Investing in the face of a storm

RISING VOLATILITY: FIXED INCOME, MONEY MARKETS PREFERRED

Peter Nurcombe-Thorne, a director of the Rosebank Wealth Group, advises a reader on how to invest into uncertainty.

Question: I have R150 000 to invest into a compound interest account. Then I want to contribute R4 000 monthly to it. What would be the best option for me, that would also allow access to my money when I need it?

Answer: Without fully understanding your total financial position we can’t give you specific advice. I will, however, give you an idea of how we would approach an investment of this nature. Chat to your financial adviser before you make a decision. For the foreseeable future, we expect equity markets will offer at best high single-digit/low double-digit returns. We cannot rule out the possibility of a financial shock over the next few years and believe the relative certainty of achieving inflation-beating returns in money market and fixed income investments is extremely attractive. It is prudent to be more conservative upfront. Our medium-term view on the rand is more bullish than most. The rand might weaken further in the short term, but could strengthen over the medium term (one to three years) in the absence of more political shocks.

We recommend a two-tier approach to position the lump sum in a relatively low volatility investment, where you will have easy access, with the debit order being positioned in a more growth-orientated manner. We suggest investing your R150 000 in money market and fixed-income unit trusts. This will protect your capital and beat inflation in an uncertain environment. We would select unit trusts with relatively short duration, limited equity exposure and limited offshore exposure to avoid rand volatility. You can switch these funds easily, beat inflation and protect your capital.

By contributing to an investment periodically, you can take advantage of “rand-cost-averaging” – investing a fixed rand amount (R4 000) on a regular basis, regardless of the share price. If prices are trending downwards, your monthly contribution will purchase progressively more units each month; the opposite being true if prices are increasing.

We suggest buying into two or three stable or balanced funds (SA multi-asset low-equity funds or SA multi-asset medium-equity funds) every month. Stable and balanced funds are slightly more aggressive than fixed interest unit trusts and have equity and offshore exposure. However, equity and offshore exposure is capped and both mandates would still have a decent exposure to money market and fixed income. These investments are more geared to long-term capital growth and complement the relative certainty of the lump sum investment.

If you have a question, contact eleanor@moneyweb.co.za.