If you had to put all your eggs in one basket, would it be in an endowment or unit trust?
Would it surprise you if I said it doesn’t make a difference?
Let me explain why I’m writing about this.
A couple of days ago I got a call from someone resigning their job. I mentioned the option of either a retirement annuity or a preservation fund and was told this:
“Oh, I’d prefer not keeping all my eggs in one basket. Can I invest in both of them?”
So after I’d explained how these things work, I got to thinking.
Strange how even the most brilliant people know so little about investments. But just maybe it’s people like me who’ve made it sound so complex?
Today we’re going to talk about eggs and baskets and wrappers and engines.
The first thing about investments is…
It’s got nothing at all to do with the basket.
Take a look at this list of investment products:
- Unit Trust
- Retirement annuity
- Preservation fund
- Pension fund
- Provident fund
- Living annuity
I’m sure I’ve missed a few, but the only difference really, is how they’re handled in terms of legislation.
Take the endowment for instance.
Basically, it’s a 5-year investment where the interest and capital gains are taxed within the fund at a flat 30% instead of your personal capacity.
Who should invest in an endowment?
Think of the person paying tax at 41%. I don’t know about you but I’d rather pay tax at 30% on an endowment than being taxed at 41% in a unit trust.
Who shouldn’t invest in an endowment?
Think of the person paying tax at 18%. Surely they’re better off in a unit trust paying tax at 18% than an endowment taxed at 30%?
And what about a pension fund?
All that a pension fund is, is an investment whereby you are allowed to contribute 7, 5% towards your retirement and get a tax deduction.
Your employer is also allowed a deduction on their contribution to your retirement. While you’re in the pension fund, no tax is paid on all the interest earned and any of the capital gains.
And guess what?
The same rule about no tax on interest and capital gains applies to retirement annuities and provident funds.
Basically, everything we’ve mentioned above – from the endowment down to the living annuity – are all the same thing.
It’s got everything to do with the engine.
Let’s compare investing to buying the Mercedes Benz C class, shall we?
- At the bottom end of the range, we have the C180 with a 1600cc engine pumping out 115 kW of power. A perfect car for anyone in middle management.
- On the other end of the scale, there’s the C 63 AMG S pumping out ginormous amounts of power, perfect for the housewife picking her children up after school.
Both have four wheels and a steering wheel. Both come with a key. Hopefully, each has air conditioning. I’ll take on the manager with his C180 any day…it’s the mama behind the wheel of the C 63 AMG S I’m scared of!
In investment terms, that’s what we’d call the wrapper. But it’s what’s under the bonnet that counts. That’s where your risk lies.
With investments, you risk has little to do with the wrapper, and everything to do with the funds you’re invested in.
So let’s look at someone choosing between a retirement annuity and a preservation fund.
I’m going to use the Allan Gray investment platform for my example.
Allan Gray offers both a retirement annuity and a preservation fund. We now know that the retirement annuity and the preservation fund aren’t your risks. It’s the funds in which you invest which are your risk.
You could also say that having all your eggs in one basket at Allan Gray is a risk, and you’d be correct.
But Allan Gray also has 58 funds from which to choose – 9 of which are Allan Gray in-house funds. The rest are all funds from external companies.
- You could choose either a volatile equity fund such as the Foord equity fund or the low-risk Allan Gray Money market fund.
- You could decide to invest in Coronation or Investec all while using the one platform.
- You could decide to invest your money with 5 different companies – and so spread your company risk – or
- You could invest it all in 5 of the Allan Gray funds
- In fact, you could invest your million Rand pension into low equity funds (because you don’t want to expose it to too much risk), while directing your monthly investment into high equity funds.
- Be aware of why you’re investing in a product. Obviously, you don’t want to invest in a retirement annuity when what you actually want, is to save for a home.
- Be aware that your risk comes in with the funds you select. Retiring, and then investing everything into equity is financial suicide. Investing it all in cash is also financial suicide.
- Always get sound advice from a financial planner. Remember that most investments aren’t guaranteed. You can lose money. A financial planner will help you set objectives and advise on which funds would best suit your risk profile.
Interested in investing some of your eggs in our basket?
Here are the conditions:
- You need to be willing and able to invest at least R500 a month (Because that’s the minimum amount they’ll accept)
- We don’t charge upfront fees
- We do take an annual management fee of 0, 50% per annum excluding VAT based on the investment value
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