Author Topic: Help a guy in the Third World  (Read 728 times)

AfricanMustache

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Help a guy in the Third World
« on: August 10, 2018, 02:00:16 PM »
Good day Mustachians. I recently posted a scenario in my cohort forum but it was recommended I repost in Ask a Mustachian, to get more exposure to the brains trust. Below is my original post. Any thoughts would be appreciated.

"This is my very first post on the forum, having adopted the mustachian ways relatively recently. Having done the numbers we are planning for FIRE or at least FI by 2030 so I therefore happily join this cohort.

Our net worth is about $190k, the majority of which is in our retirement accounts, which will be accessible without penalty when we turn 55, which for me will be 2035 and for DW 2045. So we'll use our stash (with high WR) to tie us over between 2030 and 2035, at which point the retirement funds kick in. Our target spending post-FIRE will be around $35k.

So maybe an interesting scenario for the wise men and women of the MMM community with which I'd appreciate your help. It's a pay off the mortgage vs build stash scenario but since we live in South Africa the variables and considerations are somewhat different than you may be used to. My options are to pay off the mortgage in about 6 years ($230k outstanding) or start building our stash right away, which could then pay off the outstanding mortgage when we FIRE - we don't want mortgage repayments post-FIRE.

1. Mortgage interest rate is 9.2% (you read that right and that is considered low in these parts). It is a variable rate 20-year mortgage with about 20 years still currently remaining (new house).
2. Our local stock market (JSE) has been underperforming (trending sideways) in the last few years due to epic political mismanagement. Prior to that though it has been strong and even outperformed the first-world markets on most time scales. Still more political uncertainty lies ahead for the next few years though. Since our retirement funds may only be invested 25% offshore I already have my fill of local equities anyway and any stash building to be done will be through my U.S. investment account into S&P 500 and global equity index trackers.
3. The problem with 2 above is currency risk - buying dollar-denominated investments when I earn and spend SA Rands. Many a South African investor has in the past gotten negative on the country and moved as much as possible into hard currency, only for the rand to go on a bull run and wipe out any gains that may have otherwise been made. Currency moves almost become more relevant than market performance.
4. The government is currently pushing for constitutional amendments to allow for the expropriation of land without compensation (Venezuela and Zimbabwe-style?). There are differing opinions if and how expropriation may practically be done if at all, but suffice it to say I may not necessarily want to be putting all available excess funds into a mortgage over a property that may actually be legally taken from me by the government (rather let the bank carry the risk?).

I am fairly certain we can realistically achieve our 2030 FIRE goal but am not sure which way to go. Pay off the mortgage over the next 6 years then move to 70-75% SR for the last 5-6 years before FI or build the stash aggressively and worry about the mortgage later, given the country-specific points mentioned above."

KCM5

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Re: Help a guy in the Third World
« Reply #1 on: August 10, 2018, 02:18:22 PM »
Are you planning on staying in your house after retirement? If you pay it at the current rate it sounds like youíll have eight years left on your mortgage when you retire. If I were planning on staying iísd split the different between the mortgage and saving by paying enough to gave it paid off at retirement. And put the rest in the market.

I donít feel qualified to tell you what percentage domestic and what percentage international - currency risk is real and the Rand is relatively weak or strong depending on the time period that youíre looking at. I have no idea whatís going to happen.

Do you own the sort of property that could be expropriated? It seems to me the individual danger of expropriation is low (ie youíre probably not going to lose your house) but the larger danger is what it would do to the stability of the economy. Also, are they really going to do it? I canít tell. Iíd think they wouldnít do it in the style of Zimbabwe, if only because itís such a clear picture of how things will go wrong. I have a personal opinion on how expropriation could be done - a 40% tax on land at transfer, either sale or inheritance. But Iím not an economist and not running the South African government, obviously!

Full disclosure: not a South African, never lived there (and donít want to), just married to one

historienne

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Re: Help a guy in the Third World
« Reply #2 on: August 10, 2018, 07:39:29 PM »
You can wait and see how the constitutional amendment is worded, but I think it is very very unlikely that it's going to impact owner-occupied properties in non-agricultural areas.  This is not the time to go shopping for a farm, but a standard house in a residential suburb is not what the debate is about.  I wouldn't worry too much on that front; in fact, we are looking at buying there soon ourselves.

Right now, I'd probably keep the money local (so putting it into the mortgage), but I'd be keeping an eye on the exchange rate, and when it dips back down, I'd reallocate to foreign index funds, split across US/EU/UK/other developing markets to mitigate currency risk somewhat.

AfricanMustache

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Re: Help a guy in the Third World
« Reply #3 on: August 11, 2018, 01:45:57 AM »
Are you planning on staying in your house after retirement? If you pay it at the current rate it sounds like youíll have eight years left on your mortgage when you retire. If I were planning on staying iísd split the different between the mortgage and saving by paying enough to gave it paid off at retirement. And put the rest in the market.

I like that. The balanced approach - pay just the necessary to have it paid off at target date. Yes we will be staying on after retirement, so it must be paid off by 2030. I guess the other part of it for me is which is the sounder investment - 9.2% guaranteed, risk-free after-tax return or the stock market which may well do even better than 9.2% over that time but risk is higher and since I will invest in a non-tax-advantaged account there's tax too?

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Do you own the sort of property that could be expropriated? It seems to me the individual danger of expropriation is low (ie youíre probably not going to lose your house) but the larger danger is what it would do to the stability of the economy. Also, are they really going to do it? I canít tell. Iíd think they wouldnít do it in the style of Zimbabwe, if only because itís such a clear picture of how things will go wrong. I have a personal opinion on how expropriation could be done - a 40% tax on land at transfer, either sale or inheritance. But Iím not an economist and not running the South African government, obviously!

Our property is in a housing estate in an urban area. I tend to agree with you that the chance of actually losing one's property is low. Personally I think it's all politics ahead of next year's election. Actually doing it would be a massive own goal on the economy and foreign investment.

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Full disclosure: not a South African, never lived there (and donít want to), just married to one

Awesome :)

You can wait and see how the constitutional amendment is worded, but I think it is very very unlikely that it's going to impact owner-occupied properties in non-agricultural areas.  This is not the time to go shopping for a farm, but a standard house in a residential suburb is not what the debate is about.  I wouldn't worry too much on that front; in fact, we are looking at buying there soon ourselves.

Right now, I'd probably keep the money local (so putting it into the mortgage), but I'd be keeping an eye on the exchange rate, and when it dips back down, I'd reallocate to foreign index funds, split across US/EU/UK/other developing markets to mitigate currency risk somewhat.

Thanks historienne, I think you are probably right about urban land being safe - thanks for the perspective. And I think you could get a good deal over here now. The market has been a little soft and the latest political talk hasn't helped. Are you looking at a vacation place?

The nice thing with paying extra on the mortgage is of course the instant availability of the funds as well should I wish to go big into the market due to favorable exchange rate or market conditions. I know market timing is frowned upon by the MMM community but the combination of a strong rand and post-correction stock market will be too yummy to resist. In 2011 the rand was twice as strong against the dollar compared to present day, so take the market performance in dollar terms since 2011 and times it by 2 for investment return in rands!

Of course South Africa could equally well turn into a beacon of hope and liberty with a roaring stock market and outperforming currency during my investment period, thereby halving any return on my dollar-based investments! These things are complicated...

rebel_quietude

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Re: Help a guy in the Third World
« Reply #4 on: August 11, 2018, 07:03:41 AM »
Hey, African Mustache!

My two cents: 9.2% is huge. Really, really huge. The finnicky part is, most years the stock market does better than that; the exception is the years where it goes much further the other way (recession, etc).

If I were you, I would find a percentage I'm happy with - 80% / 20%, or 70% / 30% - that has you devoting the majority of your assets to your mortgage, with a little bit left for investment. Then, I would re-evaluate whenever the stock market takes a significant dip or a recession comes around, until your mortgage is paid off.

For example: Shovel $1,500 of your $2,000 free cash into the mortgage this month, the $500 remaining goes into VOO. Next month, there's political turmoil impacting local stock, or the U.S. market has dropped 30% - I'm switching the percentage and putting $1,500 into the stock market to take advantage of the dip. Historienne's got a great point about the currency exchange, too. Take advantage whenever the U.S Dollar's on sale.

Good luck, and welcome to the class of 2030!

AfricanMustache

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Re: Help a guy in the Third World
« Reply #5 on: August 11, 2018, 07:52:15 AM »
Hey, African Mustache!

My two cents: 9.2% is huge. Really, really huge. The finnicky part is, most years the stock market does better than that; the exception is the years where it goes much further the other way (recession, etc).

If I were you, I would find a percentage I'm happy with - 80% / 20%, or 70% / 30% - that has you devoting the majority of your assets to your mortgage, with a little bit left for investment. Then, I would re-evaluate whenever the stock market takes a significant dip or a recession comes around, until your mortgage is paid off.

For example: Shovel $1,500 of your $2,000 free cash into the mortgage this month, the $500 remaining goes into VOO. Next month, there's political turmoil impacting local stock, or the U.S. market has dropped 30% - I'm switching the percentage and putting $1,500 into the stock market to take advantage of the dip. Historienne's got a great point about the currency exchange, too. Take advantage whenever the U.S Dollar's on sale.

Thanks rebel. I like the idea of allocating according to market and exchange rate conditions. I guess it might actually be a good thing to have a high mortgage rate in that sense since you get your guaranteed 9.2% when markets are expensive or local currency is weak but then have the flexibility to take advantage of favourable conditions and cheaper markets.

The other thing is that on my flexi-bond all additional contributions to the mortgage is still instantly available to withdraw. So in the recession scenario I could actually easily withdraw that money again (effectively at 9.2%) and pump into stocks.

Another thing to consider I guess is the variable interest rate on the mortgage. In a rising interest rate environment it would make more sense to increase allocation to the mortgage since the "risk-free" rate is higher and the stock market generally doesn't like rising rates?

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Good luck, and welcome to the class of 2030!

Thanks very much, it is a really great thing to be on this journey, much more so when being able to share it with like-minded people.