Shomer Shekalim

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Freelancing Finance Part 1: Pensions and Hishtalmut

Shomer Shekalim offers free workshops to help freelancers understand and take control of their fiances.  If you’re interested in organizing such an event for a small group of freelancers (4–10 people) please e-mail me at jonnydegani@gmail.com or call me at 052-790-6824.

Unlike salaried workers, freelancers (עצמאים) have no minimum they must set aside for their pension.  Unfortunately, this leaves freelancers with the responsibility of making sure that they have money for retirement in addition to the appropriate level of life and disability insurance. 

But there is some good news.  Freelancers have significant tax benefits to saving through a pension and keren hishtalmut

Pension:  An עצמאי can deposit up to 16% of his salary into a pension.  Of this 16%, 5% gets you a 35% tax credit and 11% is tax deductible.  OK, now in English:  Lets say you make NIS 100,000 a year.  If you deposit NIS 16,000 in your pension, you get back 35% of NIS 5,000 = NIS 1,750.  Also, the other 11% is tax deductible, so at the end of the year, you’ll pay taxes on NIS 89,000 instead of NIS 100,000.

In addition, a freelancer can give himself a keren hishtalmut, a mutual fund that grows tax free and becomes liquid after six year.  A freelancer can set aside up to 7% of his salary, 4.5% is a tax deduction.

Freelancer CalculatorThis is a link to a calculator from beinleumi that calculates how much you can put aside for a keren pensia and keren hishtalmut and the subsequent tax breaks you’ll receive.  To be clear:  a זיכוי is a credit which means 35% of it is money back in your pocket.  ניכוי means a tax deduction, which means that it is as if you never made that money for the purposes of your paying taxes. For your convenience, I translated the calculator in the image here (click to enlarge).

For help understanding the pension system, see my series on pensions in Israel.  If you’re interested in choosing a pension or hishtalmut, please contact me at jonnydegani@gmail.com or 052-790-6824.

In my next post, I’ll make sense of the barrage of insurance offers that atzmaiim receive from insurance companies and agents and discuss what is more important, what is less, and what should be completely ignored.

Israeli Investing 101

I’ll be blunt.  When it comes to investing, most people have no idea what the hell they’re doing.  But it doesn’t have to be that way.  Israel’s financial system has a fantastic system in place in order to help people invest safely and wisely.  And the best part is that quality, objective financial advice is usually free.

Before you need to invest, you need to know why you are investing.  Investing in order to save for a down payment on a mortgage is not the same as investing in order to preserve the value of money, nor is it the same as investing for retirement. Each of theses goals has a specific rationale behind it that impacts the risk one is willing to take, the amount of investment and the oversight required.

Once you know why you are investing and how much you are looking to invest, the next step is to find someone to help guide your investments.  In Israel, the person to look for is a yoetz hashkaot, a certified investment advisor.  This is not the same as a meshavek hashkaot­, someone licensed to sell investments.  Only a yoetz hashkaot is entirely objective, a term with significant legal ramifications.  Buying investments from a meshavek hashkaot is like buying a second hand car and relying on the car salesman for a fair assessment.  I am not saying that the meshavek hashkaot is lying, but his goal is to sell you the best financial option that he has to offer, not necessarily the best financial option from among all the options available.

Finding a yoetz hashkaot is easier than you think; just go to your bank and ask for one.  Speaking with your yoetz hashkaot at the bank and receiving his advice an analysis is free, although the bank does take a commission of 0.4% – 0.7% on buying and maintaining some investments.  Some banks do not offer investment counseling unless you have a lot of money.  If you have a bank like this, I suggest speaking with the manager or telling your banker to #&@% off; many banks offer free advice, regardless of how much money is being invested.  I bank at Mercantile, and I received free investment counseling even though I began with only NIS 7,000 (I am not sure if the policy of offering and limiting investment counseling depends on the bank or the specific branch.)

Alternatively, you can look for a private yoetz hashkaot who will take a different commission (or maybe just a fee for his advice and analysis) and will do the buying and selling of investments for you or show you how to do it yourself.  If your Hebrew isn’t that great and your bank doesn’t have someone who can speak English, it may be worthwhile to find a yoetz hashkaot who speaks English.  Also, if you’re not comfortable with your bank’s yoetz, you should find a private one.  Just make sure that the person you find is a yoetz hashkaot, not a meshavek hashkaot.

Once you know why you’re investing and you have a yoetz hashkaot, you’re almost ready to go.  The yoetz will begin by explaining his liability to you and then give you some simulations to test how you feel about risk.  In most cases, your yoetz will take a few minutes to talk you out of investing in the currency market and begin to direct you to mutual funds (as a Dave Ramsey fan, I appreciate this).  Depending on your adversity to risk, the yoetz will find a few funds that match your preference.  Finally, you’ll compare funds by discussing the risk, the sharpe, and fees.

A good yoetz hashkaot is not just someone who can give you good advice, but is also someone who holds your hand and explains everything to you clearly so that you can make a decision.   Let me say that again – so that you can make a decision, not him.  Don’t invest anything if your not 100% comfortable with the decision.

What has your experience been investing in Israel?  Is there a bank or yoetz hashkaot that you recommend?

choosing a keren hishtalmut with gemel net

The site that measures providence funds in Israel is called gemelnet.  This site is run by the ministry of finance in order to give accurate information about providence funds.  Begin by entering the site. Noe:  this site only works in internet explorer.

Okay, now you see a screen that will allow you to select what you want to compare.  In our case, we will select all of the kranot hishtalmut.  Next, select the purple button that reads “hatzag doch” in the bottom left hand corner of the screen.  Wait for the new page to load.  Now click on the button that says “Excel” on the right side, across from the “hatzag doch” button.  Save the excel file to your desktop and close the internet browser.

Now open the excel file.  You should see the following columns:

A – this is the reference number within gemelnet for the providence fund

B –the name of the providence fund

C – the period we are reviewing in this document.  Because we did not change the setting on the original web page, this file tells us how well the funds did for the last 12 months

D – this is the return (interest earned) on the fund during the period we requested – including compound interest.

E –the average annual rate of return on the fund over the last 3 years

F – the average annual rate of return on the fund over the last 5 years

G – sharpe ratio – this tells us how much of the return on investment was from risk and how much was from management of risk.  The higher the number, the more the return is a result of risk management, the lower the number, the more it is a result or risk.  If a fund has a huge return on investment, but a low sharpe ratio, then it is probably very risky.  On the other hand, if a fund has a low return on investment, but a high sharpe ratio, then maybe it is too conservative.  If the return is high and so is the sharpe, then it looks like a good deal (but be warned, the sharpe ratio is not perfect.  This article in wikipedia deals with the strengths and weaknesses of using this ratio.) According to the file I downloaded today, the average sharpe ratio was .49.  This number really reflects your comfort with risk, so educate yourself and decide what level of risk management is too little for you to withstand and do not choose anything below what you are willing to live with.

H – Average finance fee – how much of your interest you have to pay to the providence fund provider.  Since every single person pays a different fee, this means nothing.

I – How much money is in the fund, or market capitalization – in theory, a huge fund is a stable place to keep your money.  I say “in theory”, because I was not born yesterday.  Sometimes managers of big funds make stupid mistakes.  But if all the other numbers look right, this number could be a measure of stability.  The larger funds are called large cap(italization)  or “blue chip,” named for the most expensive chip in a poker game.  Medium sized funds are called mid-cap, and the little funds are called small cap.  There is no technical cutoff for these, and if there is, it is different in Israel, where the market is much smaller.  For our purposes, I would say that anything over a billion is large-cap, anything over 400 million is a mid-cap and anything less is small-cap.

J – Net accumulation – this tells us how much money has either gone into or left the fund during the period we are reviewing.  Money goes in when (1) people put in more money and (2) the funds gains value.  Money goes out when (1) people take out their money (2) the funds lose value and (3) finance charges are taken by the fund managers.  This number should look normal compared to the market cap.  If a fund is loosing ₪ 100 million, but it is an ₪ 8 billion fund, then it could just be that some people took out their savings the past month.  Look at this number along with the return on investment numbers to try to figure out why the money is going in or out.  If you notice everyone is jumping ship on a fund, ask why.  It doesn’t mean you should leave the fund, but it could be a red flag.  Alternatively, if this number is huge, see why it is doing so well – it could be a sign of a successful management, but it could also be the result of a bunch of people blindly put their money there because someone mentioned the fund in an article in the paper.

K – liquidity index – When a fund invests in less liquid assets, it is harder to value the assets exactly.  This means that the information about the company’s profit (used for the interest rates, sharpe etc) may not be as accurate.  Ideally this number should be as high as possible.  If you want to be a real pessimist, then this number could be taken as a margin of error for the reported income.  Realistically, the margin of error is usually much less.

L – The name of the fund again – because this file has so many columns that you may forget what fund you’re looking at as you go from column to column.

I used the following method when I looked for my first conservative, general fund keren hishtalmut:  For starters, I need my money at the end of six years, so I am not ready to experiment with a new fund; I like to see a proven track record.  Whatever does not have a track record of 5 years was eliminated.  This excel file is a bit messed up, so let me explain how to do this.  (1) Add a line above the first providence fund (below the titles for the columns) and then (2) highlight all of the 5 year averages and choose “sort descending” (there is a problem with the file because even then, it will sort everything except the first line.  You’ll just have to live with it and look at that fund separately).  Whatever does not have a number for a five year average is eliminated.  In fact, whatever was less than the market average for a five year return is eliminated as well. If you’re wondering – I do not do the same with the one year average, so as to not discount conservative funds.  Some of the more conservative funds with more risk management (usually with a higher sharpe), did not go on such a roller coaster ride these past few years. Since they did not go down so much in 2008, they did not go up as much this past year. Many of the funds that made over 30% this past year, started with -15% and then made it to a normal 10 – 15% return; whereas some more stable funds began at 12% and made it to 15%, so their return for the past year is not as high.  (This is one of many examples of why choosing a kupat gemel or keren hishtalmut must also take into account when you are doing it.)

Next I checked the sharpe ratio.  In the current economic climate, I am personally am okay with anything above .5 (you may not be – remember, you are risking your money here), so I sorted again and deleted any funds with a sharpe ratio less than .5.  I am now down to around 40 funds.  Not bad after starting off with several hundreds.

Next was the market cap.  I know, it may not be the greatest of ideas, but I am fairly conservative and will not go for anything less than a mid-cap.  Now I am down to 20.

Now I have to analyze until I find what is right for me.  I check the net accumulation.  Any red flags?  Anything stand out for the good?  I analyze why.  Next, I go to the first columns and compare the 1, 3, and 5 year averages with the sharpe index to learn the story of each one.  Some have too much risk and not enough management to justify it.  Some are too conservative; I am willing to take the ride, even if it is only the teacup and not the roller coaster.  In the end, I am down to about 4 or 5 funds.  In this case, I have to either find a way to look into the companies further (who has less finance fees, which name sounds nicer, which fund managers brake for small animals etc.) or just pick one.  No fund is *perfect*, but if it fits the bill and is what I am looking for, then I am comfortable with the decision.  Remember, decisions are judged on the knowledge one has at the time.  Even if it does not turn out well, it is still the right decision.

So, there you have it.  This is my plan; you may disagree.  You may only stick with a sharpe of .7, or not eliminate anything without a 5 year track record.  the most important thing is that you have a plan that you understand and agree with. Remember, never take financial advice blindly; always make sure you understand where your money is.  No one cares about your money more than you.