Weekly Thoughts December 2011

I heard an advert on the radio recently that stated that the Johannesburg Stock Market was 5% down but government RSA retail bonds gave a guaranteed 8% capital growth and that there were no fees or costs.  This is not completely accurate.

The 8% is the guaranteed yield or income that the bond will give, not capital growth.  In other words on one million Rand you would get R80 000 of income each year but when the term of the bond is up, the 1 million Rand is still 1 million Rand.  I mentioned to a client on the phone a couple of weeks ago that they were getting an income yield of 8.7% per annum from Marriott after asset manager and my fees.  Yesterday the yields looked closer to 8.8%.  The person invested via the stock market when it experienced a 5% drop, could still have had some decent and growing dividend income and should be buy more after the drop.

And there has to be costs.  Even if the cost is leveraged somewhere off the difference in the yield that they give you and the benefit that they gain from having your money for a defined period of time.  I know a bond trader.  He plays with massive sums of money daily and will receive a bonus at year end.  Where does that bonus come from if there are no costs or earnings?  And as I said last week, I wonder how guaranteed a Greek Bond is right now.  A guarantee is worth the paper it is written on; rather understand what you own and what its potential is.

Just wanting things to be put in their right context, that’s all.  There could well be a place for buying a bond for income, but the RSA retails are not necessarily always going to give the best.