How to take a re­al­is­tic view of risk and re­turn on your in­vest­ments

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

One of the most im­por­tant judg­ments you must make on any in­vest­ment is the risk of the in­vest­ment rel­a­tive to the re­turns you want. Gen­er­ally, as is oft re­peated, the greater the re­turn you re­quire, the greater the risk that you could lose part or all of your money.

No mat­ter how of­ten this sim­ple truth is re­peated, peo­ple still fall for get-rich-quick schemes, many of which are sim­ply fraud­u­lent or based on ex­ag­ger­ated claims, in­clud­ing very ques­tion­able guar­an­tees on re­turns.

The flip side, how­ever, is that if you do not take some in­vest­ment risk, you will not re­ceive a real re­turn (a re­turn above in­fla­tion and af­ter tax). If you in­vest in a prod­uct that gives you a re­turn equal to in­fla­tion, you will be stand­ing still af­ter any tax has been de­ducted.

And if you have in­vested for a fixed in­come, there will be a neg­a­tive im­pact even with low, sin­gledigit in­fla­tion of, say, 4.5 per­cent a year. The buy­ing power of a fixed in­come in an in­fla­tion en­vi­ron­ment of 4.5 per­cent will de­cline by 25 per­cent ev­ery six years.

The main ob­jec­tive of any in­vest­ment is to pre­serve your cap­i­tal against in­vest­ment risk and in­fla­tion risk. You need to guard against both these broad cat­e­gories of risk. In­fla­tion will un­der­mine your cap­i­tal in the long term as surely as any high­risk in­vest­ment.

Then there are ad­di­tional prob­lems: high-re­tur n in­vest­ments are not nec­es­sar­ily risky and lower-re­turn in­vest­ments are not nec­es­sar­ily low risk.

For ex­am­ple, it would have cost you R4.80 to buy an Old Mu­tual share on March 9 last year. You could have sold the share for R14.01 a year later. Apart from the wis­dom of hind­sight, pur­chas­ing the Old Mu­tual share for R4.80 could never, un­der any cir­cum­stances, have been seen as high risk. The only ac­tual risk was a fi­nan­cial mar­kets Ar­maged­don. But the re­tur ns were bet­ter than most scam­sters would have of­fered you on one of their con­fi­dence tricks.

Like­wise, lower re­turns do not al­ways mean there is less risk. In fact, some prop­erty syn­di­ca­tion com­pa­nies will of­fer re­turns that are only a few per­cent­age points higher than what you can ob­tain from a bank ac­count – and try to im­ply this means no or low risk.

His­tory shows that prop­erty syn­di­ca­tion schemes can be ex­tremely high risk, par­tic­u­larly as most can sur­vive and meet the promised ex­pec­ta­tions only if there are solid, non-stop in­creases in prop­erty prices.

The best way to as­sess the risk of an in­vest­ment is to com­pare it with in­vest­ment in­stru­ments that pro­vide a vir­tu­ally risk-free re­turn – both in­fla­tion risk and loss-ofcap­i­tal risk.


To my mind, the best base in­stru­ment you can use to as­sess risk is the RSA Re­tail Bond. These bonds are avail­able in two forms: fixe­drate bonds and in­fla­tion-linked bonds. The cur­rent rates on RSA Re­tail Bonds are:

Fixed-rate bonds. For a fixed two-year term, the rate is 8.5 per­cent; for three years, it is 8.75 per­cent; and for five years, it is nine per­cent. The rates are ad­justed once a month for new in­vest­ments. The rate that pre­vails when you in­vest is what you re­ceive for the full term.

In­fla­tion-linked bonds. The rate of in­fla­tion is ad­justed ev­ery six months and a re­turn on top of in­fla­tion is added. For a three­year term, the rate is in­fla­tion plus 2.25 per­cent; for five years, it is in­fla­tion plus 2.5 per­cent; and for 10 years, it is in­fla­tion plus three per­cent.

Reg­u­lar in­ter­est with­drawals are al­lowed for peo­ple who want a monthly in­come.

The in­fla­tion rate year-on-year to April was 4.8 per­cent. To me, any re­turn of three per­cent-plus above in­fla­tion is pretty good.

It is not that RSA bonds are en­tirely with­out risk. There are var­i­ous risks to your re­turns. For ex­am­ple, in­fla­tion may rise, re­duc­ing the real (af­ter-in­fla­tion) re­turn on the fixed-rate bonds, or in­ter­est rates may rise, re­duc­ing your po­ten­tial up­side if you are locked into a lower rate. But you may also gain if in­fla­tion or in­ter­est rates fall.

But even here, the Na­tional Trea­sury gives you some lee­way. Af­ter 12 months, you can re­set your in­ter­est rates on a fixed-rate bond. How­ever, this means that you will have to ex­tend the ma­tu­rity date. For ex­am­ple, you in­vested for two years at a rate of six per­cent. A year later, the rate rises to seven per­cent. You have the choice of leav­ing your rate as it is, be­cause you need your money in 12 months, or re­set­ting your rate to seven per­cent and start­ing the two-year in­vest­ment cy­cle again.

Longer-term cash in­vest­ments nor mally pay a bet­ter rate, be­cause such in­vest­ments ex­pose you to the risk of move­ments in the in­fla­tion rate and in­ter­est rates over the long ter m. Con­versely, money mar­ket in­vest­ments will pay a lower rate, be­cause you can ac­cess your money within 24 hours.

Your cap­i­tal is ab­so­lutely se­cure with RSA Re­tail Bonds, be­cause they carry a guar­an­tee from the govern­ment. If the govern­ment can­not meet its guar­an­tee, it is likely that you will be in trou­ble with al­most any other lo­cal in­vest­ment.

There is a sig­nif­i­cant ad­van­tage for peo­ple, such as pen­sion­ers, who use fixed-rate RSA Re­tail Bonds, par­tic­u­larly over the fiveyear pe­riod, for a monthly in­come. They can keep re­set­ting their in­vest­ments at the higher rate of in­ter­est that may pre­vail ev­ery 12 months and lock­ing into that rate for five years.


How­ever, over longer pe­ri­ods, you are likely to earn a bet­ter re­turn from prop­erty and the stock mar­ket than from re­tail bonds, par­tic­u­larly if you are look­ing for cap­i­tal growth rather than in­come. On the other hand, if you are look­ing for low-risk reg­u­lar and sus­tain­able in­come, the volatil­ity of stock and prop­erty mar­kets is a threat to your cap­i­tal, par­tic­u­larly if you are not in­vest­ment savvy.

In­ci­den­tally, in say­ing that you should con­sider prop­erty if you want cap­i­tal growth over the longer term is not to sug­gest that you should re­gard prop­erty syn­di­ca­tions as an op­tion. A trail of fail­ures and the loss of in­vestors’ cap­i­tal shows that prop­erty syn­di­ca­tions have ex­cep­tion­ally high risk and should be treated with great cau­tion, par­tic­u­larly by pen­sion­ers who can­not af­ford to lose their cap­i­tal.

There are far safer ways to in­vest in prop­erty, such as col­lec­tive in­vest­ment schemes (unit trusts and the Prop­trax ex­change traded fund) or shares in JSElisted prop­erty com­pa­nies.

Prop­erty syn­di­ca­tion in­vest­ments are in highly un­der-reg­u­lated un­listed shares.

For peo­ple who are seek­ing an in­come from prop­erty with­out the has­sle of ac­tu­ally own­ing a prop­erty, the bet­ter op­tion to prop­erty syn­di­ca­tions is par­tic­i­pa­tion mort­gage bonds, which are reg­u­lated by the Fi­nan­cial Ser­vices Board in terms of the Col­lec­tive In­vest­ment Schemes Con­trol Act.

If you want more in­for­ma­tion about RSA Re­tail Bonds or if you want to in­vest in them, go to your lo­cal post of­fice or Pick n Pay, visit www.rsare­tail­ or phone 012 315 5888.

Cameron is the author of Re­tire Right (pub­lished by Ze­bra Press), avail­able at book stores.

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