Understanding Financial Lingo.

Doctors, Lawyer, and Financial Advisers all babble in a language that sounds foreign sometimes. All you know is that whatever they say, it is going to cost you money!

Let's look at some of the terms used and what they mean.

Asset Class:

This is the term used to describe things we invest in. Asset classes with similar attributes are grouped together and given names like :

• Equity : where you buy a little piece of a company as in when you buy a share.


• Cash: please don't let me explain this! To most people cash is king, like Elvis.


• Property: is your house or a holiday flat or an office building or a factory building.


• Bonds: is not the same as the money you borrow from your bank to buy your house! This is money you give to usually a big company or the government to finance their business activities and they pay you interest.

If you give your money to be invested, it will end up in one of these asset classes. The asset class that you invest in will determine if you make money or if you lose money. Let me give you some of the characteristics of these asset classes:

• Equity : very unpredictable over the short term and because of this seen as higher risk. Provides you with capital growth (value of the share increases) and sometimes pay a dividend (income). Proved to be the best performing asset class over longer periods of time.


• Property : unfortunately the sub categories in property (residential, commercial and industrial) can have cycles that are not synchronised but in general they are also seen as higher risk because they can be damaged, slower to buy and sell, can not be moved to better location! You usually get rental income and increase in property value.


• Bonds : are generally regarded as lower risk assets because you receive an interest income from a reputable institution which is contractually binding. The instrument via which you buy your bond can have some volatility in price which makes it not 100% save.


• Cash: This is the safest investment (used to be before some banks started going belly up) and pay interest on a capital amount which are both guaranteed. (capital and interest)

Instruments:
When they talk about "financial instruments", reference is made to the containers through witch you can invest in the different "asset classes". Let's look at some of the instruments for the different asset classes:

Equity: shares direct, unit trust funds, hedge funds, policies, retirement annuities, pension funds, satrix, etc.

Property: buy a building, unit trusts, policies, retirement annuities, pension funds, etc.

Bonds: buy a bond direct, unit trusts, policies, retirement annuities, pension funds, etc

Cash: bank account, unit trust, foreign currency etc.

Diversify:
This is something you will always hear when financial advice is given. What is meant by diversification is simply the allocation of your money between different "asset classes", not necessarily different "instruments"! The main purpose of diversification is to spread your risk between different asset classes that act differently and at different times so that if you misjudged one asset class and it loses money, you might have other asset classes that make you money. You should not only diversify between different assets, but also between countries, currencies, sectors in the economy, investment strategies etc.

Short Term and Long Term
In finance talk you will always hear people attaching investments to certain periods of time. Usually they would say that shares are a "long term" investment and cash is a"short term" investment. This is all due to the level of unpredictability associated with the asset class. We know what we will get from our cash investment tomorrow, but we have much less confidence in our expectation of what will happen with our shares tomorrow.

So, to give the unpredictability time to become more predictable you have to give shares time to settle down and that "longer term" is at least 5 years, BUT, it could be much longer. I would suggest that if you want to go into shares from the current valuations you should give the investment the 5 years at least.

If you want to use your money within 18 months, don't even think about anything except cash.

Between 18 mts and 5 yrs you can call it medium term and Bonds might be an investment alternative.

To sum up:
If I have R50 000 to invest, the decision filter should be:

• Is this 5 jr plus money or not?


• How much do I want to invest in the different asset classes?


• Which instruments am I going to use?

Answer:

• Yes, all of it.


• Diversify between 10% cash, 10% bonds, 10% property and 70% shares.


• Cash: account at my bank or unit trust; Bonds: Unit trust fund; Property: Unit trust fund; Shares: 50/50 between satrix divi and satrix rafi.

We have lots still to cover and only 352 days to go, keep those comments cumming!