Own sen­si­ble in­vest­ment port­fo­lios linked to your time hori­zon and min­imise fees

Finweek English Edition - - INVESTMENT -

In­vest­ment r i sk i s l i nked to your in­vest­ment time hori­zon, which is your time to re­tire­ment. If you in­tend in­vest­ing in a liv­ing an­nu­ity at re­tire­ment then your in­vest­ment hori­zon is t he rest of your l i f e! You should al­ways own well- di­ver­si­fied port­fo­lios, ie your in­vest­ments must be spread among shares, prop­erty, bonds and cash, with around 25% in­vested in­ter­na­tion­ally. In­vest­ment risk refers to the pro­por­tion of eq­ui­ties (shares) in your port­fo­lio. A high-eq­uity port­fo­lio has ap­prox­i­mately 75% in­vested in shares and prop­erty and 25% in bonds and cash.

If your time hori­zon i s eight years and longer then you should in­vest in a high­e­quity fund as this is likely t o pro­duce t he high­est r eturns over your t i me hori­zon and you can r i de out s hort­term stock mar­ket volatil­ity. As your time horiz on s hor t e ns, your eq­uity ex­po­sure falls as you have less time to re­cover f rom weak eq­uity mar­kets.

If you in­vest in a low-eq­uity port­fo­lio you must ex­pect a lower re­turn and thus need to save 47% more or 22% of your salary than in­vest­ing in a high eq­uity port­fo­lio.

The in­vestor’s re­turn equals the port­fo­lio’s re­turn less the to­tal cost of in­vest­ing, which can in­clude fees for ad­vice (up to 1% of your in­vest­ment), ad­min­is­tra­tion and Linked In­vest­ment Ser­vice Provider (LISP) plat­forms ( up to 1%) and i nvest­ment man­age­ment ( unit t r ust ex­pense ra­tios av­er­age 2% plus per­for­mance fees). To­tal fees vary sig­nif­i­cantly but av­er­age around 3% for most re­tail in­vestors.

A sen­si­ble long-term in­vest­ment re­turn ex­pec­ta­tion is 5% per an­num af­ter in­fla­tion. Three per­cent in fees equals 60% of the re­turn but com­pounds to erode 75% of your long-term re­turn! If you pay 3% in fees then you must save 67% more or 25% of your salary to be in the same po­si­tion as if you paid fee of 1%. Fees are crit­i­cal but o f t e n n o t wel l dis­closed and cer­tainly not well un­der­stood b y most i nvestors.

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