CHOOSE THE RIGHT AS­SET CLASS FOR THE RIGHT REA­SON

With cur­rent mar­ket volatil­ity, it can be tempt­ing to throw in the towel. How­ever, for now, in­vestors should re­main calm and use the cur­rent mar­ket strength to prop­erly bal­ance their port­fo­lios.

Finweek English Edition - - FRONT PAGE - By Schalk Louw editorial@fin­week.co.za

when­ever I get the op­por­tu­nity to speak to Mr Nols Oden­daal from Beth­le­hem, he al­ways tells me the story about the farmer who bought him­self a few lambs. He fed them well and chased them all into a small pen, next to which he placed his camp­ing chair so that he could watch them closely. Af­ter an hour or two, how­ever, he got ex­tremely frus­trated be­cause he didn’t see one lamb grow even a lit­tle bit. Fu­ri­ous, he de­cided to take his chair and leave, and he vowed that he would never again waste his time with sheep farm­ing. Great was his sur­prise when he drove past the pen a year later and saw that the lit­tle lambs didn’t only grow to be­come mas­sive sheep, but that they also gave birth to new lambs. He sud­denly found him­self to be an ex­tremely suc­cess­ful sheep farmer.

With mar­ket volatil­ity at a high, it makes sense that many in­vestors would also like to take their camp­ing chairs and leave for good. The year kicked off with the FTSE/JSE All Share In­dex los­ing 3% of its value in Jan­uary, fol­lowed by a fur­ther al­most 1% drop in Fe­bru­ary, only to gain 6% and 1% in value in March and April re­spec­tively. It’s no se­cret that great volatil­ity and un­cer­tainty af­fect in­vestors’ emo­tions, and un­for­tu­nately it ap­pears as though these volatile mar­ket con­di­tions are here to stay for the time be­ing.

In the same way that the farmer had to know what he was let­ting him­self in for with sheep farm­ing, you too should be aware of what you are let­ting your­self in for when in­vest­ing in dif­fer­ent as­set classes, es­pe­cially when it comes to your pen­sion. Un­for­tu­nately, I far too of­ten hear about how in­vestors are told that they need to have at least a five-year in­vest­ment hori­zon when in­vest­ing in shares, while at least a two-year in­vest­ment hori­zon for bonds should be a safe route.

Be­fore I con­tinue, how­ever, I’d like to tell you what I con­sider to be safe and why. His­tor­i­cally, shares is the as­set class that would eas­ily have provided you with the best re­turns, even over a five-year pe­riod, but how does this as­set class per­form when it is com­pared to in­fla­tion? Keep in mind that if you can­not out­per­form in­fla­tion at the very least, you may as well spend all your cap­i­tal now, as you will be able to buy less in fu­ture than you can to­day.

By con­duct­ing a closer anal­y­sis, how­ever, I found that there have been sev­eral times over the last 30 years that shares didn’t out­per­form in­fla­tion over a five-year in­vest­ment pe­riod (60-month rolling pe­riod), and that in­vestors would have been much safer in choos­ing a sev­enyear in­vest­ment pe­riod be­fore mon­i­tor­ing the growth of their “lambs”.

The same goes for bonds. There were sev­eral oc­ca­sions over the same 30-year pe­riod that bonds didn’t out­per­form in­fla­tion over a two-year in­vest­ment pe­riod (24-month rolling pe­riod), mak­ing a three-year in­vest­ment hori­zon a much safer op­tion.

If you are strongly fo­cused on ab­so­lute re­turns and at the same time re­quire an in­come from your port­fo­lio, it would be ad­vis­able to in­vest at least three years’ life cap­i­tal in a risk­free in­vest­ment such as the money mar­ket. I would then in­vest the fol­low­ing four years’ worth of in­fla­tion-ad­justed cap­i­tal in bonds, while in­vest­ing the re­main­ing bal­ance in shares for growth over the long term.

In­vest­ments with un­der­ly­ing pro­tec­tion have be­come very pop­u­lar over the last few years, and this will def­i­nitely help in re­strict­ing your port­fo­lio’s neg­a­tive pe­ri­ods while pro­mot­ing growth.

For now, I would urge in­vestors to re­main calm and to use the cur­rent mar­ket strength to prop­erly bal­ance their port­fo­lios, es­pe­cially in ar­eas where share lev­els ap­pear to be over­weight. Put away your camp­ing chair for now, and rather mon­i­tor the growth on your in­vest­ments at a later stage.

If you are strongly fo­cused on ab­so­lute re­turns and at the same time re­quire an in­come from your port­fo­lio, it would be ad­vis­able to in­vest at least three years’ life cap­i­tal in a risk-free in­vest­ment such as the money mar­ket.

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