Yes, it is that time of the year – It's Filing Season and the deadline for submission of your tax return is Friday, 14 July 2006. For all the help you need in completing your return, visit the website.

Useful information on this website:

• Changes in Taxation of Medical Aid Contributions in respect of Employees' Tax
• New easier payment options
• Small Business Tax Amnesty

Our Range of Services

We offer the following range of services to provide a one-stop service:

• Financial Planning
• Retirement Planning
• Tax efficient investments
• Approved offshore investments
• Legal & Broker Protection Services
• Pensions and Provident Funds
• Collective Investments - Unit Trusts
• Wills, Trust and Estate Administration
• Tax Structuring - Private and Corporate
• Medical Aid Schemes - Private and Corporate (accredited consultants by the Dept. of Health)
• Life, Disability, Dread & Severe Illness Assurance
• Tax free investments for high tax bracket clients

Quote of the Week

"If you planted hope today in any hopeless heart - If someone's burden was lighter because you did your part - If you caused a laugh that chased tears away - If tonight your name is named when someone kneels to pray then your day has been well spent." – Neill MacRae

Authorised Financial Services Provider FSP No. 12462Accredited Health Care Broker: BR 3440