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Monday, May 1, 1989
Consider the risk

Risk and reward: these are the essential factors to consider before making any investment - including the purchase of a life assurance policy.
Essentially, if you are prepared to take an abnormally high risk, the potential rewards must also be great. It is like betting on a horse race, where the possible profit is infinitely higher than that is offered by a bank, but the downside is that the horse gets beaten and your total “investment” lost.
On the other end, a building society savings account is about as safe as the proverbial house. But as the capital is virtually guaranteed the reward is small. In this case it’s translated into a relatively low yield on the deposit.
The South African investment scene is further complicated by the fact that high inflation continues to eat away at your capital. This means that, to preserve your cash, at least some of the capital you invest should offer a return in excess of the inflation rate.
Southern Life’s Peter Atkinson explains, “It is generally true that investment decisions revolve around the trade-off of risk and yield. High-yielding investment propositions carry extra risks while fully-secured deposits generally result in low yields.” This is precisely what makes retirement planning so difficult.
One has to find a balance between risk and reward, but at all times remembering that the return you achieve must beat the inflation rate.
Mr Atkinson believes that a suitable retirement planning strategy is one which combines a base of lower-risk investments together with some “adventurous ventures tacked on in an effort to make headway” in terms of capital appreciation. Referring to the accompanying table, Mr Atkinson notes that insurance plans, depending on their nature, will range from high/medium risk to medium/low risk.
An equity linked policy slots in at the upper end of the risk scale. The smoothed-out or conventional policies rank as medium to low risk investments. A life assurance plan incorporating investments in property qualifies as medium risk.
According to Mr Atkinson, “It is probably only the really clued-up investor who has sufficient time to devote to watching the markets, reading the economy and listening to news.”
It is for this reason that many rely on the expertise of financial institutions and, in particular, life assurers. These organisations have the resources to employ investment experts who would not normally be available to the small man.
He adds, “Life offices have also proven their valuable role in enforcing financial discipline on many investors via fixed monthly premiums. The industry also offers many unique features of added protection such as providing a facility which ensures that the premiums are still paid into the savings programme should the policy owner die or become disabled.”
Given the fact that assurers offer portfolio management facilities, tax and other benefits through their policies, it is conceded that life assurance is not the only investment option open to the person looking for a good balance between risk and return
Syfrets investment manager, Tony Gibson, notes that the advantage which unit trusts have over endowment policies is their flexibility. “Although you can borrow against an endowment policy, the money which has been invested is tied up for a minimum of ten years. “Unit trusts, on the other hand, allow the investor to pay a lump sum or make monthly payments which can be varied. He is also able to cash in his chips at any time.”
The issue of costs is also in favour of unit trusts. While the holder of an endowment policy is generally not aware of what his costs are, the unit holder can check this with relative ease.
Also important is the fact that unit trusts allow the investor to ascertain the value of his investment on a daily basis. This facility is not available to the holder of a life assurance policy.
One of the major advantages which unit trusts had over assurance products, however, was done away with in the March Budget. In the past, those managing the endowment policy portfolios were forced to invest 33% of their funds into low yielding prescribed assets.
This meant that they were only really allowed to make the full investment decision on 67c in every rand invested with them. That’s no longer the case, and it will be interesting to see how the freedom becomes reflected in financial results during years to come.
Overall, however, most investments offer unique benefits and disadvantages. The investor needs to gain a spread of investments based on the qualities of the respective assets and the amount of time the cash must remain in each.
Clearly, both unit trusts and life assurance policies have their place in the medium risk category. While much has been said about the merits of unit trusts, they will never be able to offer one of the most vital ingredients which can be included in an assurance policy - life cover.

Copyright © Insurance Times and Investments® Vol:2.5 1st May, 1989
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