Is A Guaranteed Investment Really Worth It?

We all know that investment markets go through cycles. We also know that in the long term, markets move up. These 2 statements are absolute certainties, yet it is so easy to forget them when looking at our own investments. The truth is that our emotions can also go through cycles when it comes to our investments.

Here we are at the end of October. Since January, the JSE is down over 3%; the whole world seems to be at war and to find anything positive in the news, we have to read about the Boks (maybe the Proteas?).

A very natural emotion at a time like this is to look for certainty; we all want to believe things will be okay, and this extends to our investments. The financial services industry also knows this, so we see a push towards guaranteed investment products. Phrases such as downside protection guaranteed return reel us in and satisfy our emotional needs. Most times, this is enough for us to part with our money or to move existing investments.

But are these products what they claim to be? And are they the answer to achieving our long-term financial goals?

If we look at the long-term numbers, the simple answer is NO. In 90% of cases, one would have done better investing straight into the indices these guaranteed products track. Also, taking a 3- or 5-year view on long-term investing is like calling the winner of the SA PGA golf tournament after 9 holes on day 1.

The unintended consequence of these products is that we almost certainly miss out on market growth, which means our final outcome is far from what it could be. We save ourselves poorer.

These products are often sold because they are very profitable for the companies that market them, and they pay huge upfront commissions (3%-7%), which are hidden from the investor.

Understanding why we are investing should be the starting point. What need are we aiming to fulfil? Retirement? Education? A holiday? All these should form part of a greater financial plan which directs your personal investment strategy.

The only guarantees in life are death and taxes; be wary of anyone promising otherwise.