VOLATILITY AND YOUR INVESTMENTS

Your question is best answered by comparing the relative returns of the unit trust you are considering against the interest rate of your home loan. To make the comparison fair, we must reduce the return on the unit trust by any fees and taxes incurred, as well as consider the risk-adjusted return and the guaranteed nature of interest in a home loan. This will give us the opportunity cost of each option and should aid in making an unemotional decision.

Generally, unit trusts will target a return that either beats inflation or one that outperforms a specific asset class. For example, many unit trusts that invest solely in South African shares aim to outperform the FTSE/JSE All Share Index. Many other factors matter, but let’s assume you’re considering a unit trust with a moderate risk profile that aims to outperform inflation by 5% a year over the next five years. As Consumer Price Index inflation is 4%, the expected nominal return used for our comparison is 9% a year on average. Tax may reduce this number slightly.

The return of “investing” in your home loan is easier to quantify, as the return will be equal to the interest rate on your loan. Let us assume this is at prime (10.25% a year) and can be seen as guaranteed, without any taxes and fees. I have read a lot about market volatility in the press recently and how investors should be patient. What does this mean practically for me, since I’m drawing an income from my investments?

Name withheld

Schalk Louw, a financial adviser at PSG Wealth Old Oak in Cape Town, responds:

With markets as volatile as they are, it’s perfectly understandable that investors are becoming frustrated. Big market fluctuations tend to affect investors’ emotions and, to make things worse, it appears as though these uncertain market conditions aren’t about to clear up just yet. Practically, investors are tempted to modify their investment strategy, with many opting to abandon share portfolios in favour of cash.

Investors should know what they are letting themselves in for when investing in different asset classes, particularly when it comes to their retirement funds. Remember that if your investments cannot outperform inflation, you may as well spend all that capital right now, because you won’t be able to buy nearly as much in the future with it as you can buy with it now.

Current market conditions make investors uncomfortable, but upon closer investigation, I found that there were quite a few times over the past 30 years that shares were unable to outperform

Bertus Visser, the chief executive of distribution at PSG Insure, responds:

When an insurer quotes a premium, it is the result of statistics gathered over many years. Let’s use a single-storey, standard construction, residential home as an example. Over and above the building, the location, safety measures, unoccupied periods, renting thereof, and sum insured are considered when a premium is calculated.

Statistics are employed to identify trends in advance. If claims and operational costs

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