Investing 101 Make your money work for you

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1 INVESTMENT FUNDAMENTALS 1 OF 12 Investing 101 Make your money work for you If you put some of your salary into an investment every month, over time you could build enough wealth to replace your income. This is what your retirement fund or any investment will do if you make your money work for you. Asset classes Most investment portfolios are made up of a combination of four main types of investments: shares (equities), property (real estate), bonds (fixed income) and cash (money market investments). Shares (equities) Property Bonds Cash Type of investment Shares (also known as equities) are where you buy a share or part of a company. As a shareholder you share in the profits of the company through dividends. You can check the value of a share by reading the prices on the Johannesburg Stock Exchange (JSE). These are the prices at which the shares are bought and sold. Investors generally invest in industrial, retail or commercial property, either as a direct ownership or through a listed property company. You ll get returns from rental income and from changes in the value of the property through capital gain or loss. With bonds you lend money to the government, a parastatal or a large company that agrees to pay you interest on the amount loaned. You also get your initial investment back at the end of a predetermined period. Cash investments are when you put money in a bank and the bank pays you interest. You can invest in cash when you need a secure return and cannot run the risk of losing any value on your investment. Risk and growth The value of shares can change often and quickly and are seen as very volatile. While shares are likely to give you the best investment returns over the long term, you also run the greatest risk of losing some or all of your original investment. Historically shares have achieved the best investment growth over the longer term. That s why they re considered a good investment for retirement fund members who still have many years to invest. In general, this type of investment is for someone with a longer-term investment horizon (at least five years) who wants a relatively stable return from year to year. Property investments in South African have historically done well over the long term, coming second only to South African shares. Bond values can change quite quickly because their value depends on interest rates. Bond values typically increase as interest rates drop, and drop when interest rates go up. Although it can be risky to invest in bonds, they are usually less risky than shares, but more risky than cash. Cash is generally seen as the safest type of investment, because you will always get out at least the same amount you put in. But in the long run you will not be able to grow your investment as much as other types of investments may be able to grow.

2 Compound interest is when you earn interest on the money you ve invested and on the interest you ve earned already. Not many people or portfolios invest in only shares, bonds, cash or property. They usually invest in a combination of types of assets, which is known as diversification. Because all types of assets don t behave in the same way at the same time, by diversifying, you can: Lower your dependence on the returns of a single asset class. Make up for any losses made on one asset class by gains made on another. Lower the overall risk of your portfolio. Increase the expected return of your portfolio. The secret Investing in a combination of assets will in time give you an income. The secret is to reinvest that income to truly gain from the power of compound interest. One of the biggest secrets to investing for retirement is to always reinvest your retirement fund payout whenever you change jobs. Know yourself Investment goals need to be specific. For example, aim to retire with a pension that, when invested, will give you an income of 75% of your last salary. Whatever you re investing for, be clear, have a specific goal in mind and then work with a financial planner on a strategy that works for you.

3 Back to school Rita Cool I CFP Certified Financial Planner, Financial Planning Consultant, Alexander Forbes Financial Services For most of us, having children in the house is quite an adjustment to our lives, and to our budgets. When it s time for them to go to school, you might find your monthly budget stretched to its limit. And that s before you take any extras into account. The numbers School fees of R per year in 2012 will add up to R over 13 years from Grade R through primary school to high school, if you assume a 5% increase per year in fees. If you ve just had a baby and your child will start school in 5 years, school fees will probably cost you closer to R If you save R930 every month in an investment that gives an average return of 10% per year, you will probably be able to afford these fees. The sooner you start to save for your child s education, the more benefit you ll get from compound interest. If you re hoping for a private education for your child and your chosen school costs R a year, total schooling will cost R if your child starts school this year. That amount increases to R if your baby only starts school in To save enough for private schooling you ll need to save R9 200 a month. University studies that cost R now will cost you R more in 13 years time. The good news is that you only need to put away R488 each month if you start saving today. Saving solutions Endowments The benefit of endowment policies is that you have a savings scheme where you put money away in a lump sum or monthly amount and you can t access the money before the term is finished unless you need an emergency withdrawal. The shortest investment period is 5 years but some endowments are sold for as long as 40 years. What most people don t know about endowment policies is that the fund manager deducts 30% tax on rental income, interest and foreign dividends. If your tax rate is less than 30%, a unit trust or Satrix investment might be a better option. Unit trusts Unit trusts allow you to invest after-tax money in an accessible and flexible investment vehicle. You can invest in a combination of asset classes or unit trusts to suit your investment time and risk requirements. You can also access or add to the unit trust at any stage and you will be taxed in your own capacity. SATRIX An exchange traded fund where you can buy the performance of a basket of shares on the stock exchange instead of buying the shares individually. It is an aggressive strategy and you need a longer investment period as you will see negative returns over the short term. If you are saving for a child s long-term education, Satrix ( is a good solution. It is easy to invest in and you don t have to use a broker, although we recommend that you speak to a qualified financial adviser. Thinking long term When saving for your child s education, don t neglect your own retirement savings. People are having children later and are potentially still paying for education when they should be retiring. Your child will always have options when it comes to paying for education, like applying for a loan or a bursary, but your retirement savings can only come from years of investing.

4 Saving up VS paying off Is it better to delay gratification, build wealth and wait it out, or get what you need now and pay it back at a rate you can afford? Credit has its merits, but in today s unsteady economy, it might not be such a good idea to be at the mercy of the bank. Ways to save If you can squeeze some extra money out of the end of every month, what should you be doing with it? Pay off outstanding debts If the interest on your debt is higher than the interest on your savings, it s better to pay your debts before you start saving. Besides, if you want to buy a house, pay for a wedding and send your children to university one day, you re more likely to get a good interest rate, or any loan at all, if you have a proven track record. Save. Save more. Save even more. It s vital to save throughout your life from saving for an emergency fund that keeps you out of debt to saving for your retirement the sooner you get into the habit the better. Start by saving every R5 coin you get as change this year. Or put every R10 note into a tin. When you have enough to keep in an account, open one. Get a debit order into a savings account. You won t notice R50 coming off your salary every month. Or even R100? When you have a substantial amount saved up, you re a big step closer to having the things you want. Whether it s an education, a house, a new car, a travel experience or a yacht, none of those is as enjoyable when it belongs to your bank. Debt can be a good thing When you re ready for it, paying off a big debt like a bond or student loan can in time become a great investment. Remember that the more money you have to put into your debt at the start, the better. Bigger payments earlier on will also make a difference to your final debt amount, so it s always a good idea to have a bit saved up for a downpayment that goes for any investment or purchase you make. With your bigger debts repaid, you can start investing any extra money however you want. You can add it to a policy or start a buy-your-own-island fund. Once your mind is set to save, you re more likely to create real wealth for yourself and your family for the long term. Are you ready for commitment? Saving for a wedding ring is a great practice run for the things you re about to bring into your life: a bigger home, pets, children, a bigger car, longer holidays Take time and work with your financial planner to make sure when you make your unending promise to your future spouse, that your promise is sealed with a ring that belongs to you and not to your bank. Happy Valentine s Day!

5 Economic comment Market and economic solutions Global Global equity returns were positive in January, supported by improved global risk appetite as fears of a European banking crisis abated following the introduction of the three-year Long Term Refinancing Operation (LTRO) by the European Central Bank in December. Market sentiment was particularly buoyed by greater confidence in the global growth outlook as economic news from the US continued to improve and concerns about a hard landing for China eased. The US Federal Reserve s decision to keep interest rates at current low levels until at least late-2014 (an extension from mid-2013) also bolstered markets. Emerging markets gained a solid 11.4%, while their developed counterparts returned 5% (as measured by the MSCI Emerging and Developed World Index respectively). All major markets, including Europe, posted positive returns. This was despite the sovereign credit downgrade of nine European countries, including France, which lost its AAA rating. Commodity prices also benefited from higher risk appetite and improved growth prospects. The dollar, which lost ground against the euro and more risky currencies over the month, also buoyed commodity prices. Gold rallied strongly in line with other commodities, gaining 11.1% in January. As was the case in 2011, financial markets started the year on a firm footing. However, it is not clear whether market sentiment will hold up well throughout the year and whether the positive growth momentum, particularly from the US, can be sustained. The systemic risks associated with the European debt crisis and policy actions will continue to be a key driver of financial markets. If these can be contained, risk assets (equities, emerging markets and commodities) will benefit. Headwinds to global growth also remain, such as a worse-than-expected contraction in European economic growth, still structurally weak US housing and labour markets, high US debt levels, the China property market, as well as geopolitical oil-supply risks. Local The FTSE/JSE All Share Index advanced 5.7% in rand terms in January, benefiting from improved global market sentiment. The local bourse rallied to new record levels during the month, with all major sectors posting positive returns. Resources led the rally (up 8.1%), benefiting from improved global demand and rising commodity prices. Financials and Industrials returned 6.1% and 3.7% respectively. The ALSI posted a total return of 9.5% in dollar terms, reflecting the benefits of a strong rand, which appreciated by 3.5% against the greenback in January. Equities were the best-performing asset class in January, followed by property (4.7%), bonds (2.1%) and inflation-linked bonds and cash, which remained flat. A stronger rand will be positive for inflation, which has already breached the 6% target band (unchanged at 6.1% y/y in December). However, the rand is still relatively weaker at current levels than it was a year ago and remains vulnerable to global sentiment. Moreover, the full effects of the rand depreciation of the past few months still need to filter through. High food, energy and administered prices will continue to keep inflationary pressures elevated. The Reserve Bank s monetary policy committee revised its inflation outlook upwards at its January meeting, citing upside risks to inflation from a weaker rand, among other reasons. The Bank now expects inflation to stay above 6% throughout Despite rising inflationary pressures, the Bank left the repo rate unchanged at 5.5%. Its assessment is that risks of higher inflation are counterbalanced by less favourable economic growth prospects. The Bank s domestic growth forecasts were downgraded to 2.8% for 2012 from 3%. The IMF has also revised SA s 2012 growth forecasts downwards in January to 2.5% (in line with Investment Solutions revised view) from 3.6% in September. The downgrade mainly reflects the negative effect of a slowdown in global growth on the local economy.

6 Global asset-class performance January 2012 Month Q Q YTD 1 Year 3 Year (p.a.) 5 Year (p.a.) Equities ($) MSCI World 5.05% 7.72% % 5.05% -2.45% 17.11% -1.08% USA 4.48% 11.82% % 4.48% 4.22% 19.24% 0.33% UK 3.62% 9.14% % 3.62% -1.11% 18.72% -2.30% Europe 4.72% 5.45% % 4.72% -9.86% 14.62% -3.86% Japan 4.52% -3.85% -6.37% 4.52% % 5.78% -5.76% Pacific Basin ex Japan 9.65% 6.04% % 9.65% -3.13% 28.82% 4.82% MSCI Emerging 11.36% 4.45% % 11.36% -6.35% 27.60% 5.16% RSA 9.45% 7.92% % 9.45% 2.03% 32.56% 7.25% Global Bonds ($) 1.47% -0.12% 2.38% 1.47% 7.94% 6.76% 7.74% Source: Data Stream Local asset-class performance January 2012 Month Q Q YTD 1 Year 3 Year (p.a.) 5 Year (p.a.) Equities FTSE/JSE 5.73% 8.38% -5.84% 5.73% 10.83% 21.20% 8.82% ALSI (R) Bonds ALBI (R) 2.06% 3.51% 2.81% 2.06% 13.49% 9.00% 8.88% Cash STeFI Overnight (R) 0.44% 1.31% 1.31% 0.44% 5.29% 6.46% 8.00% ILB (R) 0.91% 4.47% 3.04% 0.91% 14.57% 11.02% 11.03% Property SAPY (R) 4.75% 3.73% 2.19% 4.75% 19.08% 19.50% 13.45% Source: I-Net Bridge

7 Dominant themes January 2012 Month Q Q YTD 1 Year 3 Year (p.a.) 5 Year (p.a.) Large Caps 6.02% 8.44% -6.56% 6.02% 10.23% 20.62% 8.41% Mid Caps 4.31% 8.24% -1.98% 4.31% 14.69% 25.35% 11.73% Small Caps 4.32% 6.77% -2.27% 4.32% 9.44% 19.57% 7.72% Resources 8.11% 7.26% % 8.11% 1.56% 16.43% 7.16% Financials 6.05% 8.68% -3.14% 6.05% 15.62% 22.27% 4.68% Industrials 3.68% 9.16% -3.26% 3.68% 18.02% 25.42% 12.44% Source: Data Stream Dominant themes January 2012 Month Q Q YTD 1 Year 3 Year (p.a.) 5 Year (p.a.) FTSE/JSE ALSI 5.73% 8.38% -5.84% 5.73% 10.83% 21.20% 8.82% SWIX 4.53% 8.26% -4.28% 4.53% 12.69% 21.55% 8.93% Oil & Gas 3.50% 18.60% -5.97% 3.50% 19.20% 16.88% 14.04% Basic Materials 8.70% 5.78% % 8.70% -0.20% 16.67% 6.10% Consumer Goods 4.96% 10.55% -2.10% 4.96% 21.92% 29.48% 17.41% Construction 5.23% 4.89% -9.97% 5.23% -8.62% 1.38% -2.72% Health 3.42% 5.07% 2.49% 3.42% 17.51% 28.55% 12.67% Consumer Services 4.48% 10.77% -1.24% 4.48% 22.02% 33.85% 15.81% Telecommunications -4.97% 6.68% -4.56% -4.97% 15.39% 14.80% 10.22% Technology 4.97% 12.05% 4.96% 4.97% 31.14% 46.20% 17.44% Banks 7.78% 7.80% -3.33% 7.78% 14.94% 22.75% 7.65% Source: I-Net Bridge

8 Terms and conditions By entering this competition the entrant accepts these terms and conditions. This is a lucky draw and the first correct answer drawn will be the declared winner. The prize is R2 500 in unit trusts. The prize is not redeemable for cash. The winners will be contacted telephonically. The competition is open to anyone in South Africa, except employees of Alexander Forbes (including AFI, AFFS, AFRIS, Guardrisk, Afrinet, Investment Solutions) and their immediate families. The winner agrees to be photographed and participate in an Alexander Forbes promotional campaign, should such a campaign be undertaken. The judges decision is final and no correspondence will be entered into.