The last couple of months have been a roller coaster ride for investors in both global and local markets - actually nothing abnormal about this. Where investors are looking for large gains, they need to be able to stomach shorter term volatility. What is always important to remember is the compounding effect of gains that will be produced across different asset classes. This month's Market Focus looks at history to try and guide decisions going forward.

Executive summary

An investment into equities has proven to have been the best investment over longer periods of time. But a number of factors come into this, the biggest of which is the price paid at the time relative to the value received. With inflation structurally coming down to low single digits over the last decade, property and bonds have taken top spot, displacing equities, much like usual formula one winner, Schumacher in 2005.

Investors need to look to compound real returns over time as the only method to counter inflation. Real assets, which include businesses and property, are the only investments which have this ability to produce inflation proofed returns. An "investment" into a policy is nothing more than accessing these real assets, via a very expensive conduit, and while compounding is positive over the longer term, it naturally works in reverse with costs - effectively transferring wealth from policyholders to the sellers of the product.

An investor must always make the distinction between buying and investing. The former (policies) will struggle to produce a real return, while an investment is best defined by Benjamin Graham as "?.one which, upon thorough analysis, promises safety of principal and an adequate return".

As a quick indication of value, look at the yield generated by the investment. Determine what earnings and dividends it's returning as a percentage of asking price.

For the detailed Market Focus newsletter, please click here.

If you are looking for best advice investment counsel in 2005, I will be taking on selected high net worth clients. Contact me for a confidential discussion, or e-mail me your contact details to ian@exsequor.co.za

Posted: 2005/05/31 18:18 View Archive

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