“When investing, what is comfortable rarely pays off” – Robert Arnott.
In a world of unicorns, bulls, and bears, finding the right solution and not missing out on opportunities can be daunting and a little overwhelming. There are many different products, asset classes and fund managers. Local or offshore, conservative or higher risk? These are tough decisions to make. My advice is to start a financial portfolio with the guidance of a wealth advisor who will help you determine your goals and your risk appetite.
What we see as a “risk” is, however, the number one mindset shift we need to make. Are we afraid of “risk” or are we afraid of volatility? They are two very different notions.
Understanding the performance of asset classes and the different risks they all involve will make it easier to navigate markets and investments.
Each asset class plays a different role in your portfolio and comes with different risks, as well as different potential returns. In the long run, higher returns will require accepting more volatility and weathering market cycles.
As in the lyrics to the song “Something just like this” by The Chainsmokers and Coldplay, you will have to decide “Where would you like to go?” How much do you want to risk? “
The table below shows the returns by calendar year of the indices representing the different asset classes over the last ten years up to July 2019.
|Portfolio and asset classes||January-July 2019||2018||’17||’16||’15||’14||’13||’12||’11||‘ten||’09||’08|
|SWIX equity index||6.6||‘-11.8||21.2||4.1||3.6||15.4||20.7||29.1||4.3||20.9||29||‘-21.7|
|MSCI Global Equity Index||17.7||2.1||11.7||‘-6||31.1||16.3||51.5||22.3||11.5||1.2||4.1||4.8|
|Local ownership (Sapy)||4.8||‘-25.3||17.2||10.2||8||26.6||8.4||35.9||8.9||29.6||14.1||4.9|
|Local bonds (Albi)||6.8||7.7||10.2||15.5||‘-3.9||10.1||0.6||16||8.8||15||‘-1.0||17|
|Local species (Stefi)||4.3||7.3||7.5||7.4||6.5||5.9||5.2||5.6||5.7||6.9||9.1||11.7|
This shows that asset classes are all volatile in their own way and often impossible to time them. However, their degree of volatility is different. The chart below shows the performance of a few different portfolios over the past few years.
It compares the following allocations:
- A reinforced interest portfolio: a cash-type multi-manager portfolio (with the bulk of the portfolio consisting of 77% local cash, 22.5% local bonds).
- A regulatory portfolio 28: it is aligned with the typical regulated allocation required for an investment in a pension / provident fund or a retirement annuity (the major part of the portfolio consists of a local equity allocation of 44%, foreign equities by 27% and local cash 20%).
- A portfolio intended to meet the needs for post-retirement income or stable growth (local liquidity 14%, local bonds 16.5%, local equities 28.3% and foreign equities 34.5% with small holdings in the classes of remaining assets).
- A global equity fund (94.6% foreign equities and small holdings in other asset classes).
- A combined 50/50 exposure to a local and global equity fund (resulting asset allocation of 40% local equities, 54.7% foreign equities and small holdings in other asset classes) .
- Finally, a flexible global feeder fund (with a weighting of 42.7% in foreign cash, 25.6% in foreign bonds, 28.7% in foreign equities).
Source: Morningstar Direct, PSG Wealth
If you had invested in cash in 2019, you would have received an average return on investment of 7% to 8%, as mentioned in your question. For the same period, if you had invested overseas, the story might have been very different. The one-year yield of the S & P500 (according to Bloomberg at the time of writing) is 27.94 and the Dow Jones is 27.19%. The one-year return on the JSE is 15.967%. Going back to my first diagram, this can change very quickly. In 2008, the local market fell by 21.7%, the recovery also occurred as quickly in 2009.
Investing in growth assets (exposure to equities) will offer a higher return in the long term, but this will also be more volatile. There will always be market and economic cycles – riding the wave and not making any emotional decisions is the important part. When you invest in stocks, you are buying components of a company. If it is a fundamentally good business, your property will always be of value; the unit price will simply vary as the markets go up and down. It is only when you sell these units at a low price that you “lose money”.
Paul Samuelson said: “Investing should be more like watching the paint dry or watching the grass grow. If you want some excitement, grab $ 800 and go to Las Vegas.
Having a long-term mindset is imperative when it comes to investing – without that mindset you’ll always be disappointed or stuck on the emotional roller coaster of market cycles.
Different asset classes carry different risks
|Asset class||Risk / return factors||Role in the portfolio|
|Classified property (For example, REITS real estate investment trusts)||Risks and rewards of ownership||Diversification|
|· Interest rate||Return generation|
|Rents||Protection against inflation|
|Capital gain / loss on sale of direct holdings|
|Local shares||Risks and rewards of ownership||Diversification|
|· Change rate||Inflation protection|
|Political uncertainty||Yield generation (Growth assets)|
|Local economic uncertainty|
|Foreign equities||Risks and rewards of ownership||Diversification|
|Profits of foreign companies||Return generation|
|· Change rate||Inflation protection (Growth assets)|
|Foreign investment risk||Exposure to foreign currencies|
|Obligations||• Rights of a creditor||• Diversification|
|• Interest rate||• Income generation|
|• Issuer’s creditworthiness||• Capital protection|
|• Reinvestment risk|
|Cash||• Rights of a creditor||• Diversification|
|• Interest rate||• Income generation|
|• Inflation||• Capital protection|
|• Cushion for unforeseen expenses|
|• Book to take advantage of unexpected opportunities|
Source: Adapted from www.getsmarteraboutmoney.ca here.
I believe you have to first determine your goals and decide on an appropriate strategy from there. The strategy will probably also be different for the different products in your portfolio:
- Why are you investing? Is the focus on retirement or is it a shorter term goal?
- How close are you to retirement?
- Do you have an emergency fund – or do you depend on those funds in a crisis?
- What is your risk appetite? It is important to define here what you consider to be a risk. It’s important to understand that investing only in cash is a risk in itself – inflation and interest rates can impact your investment.
- Which term should you work with? For investors nearing retirement, it’s important to remember that the term of your investment does not end at age 65. This is only the start of a new investment term for probably another 30 years.
To build a successful portfolio, you will need to make sure you have comprehensive planning for all aspects of your life: risk planning (life coverage, income protection, medical assistance), fiduciary planning, as well as structuring your portfolio. ‘investment. This will not only focus on retirement, but also on shorter term financial goals.
As our lives change over time, so do our wallets; it is important to make these changes in different phases of life. It will also be different for each person, as financial circumstances and goals differ, and risk appetite will not always be the same for everyone.