Investment jargon for dummies

Last updated on 21st January, 2019 at 08:48 am

Can’t tell the difference between a liability and a labrador? Wouldn’t know a diversified portfolio if it slapped you across the face? Fear not… at the end of this tutorial, you’ll be beating inflation with the best of them.

A is for assets

Your possessions are known as your assets, while any debts you may have incurred are called liabilities. If the mortgage on your home is fully paid up, then it’s an asset, but if you’re still paying off a hefty home loan, then your home sweet home will start behaving more like a liability. To determine your net worth, you simply subtract your liabilities from your assets.

Of course, not all assets are created equal: that brand-new 4×4 might’ve been worth a pretty penny the day you drove it out of the showroom, but because it’s now lost more than half its purchase value, it’s called a depreciating asset. A fully paid-off home in a desirable area, however, is an appreciating asset.

Beyond the basics

Savvy investors get their money to work for them, instead of the other way around. When it comes to investing, you need to be aware of four main asset classes:

• Shares aka stocks or equities are an opportunity to own a tiny slice of listed and private companies. Put simply, companies sell off little bits of themselves in return for cash. These are traded on the stock market, and their value is subject to a myriad market forces.
• Bonds are issued by governments or large companies who want to borrow money from members of the public. A bond comes with a contract stating the interest rate that will be paid and when the loan will be returned. If you hang on to a bond until it matures, you know exactly what you’ll get in return, but bonds can be traded on the market.
• Cash refers to an array of short-term loans which in return pay a fixed interest rate for a short period, that’s usually less than 12 months.
• Your home is an asset, but so too are rental properties, commercial properties (for your own business or rental), real estate investment trusts and property unit trusts.

Variety is the spice of life

A sound investment strategy involves cherry-picking investments from a variety of asset classes to build up what is known as a diversified portfolio. That fable about not putting all your eggs in one basket is the very definition of the age-old investment principle of diversification.

Fortunately, you don’t have to do all the picking and choosing yourself, as there are hundreds of off-the-shelf ‘ready meals’ put together by highly experienced fund managers. Unit trusts pool together the money of many investors before investing it in a selection of underlying assets (shares, bonds, cash and perhaps property) according to the unit trust’s investment objectives. Returns are then shared among investors. Some examples include:

• Money market funds invest solely in cash. These low-risk, low-reward investment vehicles are ideal for short-term investing.
• Balanced funds spread the love between asset classes to ensure that there’s a healthy equilibrium between risk and reward. Perfect for medium-term investing and retirement funds.
• Equity funds invest heavily (or exclusively) in shares. This increases both risk and reward and means that these unit trusts are ideal for long-term investing.
• Funds of funds invest in a portfolio of different unit trusts (according to their investment objectives) to make the circle even bigger. A portfolio containing a few carefully-chosen unit trusts can be mighty effective – provided it fits in with your time-based goals (more about those very soon).

Time is on your side (sometimes)

In the investment game, anything is possible if you have enough time to play with. Thanks to the wonder that is compound interest (growth on growth of your investment for supercharged profits) a relatively small monthly contribution can become a pretty impressive lump sum if you can wait a few decades before dipping into it.

To make time work for you, you simply need to beat the inflation rate (the rate at which the cost of goods and services increases). If your overall investment portfolio outperforms inflation, then you’re sitting pretty.

Hatch a plan

Diversification means you avoid putting all your investment ‘eggs’ in one basket.

Golden years

When you reach retirement age (provided you’ve embraced retirement funds) you’ll get the option of purchasing a life or living annuity to provide you with an income during your golden years.

• A life annuity is an insurance-based fund which provides you with a guaranteed income during life.
• A living annuity is a unit trust-linked investment which will provide you with an income based on the value and returns of an investment portfolio.

Both annuities come in different shapes and sizes, but all withdrawals are regarded as income by the tax man and taxed at your marginal income tax rate. The major difference between these annuities is that a life annuity ceases on death (although there are some exceptions here), while the remaining value in a living annuity passes on to your nominated beneficiaries.

But I can’t even choose my own pizza toppings…

For the very same reason that you wouldn’t highlight your own hair (we hope), it’s best to engage the services of a financial planner who will analyse your financial health and retirement goals before advising on time-based investment strategies.

Did you know? Over a 10-year period, a Sanlam Reality member on Gold status could earn as much as R270 000 more on a R1-million investment than a non-Sanlam Reality member, thanks to 100% discount on primary asset management fees. Click here to find out more.