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: 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: 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? 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 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

Investment Types Financial products / investment opportunities available in many forms 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. 1 st floor, 44 Melrose Boulevard, Melrose Arch, 2196 Telephone