Take control of building your investment portfolio
We offer some advice to investors when it comes to structuring their portfolios and how to choose the materials with which to build a solid investment foundation.
fascinating to hear all the different opinions when it comes to building properties – whether it’s starting from scratch or just an addition to your existing property. Some will tell you that it’s better to pay extra for someone experienced to manage the build on your behalf, while others will tell you that managing it yourself will save you money. Whatever you decide, you will be left with a few extra grey hairs and you will have learnt so much in the process that you feel you could just as well have done the building yourself. The reality is that you don’t physically have to lay bricks and cement in order to build. By hiring experienced builders and electricians for each respective task, for example, you will have greater control and save money in the process.
Investments are based on the same principle in many ways. Investors worldwide have become much wiser and are able to manage their own share portfolios via the internet these days, to name but one example. But when we look at risk versus returns on this investment, many may realise that although this type of investment may provide higher-than-normal returns, it comes at a much greater risk.
The first step in taking control of your total investment portfolio is to take a good look at your personal risk profile. Investors can seldom afford to be invested in shares only, especially in the more risky investment environment we currently find ourselves in. Pensioners, for example, who depend on a monthly income and capital stability, rarely consider investing in shares and find money market with an approximate 7% return much more reassuring. After tax, however, these returns no longer look quite as attractive as they can barely keep up with the annual growth in inflation, which causes many of these investors to seek comfort in income funds to try and earn an extra percent or two in capital growth.
Income funds are usually recommended for investors with a primary need to protect their capital and a secondary need for income generation. To protect investors against capital erosion, these funds mainly focus on the more conservative asset classes such as money market, bonds, property and high-dividend shares.
The money market and bonds ensure capital preservation, which is supplemented by conservative interest and coupon payment. Property shares and highdividend shares offer a more risky addition to a conservative income fund which, in turn, offers less security in capital preservation, but delivers a higher income and tax-advantageous dividend income. Both asset classes also provide the further addition of possible long-term capital growth. The optimal mix of these four asset classes will be determined by the nature of the fund and the fund manager’s strategy, but capital growth is much more limited compared to shares and balanced funds.
When we take a look at the list of available South African income funds (unit trusts), we see that during the past two years’ more volatile market conditions, income funds still outperformed money-market investments by roughly 2.5% and, although it may have trouble in keeping up with growth investments like shares over the long term, it performed a mere 2% weaker against the FTSE/JSE All Share Index over this short period. What’s more is that the volatility wasn’t excessively higher than money market, offering the more conservative investor some peace of mind over the past two years.
My message this week isn’t aimed at convincing investors that income funds are better than other funds or investments, but rather to offer an alternative portfolio building block to investors who normally find salvation in 100% money-market investments, or who are currently concerned about our extremely high-priced stock market.
are usually recommended for investors with a primary need to protect their capital and a secondary need for income