Investments – explained
(well partially at least)
A presentation to Lifehouse Church by Kerrin Lynch
August 2012
Agenda
Why do we invest
Considerations in investing
Investment premia – a different way of thinking about investments
Investment types
„An investor who knows all the answers, didn‘t really understand the
questions to begin with.“ - Unknown
Why do we invest?
• As a consumer, we have the choice to spend now or
save to spend at a later stage.
• Live in a consumer culture (spend now, pay later!).
• Save for various reasons:
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Holidays
Cars / other purchases
Retirement – this is important!
Unforeseen expenditure
To leave a financial legacy to our children / grandchildren
• But which is the appropriate vehicle to save in?
Why do we invest?
• Choose the most risky / least risky investment from the
following:
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Shares on the stock market
A Government-issued bond
Bank account
Your house
Your mate’s start-up IT company
• The real question is: How do you define risk?
• Decrease in value of your investment?
• Decrease in value of your investment ?
• Losing all your money?
• Most important concept in investing:
Why do we invest?
»
Risk
•Vs.
Return
Considerations in investing
• What should we take into account when we invest?
• Reward – expected return from the investment
• Risk – defined differently – security / probability of low or negative
returns
• Liabilities to be met – (A = O + L)
• Term of the investment
• Expenses associated with investing
• Taxation regime –
– income tax; and
– capital gains tax
• Diversification of investments (local / international / sector /
companies / banks)
Investment premia
• Consider investments differently. In making a particular investment,
what compensation (premium) am I trying to get out of the
investment?
• Allows you to make comparisons of different investment types to see
if the compensation is worthwhile.
• Premium examples
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Term Premium / Illiquidity Premium
Credit Premium
Inflation Risk Premium
Equity Risk Premium
Rand Premium
Social Premium
Investment Types
• First some background information – Let us consider the
financial structure of a typical company
• Ranked from highest to lowest risk
• Investors demand higher return from
higher risk investment
Ordinary Shares
(Public or Private)
35%
Preferential Shares 5%
Mezzanine Loan
10%
Junior
Unsecured Loan
20%
Senior
Secured Loan
30%
Investment Types
• Financial products / investment opportunities available in many
forms
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Bonds (issued by Companies / Governments / Banks)
Equity
Property
Cash
Unit Trusts
Retirement Annuities
Property
Your mortgage
Derivatives - Options / Swaps / Futures
Art / Gold Coins
Others?
• Let’s look at a few in terms of their premia / risks / rewards / other
considerations
Investment Types
• Property
• Rewards
– Capital Growth / rental income
• Risks
– Lack of diversification / Land grabs
• Expenses
– Insurances / Costs of buying & selling / Maintenance
• Taxation
– CGT / Income tax
• Premia
– Illiquidity / Term
Investment Types
• Equity
• Rewards
– Capital Growth / dividend income
• Risks
– Market risks / Company mis-management
• Expenses
– Unit trust costs / Satrix fees / Broker costs
• Taxation
– CGT / dividend tax
• Premia
– Equity risk
Investment Types
• Gold Coin
• Rewards
– Capital Growth
• Risks
– Gold price / buyer demand
• Expenses
– Selling costs
• Taxation
– Capital Gains Tax?
• Premia
– Term premium / Gold Price premium
Kerrin Lynch
B.Sc. F.F.A. F.A.S.S.A.
1st floor, 44 Melrose Boulevard, Melrose Arch, 2196
Telephone 011 912 9134
Kerrin.lynch@towerswatson.com