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.
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.