Searching for the Holy Grail
I had a few responses following last month’s article which dealt with loan offerings from one of the country’s largest banks. The common theme that resonated throughout the responses came in the form of a question: Is there a perfect financial solution?
The short answer is no – But you can mix things up to get a risk/return profile that comes as close as possible within the confines of realistic expectations. Each individual’s needs and therefore investment objectives are likely to be somewhat different. Each individual’s willingness and ability to take on risk is also different, so not all investments solutions can be equally suitable.
In this line of work we come across an all too familiar expectation from clients – They want to achieve equity-like returns (highest of all asset classes over time) but only want to take on cash-like risk (zero or none) . In other words they want all of the upside but are not willing to accept any downside risk – The investment holy grail so to speak.
There are ways of structuring a portfolio or investment solution which minimises the downside risk, or indeed eradicates it, while offering the potential to participate in any gains in the stock market. BUT the price you pay to limit your downside risk comes in the form of limiting the upside growth in your investment. Let me say that again – You can only structure an investment to limit your downside exposure by sacrificing some of the upside potential.
Many of the big banks and investment houses sell these products under the banner of “Retail Structured Products”. They are frequently complicated and difficult to understand, combined with the fact that they are usually quite expensive.
What if I told you that I can structure an investment solution for you that is neither expensive nor complicated and has the following characteristics:
It is 100% Capital guaranteed *
It allows participation in the future performance of the stock market. (JSE Top 40)
It offers tax free returns**
It has a very high probability of beating the current returns from your savings account at no additional risk to your capital.
All fees are included.
It has a very good chance of beating current CPI inflation***
The ‘pay-off’ or potential return profile of this solution looks like this:
How to interpret this data:
If the JSE Top 40 Index over the next 5 year period delivers the same returns as the last 5 years (19.6%) then the clients return will be 12.3% per year on average for each of the 5 years. That would be a cumulative return of 78.5% in total over the period for an investment solution which is guaranteed not to lose any of the initial capital.
If the JSE Top 40 Index returns the long term average (since 1900) South African equity market return of 12.5% a year, then the client will have earned 9.6% per year on average at the end of the five year period.
If the recent rampant stock market performance is not sustainable and is likely to be lower by half in future years (let’s say 9% returns a year for the next five years) then the client can invest in this solution and earn a marginally lower 8.4% a year with a capital guarantee in place – Sounds almost too good to be true?
Even if the JSE top 40 Index delivers a flat or zero return over the five year period, the client will receive an average annual return of 5.8% over the period. I bet that beats just about any variable rate savings account currently available at any bank or in any money market fund.
If the JSE Top 40 were to lose 20% of its value each and every year for the five year period, the client would still receive an average return of around 2% a year for the period or a cumulative 10.7%.
WOULD YOU WANT TO ACCESS SUCH A PRODUCT?
White Investments can set up an investment solution that does just what I have outlined above for a once off upfront fee with zero hidden costs or ongoing management charges.
What investor would this investment solution suit?
Those who have missed out on the stock market performance of the last 5 years and are worried that the same will happen in the next five years.
Those who are not willing to lose any of the initial capital that they invest but would like to have some exposure to the stock market.
Those that think the stock market is overvalued and want to protect themselves from the downside risks while maintaining some exposure to the asset class.
Those that think recent stock market performance cannot be repeated in coming years and while not expecting a major correction, feel the returns are likely to be only around half as good in future years.
Those that have had money sitting in a bank savings account earning little or no returns and are able to commit the money for a 5 year period.
Who should NOT sign up for this solution?
Those that believe the stellar annual average South African stock market returns are likely to continue for at least the next five years on average.
To Find out more:
General inquiries: firstname.lastname@example.org
Specific inquiries: email@example.com
*You are guaranteed to at least get all your initial invested money back. However, you must be willing and able to invest for a minimum period of 5 years. If you seek to exit earlier than this then the capital guarantee falls away and you may get back less than you initially invested.
** Returns will be free from income tax assuming the investor does not use any of their existing annual interest income exemptions and that taxation legislation does not change for the worse relative to current tax rules in the next five years. There is a limit as to the amount which can invested on a tax free basis and this will depend on the age of the investor and the timing of the investment at initiation.
*** Current CPI inflation is 5.6%. If the JSE Top 40 index does not deliver a negative annualised return over the 5 year period you will receive a return in excess of this number. Please note CPI inflation could very well rise well above this level over time and CPI may not be a fair reflection of your personal rate of inflation.
All income earned through the life of the investment is reinvested. So this solution would not be suitable for income investors or those relying on a steady income from their investments.
Capital gains tax may be payable at the end of the term.
The return profiles outlined above use an after fee return expectation on the JSE Top 40 Index.
If you have any questions or want further advice on how to structure your investments or improve your personal finances please contact us at firstname.lastname@example.org