The English language may not have twenty terms for
different states of rice, but it does have more words than any other language - over half
a million, in fact.
While most native English speakers use less than 100,000 words in
everyday communication, that’s still more than many languages’ total vocabulary.
Why then do some people complicate matters by creating jargon when
perfectly acceptable and widely understood words already exist?
Every industry and profession has its own technical terms. These often
make complex processes easier to comprehend or apply - at least for those insiders who
understand the subject and know to what the technical term refers.
However, to those outside that particular industry the use of
unfamiliar technical terms can be confusing, and even misleading.
Every year we seem to be subjected to more and more jargon. Some
professions are accused of wrapping up simple concepts in convoluted language and complex
jargon deliberately to obscure facts, hide ineptitude or simply to elevate the user to a
higher plane than the rest of us.
And my profession is far from exempt from this quite legitimate
criticism.
While I cannot speak for others, I believe it is
important that every client of my firm gains a clear understanding of whatever topic we
may be discussing, because this always has to do with the client’s financial health
and well-being.
A lack of understanding may lead to inaction, or worse, inappropriate
action, which could seriously affect his or her family’s financial future.
Even combinations of perfectly ordinary words can lead to confusion.
For example, we all know what "offer" means, and we all know
what "bid" means; and there are various meanings to the word "spread."
(No, Marge, not what you put on your bread, nor what you put on your bed, nor even what
you do with your legs...) But how many average readers know what a "bid-offer
spread" is? (It’s the cost of buying units in a mutual fund or unit trust, where
the "offer" price is the price you pay when you buy units and the
"bid" price is the price you sell or redeem them for. This has nothing to do
with the fluctuations up or down caused by market movements, but is simply the
‘entry’ cost to acquiring a slice of these investment funds. The
‘standard’ difference between these two prices - typically 5% in the case of
unit trusts - is therefore called the "bid-offer spread". So now you know why
these three little words are used to convey what took a paragraph to explain.)
An "offshore tax haven" is therefore a
regime where investments can grow without any tax being deducted from them at source. For
most expatriates, holding such investments is not in any way illegal (although some
countries insist their citizens declare they’re holding them, so their tax man can
collect his slice of the growth.)
Drawing down from such investments may, however, trigger (and here
comes another one) a "chargeable event."
This is not, as you might think, a local fair which you have to pay to
go into, but a term thought up by tax authorities which means something has happened which
entitles them to collect some tax.
For example, your offshore investment might be growing tax-free, but if
you draw some money out of it whilst resident in the U.K., for example, the tax man may be
entitled to a slice of the action - or he may not if your long-term savings plan happened
to be a "qualifying policy".
Certain offshore savings plans into which you’ve been contributing
regularly and which include an element of life insurance coverage could be
"substituted" onshore (which means exchanged for a similar one in the U.K. if
you happen to return to live there permanently), and legally avoid having any tax
liability once they’ve run for at least 10 years.
For people in the higher tax bracket, avoiding (as opposed to evading)
tax at 40% is well worth the relatively small additional insurance cost attached to such
plans which "qualify" for tax exemption.
The term "fixed interest security" causes much confusion,
inasmuch as some think this is an investment similar to a bank account but earning an
unchanging rate of interest. In fact, it refers to a government bond, which pays a fixed
dividend throughout the life of the bond, but is traded on the open market in the
meantime. Thus the price can go up or down, and the yield (or fixed interest) fluctuates
as a percentage of this price accordingly, but inversely.
"Gilts" are the same animal, but are bonds issued by the U.K.
government. As each such certificate has a gold border, hence the name.
(An insurance bond, on the other hand, is simply a lump-sum investment
made through an insurance company, which accesses a range of underlying investment funds.)
"Leverage" is another somewhat confusing term, inasmuch as
this same word can mean very different things in different professions.
As far as the investment industry is concerned, it applies to certain
investment funds which can borrow additional money to invest, thereby increasing the total
amount of investment (thereby levering the market), in the hope of increased gains.
Thus a fund which is leveraged by 25% is actually investing 125% of its
cash capital into the market. If the market goes up by 10%, the units you own in such a
fund increase in value by roughly 12.5%. (This has its drawbacks as well, because should
the market fall by 10%, your fund units also fall by about 12.5%.)
Back in the mid-80s, the "flavour of the month" was leveraged
Japanese warrants, which were being sold like hot cakes in the anticipation that the Japan
stock market was heading for a boom. Well, it headed for a bang instead, and these
particular funds - which were leveraged by up to 400% - went down the tubes rather
rapidly, taking much of their investors’ money with them. A speculative investment of
$10,000 in 1986 into these sort of funds is currently worth around $600...
Many people I’ve met who bought them at the time bewail the fact
that they hadn’t understood how risky these sort of funds were, and wished
they’d asked what "leveraged" meant...
There are many other commonly used technical terms which are confusing
at best to most inexperienced investors, and even to many experienced ones.
So, when you’re discussing financial matters with an advisor and a
term comes up with which you’re unfamiliar, don’t hesitate to ask for
clarification.
You owe it to yourself to understand clearly what is going to be
happening with your money, and as an outsider to the financial services industry, if you
encounter jargon or are blinded by technical terms, ask for a clear explanation in
layman’s terms. There is no shame in asking, and you’ll be wiser afterwards.
After all, it is better to look a fool for ten seconds than be a fool for the rest of your
life.
If you have any comments or queries on this article, or about other
topics concerning investment matters, write to Leslie Wright, c/o Family Money, Pattaya
Mail, or fax him directly on (038) 232522 or e-mail him at [email protected]. Further
details and back articles can be accessed on his firm’s website on
www.westminsterthailand.com.
Leslie Wright is Managing Director of Westminster Portfolio Services
(Thailand) Ltd., a firm of independent financial advisors providing advice to expatriate
residents of the Eastern Seaboard on personal financial planning and international
investments.
Dear Hillary,