This week the Association for Savings and Investments South Africa (Asisa) announced that investors committed R88 billion to Collective Investment Schemes, aka unit trusts, during the second quarter of 2020. This is the highest quarterly net inflows on record, surprising even Asisa itself.
Much less surprising, is the fact that almost R50 billion of these flows were channelled to interest-bearing and income portfolios. The disaster that was quarter 1 2020, has clearly taught investors two things:
- Most of us need to be saving much more than we thought; and
- Stock markets scary!
Unfortunately, this knee-jerk reaction to the enormous volatility seen in equity markets in the heart of the Covid-19 panic is not a sustainable investment plan. Global interest rates are at all-time lows, making money market investments and to lesser extent income funds, decidedly unattractive. In the long run, they will not provide the returns that most of us need to reach our investment goals on their own.
Whatever you are saving for, the process will generally consist of three phases, albeit with many underlying steps and considerations in each of them. We strongly recommend that you ask a qualified financial advisor to guide you through the following:
Your goals will drive your time frame and capacity to assume risk in the investment. It will also include some tax and estate planning.
Implementing your plan
Here you will match products and underlying assets to your set goals.
This is the most difficult phase because if you did a good job with phases one and two, you need to stick to your original strategy no matter what the markets throw at you. It is only human nature to want to make changes to your investments when you experience dramatic events as we all did in 2020. More often than not, these changes will derail your original strategy and impede your ability to reach your goals.
When thinking of investment options, it is easy to confuse products with underlying assets. The product is the outside shell of your investment. The underlying assets are the engine that will determine the speed at which your investment will grow, as well as the risk you will assume within your portfolio.
The product you choose will determine factors like your investment time frame, tax treatment, contribution and withdrawal options of your investments. Some examples of investment products are:
- Retirement products like pension and provident funds, retirement annuities;
- Endowment policies; and
- Unit trusts.
Once you’ve selected the product, you need to determine the suitable asset allocation (engine). In investment terms, interest-bearing investments like bank deposits are the 900cc engines of the industry while the stock market is the 4l turbo. You will reach your destination much quicker in the 4l turbo, but your risk of having an accident along the way is much bigger when you’re going that fast. The analogy can go on and on but enough about engines, let’s get back to investing.
The collective investment industry provides investors with literally thousands of global investment options covering the full risk spectrum. Yes, global. Investing in a well-diversified, global portfolio is no longer a privilege reserved for the super-rich. In fact, offshore exposure is a fundamental component of any investment plan.
Let’s say one of your investment goals is to save for retirement 20 years from now. Your advisor may recommend that you supplement your existing company pension fund savings with a discretionary after-tax investment (product) in a relatively high-risk strategy, around 70% on the stock market (asset allocation).
You can now select an investment product that suits your needs. Remember the product must align with your timing, tax situation, investment amount, estate plan, etc.
The next step is to get the right mix of underlying assets inside that product. One option would be to use a well-priced global unit trust fund in the high equity category. Once you have selected the fund, you only need to evaluate your goal from time-to-time. If you planned correctly and your goal remains unchanged, you can probably stay in this one fund for the full lifetime of your investment. Your fund manager will make sure that you have exposure to the right mix of the various asset classes as market conditions change and that you have exposure to global assets all over the world.
Larger investors may prefer to use a building block strategy. Here you will still choose a combination of products and underlying funds or direct investments to achieve your overall target asset allocation. Your portfolio could look something like this:
A building block strategy will require more ongoing monitoring and probably need some administration from time-to-time, but the overall strategy should always remain in line with your original goal.
This is just two examples of how you can build your personal investment portfolio. Investors are spoiled for choice. As mentioned before, we strongly recommend that you approach a qualified financial advisor to help you filter through all the options and customise a plan suited to your personal needs.