WHICH INVESTMENT IS BEST?

South Africans are increasingly forced to choose from a proliferation of investment options. They will also have to deal with contradictory advice on investing provident or pension funds and other discretionary savings they have accumulated during their lifetime. If you consider that there are more unit trusts available than there are companies on the JSE, and hundreds of insurance products, making the choice that will satisfy them ever after is daunting, to say the least.

No wonder people so often ask the rather general question: Which investment is best? The first part of the answer is easy: No single investment is ’the best’ under all circumstances for all investors. Personal circumstances, goals and different people’s needs differ, as do the characteristics of different investments. One asset class’s strength in certain circumstances could be another’s weakness. It is therefore important to compare investments according to relevant criteria. The art is to find the appropriate investment for each objective and need.

The following are the most important criteria:

• the goal of the investment

• the risk the investor can handle

• liquidity required

• taxability of the investment

• the period  until the financial goal is reached

• last but not least, the cost of the investment.  

THE GOAL

Goals determine the characteristics sought in an investment. You will be in a position to choose the most appropriate investment only when you have decided on your short-, medium- and long-term goals. The following generic goals are normally involved:

Emergency fund

Emergency fund money should be readily available when needed, and the value of the fund should be equal to about six months’ income. Money market funds are excellent for this purpose. While these funds do not perform much higher than inflation, their benefit is that capital is saved and is easily accessible. 

If you already have a ready emergency fund covering more than six months’ income, you could consider an income or a prudential asset allocation fund. Income funds are interest-paying investments like fixed deposits, bonds and high-income-earning securities. Domestic asset allocation prudential funds may, depending on their mandates, invest in riskier assets like shares, although they should always conform to regulation 28 of the Pensions Fund Act, according to which the maximum exposure to equities is 75%. You would only choose this type of fund if you were not averse to some degree of risk.

Capital protection

If your primary aim is capital protection, you will have to be satisfied with a lower growth rate on the investment. Those above 50 are normally advised to be conservative in their investment approach. While this may for the most part be sound advice, you should also keep an eye on the risk of inflation, so that the purchasing power of your money does not depreciate. It is not the nominal value of the capital  that should be protected, but the inflation-adjusted one. At an annual inflation rate of 6%, R1 million today will buy the same as R156 255 in 30 years’ time. A 50 year-old with R1 million would therefore have to lower his living standard substantially if he only retains the R1 million until he was 80.

Income

Conservative investments like those listed above should form the normal basis for providing an income. Because of inflation risk, investments should be structured so that they can at least keep up with inflation. This means that at least a percentage of the investment source providing the income should be made up of other asset classes like property and equity unit trusts. The percentage would differ according to individual and economic circumstances.

Investors fortunate enough to have their basic budget provided for by a conservative fund could consider increasing their income with commercial property funds and tax-free income from dividends paid out by listed shares. In the short term, fluctuations in share prices mean that the value of equity investments may decrease as well as increase.

Capital growth

If an investor’s primary goal is to achieve capital growth, the real rate of return should be higher than inflation. This implies greater risk to capital in the short term. While this article was being written, developments on the JSE provided an excellent example. The overall index fell by nearly 8% during the week 23 to 27 July. But investors’ money with a long-term capital growth goal was still 117% more than in the previous two years. Investors aiming at capital growth should therefore not be apprehensive, as they will reap the rewards in the long term.

The history of equity prices over the past 100 years proves equity investments to be the best performer, followed by property. This does not mean you should buy either of these investments blindfolded. Wait until the quality shares in which you are interested  are trading at inexpensive price levels.

RISK

The investment with a history of the highest growth is not necessarily the one to choose. The Standard Bank’s Gold Fund increased by 178% during the period 13 August 2001 - 24 May 2002 (284 days). Judging only on the growth of the fund during this period, it performed exceptionally well.  But  would it be the right investment for a retiree? During the 805 days following this, the same fund experienced a negative growth rate of 44%! The problem with an investment that decreases by this percentage is that it will not reach its previous peak by increasing again by 44%. This is because the growth this time will take place from a lower base, so in fact the investment would have to increase by approximately 80%. 

LIQUIDITY

Hard assets like Persian carpets, works of art and antique furniture may be good investments in the long term, but unfortunately they are not very liquid. The same is true of certain shares in smaller companies on the JSE. Money market funds, on the other hand, are very liquid, but the returns may not always be as good as those from other investments. The need to liquidise the investment quickly is therefore also a criterion to consider when evaluating investments.

TAXABILITY

The taxability of an investment has a considerable impact on its value to the investor. When comparing the returns on different investments, the return after tax has been deducted should be used. The investor should always ask what will be left in his pocket after tax deduction.

PERIOD

Conservative investments with no potential for high returns are suitable for shorter periods, while investment-objectives with longer time horizons aspire to achieving higher returns. Money market funds are suitable for periods of one or two years. Income and conservative asset allocation funds for three or four years and flexible asset allocation funds, commercial property funds and value equity funds may be chosen for longer periods, dependent on the economic and interest cycle and the propensity of the investor to accept risk.

COSTS

The costs involved in an investment are normally things like administrative cost and commission. The percentage of the costs to the investment amount directly affects the value of the investment. Many of the currently available investment products are structured in such a way that investors can negotiate commission.

CONCLUSION

No investment strategy blueprint is going to be perfect for everyone’s circumstances. Investment opportunities should therefore be examined critically before any decision is made. It should also be kept in mind that there are different companies managing specific funds under the investment categories referred to above. Some are more effectively managed than others. Investors should therefore research investments as well as the managers thoroughly before investing. Otherwise, they could appoint professional asset managers to do so on their behalf. Time spent determining the type of investment you really need is time invested in your future financial well-being.

Dr Manus Moolman

info@myebroker.info

087 808 4461 or 082 740 6793

Kapitalisme en die keuse tussen absolute opbrengs- en indeksfondse

Die meeste lesers sal waarskynlik die kapitalistiese stelsel kies sonder om vir ‘n oomblik aan ‘n ander moontlikheid te dink. ‘n Mens kan feitlik sê dat die stelsel per definisie die beste is omdat kompetisie ‘n fundamentele element daarvan is. Om kompeterend te bly, moet ondernemings beter produkte en dienste as hulle mededingers bied, beter diens lewer en dít alles teen laer pryse. Die strewe om eiebelang te bevorder, is een van die belangrikste dryfvere om geld in die kapitalisme te maak.

Beleggingsadviseurs moet ‘n lewe maak en om dit te doen, moet hulle produkte aanbeveel waaruit hulle kommissie verdien. Oor hierdie aspek en wanpraktyke wat daarmee gepaard gaan, is reeds uitvoerig in die media berig en wetgewing is gepromulgeer om adviseurs vas te vat wat beleggers aan die kortste end laat trek.

Die situasie is egter veel komplekser en verg ‘n meer omvattende oplossing as blote wetgewing. Die werklikheid is dat alle beleggingsadviseurs nie oneerlik is nie. Beteken dit dat ‘n eerlike beleggingsadviseur, hoe goed hy ookal opgelei is, altyd beleggings sal aanbeveel wat sy kliënte sal help om hulle doelwitte te bereik? Ek glo nie dis die geval nie.

Eerlike beleggingsadviseurs in Suid-Afrika funksioneer ook binne die  kapitalistiese stelsel. Hulle moet hulle kliënte tevrede hou om ‘n inkomste te verdien en om dít reg te kry, moet hulle aanbeveel wat hulle kliënte wil hoor. Toe die waarde van die rand ‘n paar jaar gelede vinnig gedaal het, en ‘n golf van negatiwiteit baie mense oorweldig het, kon beleggers maklik oortuig word om hulle geld uit die land te neem. Intussen het die rand weer versterk en het die waarde van hierdie beleggings aansienlik gedaal. Dit is sekerlik so dat sommige beleggers deur adviseurs oorreed is om hulle geld in buitelandse beleggings te plaas, maar dit is ook so dat ‘n beduidende persentasie beleggers daarop aangedring het omdat hulle gedink het die rand sal al hoe vinniger verswak omdat die land in duie stort.

Die feit van die saak is dat siklusse deel van die ekonomie is. Beleggings wat tydelik onderpresteer, maar waarvan die fundamentele faktore gesond is, kan dalk in die toekoms uitstekende resultate lewer. Van Mei 2002 tot April 2003, het die algehele indeks van die Johannesburgse Aandelebeurs (JA) met 36% gedaal. ‘n Belegging van R100 000, sou in dié tydperk tot ‘n skamele R64 000 verminder. Indien die belegging egter tot 2 Junie 2008 gehou is, sou dit met 175% tot R275 000 styg!  As die belegging tien maande later gedoen is, toe die aandelemark op ‘n laagtepunt was, sou die styging tot Junie 2008, 329% wees. Die bedrag sou vandag ongeveer R429 000 werd wees!

‘n Daling van 36% bly egter vreesaanjaend en om die skok te verminder, is beleggingsprodukte ontwerp om beleggers se geld teen ongestadigde markte te beskerm. Onthou egter dat kliënte in alle opsigte tevrede gehou moet word in ‘n kompeterende stelsel en dat adviseurs moontlikhede moet ontgin om geld te maak. Voorbeelde van oplossings is batetoewysings- en absolute opbrengsfondse. Portefeuljebestuurders wys persentasies van beleggings aan verskillende bateklasse toe en bestuur dit dan aktief om risiko te beperk. Die teorie klink goed, maar alle beleggingsteorieë moet aan resultate in die praktyk getoets word.

‘n Vergelyking van die prestasie van ‘n tipiese buigsame batetoewysingsfonds, wat nie hier geïdentifiseer gaan word nie, met ‘n passief bestuurde indeksfonds, Satrix 40 oor die afgelope drie jaar, toon dat die passiewe fonds die helfde beter presteer het. Satrix 40 het oor die tydperk met ongeveer 34% per jaar gegroei teenoor die batetoewysingsfonds se 15% per jaar. Toegegee, die beurs het die afgelope paar jaar ‘n bulmark beleef, maar met ‘n langtermyn doelwit, word vir insinkings in die mark vergoed.

Indeksfondse bied op ‘n veel direkter manier as aktief bestuurde fondse toegang tot die voordele van kapitalisme. Hulle mag meer riskant wees, maar risiko kan verminder word deur op laagtepunte in die ekonomiese siklus te belê. Terwyl akkurate tydsberekening van die mark onmoontlik is, is dit tóg binne alle beleggers met ‘n bietjie basiese kennis se vermoë om vas te stel of die ekonomiese siklus laag of hoog is.

Alle lesers weet dat rentekoerse tans hoog is. Hoë rentekoerse is sleg vir finansiële maatskappye en daarom daal hulle aandeelpryse. Wanneer inflasie iewers in die toekoms onder bedwang kom en rente begin daal, behoort finansiële maatskappye weer goed te doen. Die huidige laagtepunt in finansiële aandele is dus ‘n geleentheid om kwaliteit aandele goedkoop te bekom.

Satrix Fini, ‘n beursverhandelde fonds wat ‘n indeks van die top finansiële maatskappye op die JA uitmaak, is ideaal vir hierdie doel.  Dit is ‘n maklike en kostedoeltreffende manier om in die winste van die beste finansiële maatskappye op die beurs te deel. Alhoewel die fonds die afgelope jaar met 17.74% gedaal het, was die gemiddelde jaarlikse groeikoers die afgelope drie 15.87%. As rentekoerse begin daal en die voordeel daarvan na finansiële maatskappye begin deurwerk, behoort Satrix Fini waagmoedige beleggers uitstekend te beloon.

Dit is egter so dat daar nie ‘n enkele belegging is wat nommerpas vir almal is nie. ‘n Uitstekende aandele belegging op die langtermyn, is byvoorbeeld nie geskik vir korttermyn doelwitte nie. Die eerste stap in ‘n beleggingsukses is om ‘n beleggingstrategie met kort-, medium- en langtermyn doelwitte te formuleer. Dit moet ook duidelik wees of kapitaalgroei, kapitaalbehoud of inkomste die motief is. As hierdie bietjie huiswerk gedoen word en jy het basiese finansiële begrippe onder die knie, glo ek dat beter beleggingsresultate oor die langtermyn behaal kan word as direk in indeksfondse belê word.

Die eiebelang-motief wat so deel van kapitalisme is, gee daartoe aanleiding dat beleggings wat adviseurs aanbeveel, nie noodwendig die beste belegging vir jou is nie, maar vir die adviseur en dit het nie noodwendig iets met oneerlikheid te doen nie, maar met die verwysingsraamwerk waarbinne beleggingsadviseurs funksioneer. Kapitalisme is wel die beste stelsel om welvaart te skep, maar dan moet mens die spelreëls ken en self deel van die spel word.

Dr. Manus Moolman

082 740 6793

Lack of a sufficient income during retirement is one of the main financial risks facing individuals. To encourage people to save for retirement, legislation has been promulgated to the effect that people will receive tax benefits for their contributions towards approved retirement funds.

These funds are:

• Pension funds
• Defined-benefit
• Defined-contribution
• Provident funds
• Defined-benefit
• Defined-contribution

Each of these funds has its own advantages and disadvantages. These positive and negative aspects are like two sides of the same coin. An advantage of one fund can be a disadvantage if not handled with caution. For example: An advantage of a provident fund is that the total investment value is paid out to a member. The member of the fund may opt to start a business with the funds, but if his plans do not work out, he may lose all his money.

A new year means different things to different people. Positive people see opportunities and seek ways to take advantage of opportunities.  Negative people would probably ponder on the problems South Africans face like seemingly unending violence, joblessness and uncertainties with regard to personal finances.

The reality is that man has always lived in a hostile environment but that success lies in the way he react to external threads and find innovative ways to survive meaningfully. Financial success is possible to the degree that we are able to manipulate threads to our benefit and use our true potential to reach our goals.

Circumstances under which one can accept higher investment risk

Most investment strategies pitch somewhere upon the continuum between a high risk / high return approach on the one end and a low risk / low return approach on the other. The problem with pursuing high investment returns, is that the capital value of investments may decrease in the short term before they increase again. The problem with conservative low-return investments is that the real value of capital may over time decrease due to inflation.

The art of investing lies in finding the approach that suits you personally best.  One should on the one hand try to maximise the return on capital, but at a risk level that is acceptable to you. The question is what is regarded as acceptable risk and, is the acceptability a constant factor that stays the same under any circumstances? The answer is no. More risk is acceptable under certain circumstances, but before these circumstances are discussed, it is necessary to discuss the following terms that will be used, that are often confused:

Saving

Saving is the action of putting money aside. It means that money is not spend, but is kept at the owners disposal.

Investing

Investing means that money is handed over to a third party for purchasing assets with the purpose of long term investment growth. Investors transfer the their funds with the intention that financial assets like shares and bonds or hard assets like Kruger Rands are bought. Investing does not mean to hand money over to dubious schemes like Masterbond, Krion and, more recently, Fidentia. 

Gambling

To gamble is normally understood as “to play a game for money or other stakes” like putting money on a roulette wheel or buyng a lotto ticket. It can also mean to buy a share that you know nothing bout or investing in a scheme you don’t understand.

Marketers of schemes like Krion use the word “investing” to lure people to hand their money over to them. Initially, when “investors” receive high payouts, they think the scheme is the best investment thinkable. The fact that it has nothing to do with investment, only dawns on them when they lost all their money and it is to late to recover anything.

Speculation  

Speculation means that a calculated risk are taken to make money on a relatively short term. One may for instance buy property with the purpose to sell it in a year or two at a higher price. The price of the property may not rise, but at least you have done sufficient homework to make sure that there is a high probability that it will rise.

Now that we are sure about the terms, we can look at the circumstances under which a higher risk may be appropriate.

·        Surplus income: The higher your surplus income, the higher the risk you should be able to handle in investing money.

·        Frequency of investment To invest a certain amount regularly, holds less risk than to invest a single amount at once.

·        Amount: If the amount you want to invest, is a small percentage of your total capital, you can accept greater risk. 

·        Term: Greater risk can be handled with longer investment terms. Young people can therefore accept greater risk, but if the term of their financial objectives is shorter, investment portfolios should be structured less risky.

·        Income: If you receive an income from your investment, it should be structured more conservative with less risk. If you are not receiving an income at the moment, but plan to do so in future, you can decide to pursue a higher return till you need the income. When this happens, the investment could be restructured to reflect the new situation.

·        Investment experience: Investors with little investment experience should be more wary against risk than investors with lots of experience in this regard. 

·        Dependents: Investors with more dependents should be more wary towards risk than those with few dependents.

·        Health: Healthy investors can handle more risk than unhealthy investors.

·        Diversification: An investor that already has a well diversified investment portfolio, can accept greater risk with new investments than investors with undiversified portfolios. 

·        Timing: Share investments are normally more risky than some other investments. Investment risk can however be reduced if shares are bought when the economic cycle is on it’s lowest. Risk can also be lowered if investors buy shares of strong well established companies with little debt and healthy balance sheets.

·        Emotional tolerance: Some people loves the adrenaline rush in going for high returns, with no regard to the risk. They are emotionally capable of doing it this way. For other, it is a nightmare if their investment fall by a single percentage point. One should therefore know how you will respond to sudden capital depreciation.

Summary

One’s view on risk forms an extremely important element in investment planning. It is as irresponsible to take unnecessary risks as it is to be satisfied with a low return on your money. However, to pursue higher return, goes with the responsibility to research the investment opportunity thoroughly before parting with your money.

SOURCES

Swart, N. 1996. Personal Financial Management. Juta. Cape Town.

Moolman, M. 2006. Skep welvaart uit jou huidige inkomste – deur deskundiges se geheime te ontdek. LAPA. Pretoria.