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What low-risk, high-return investment vehicle can boost savings?

Higher returns require taking on more volatility and riding out market cycles.

I’m 25 and in my second last year of studying for my teaching degree. I’ve been investing in fixed deposits at banks since I was 18. With historic rates of 7.5% to 8.9%, I’ve done reasonably well. I’m looking for any opportunities with higher returns on similar or slightly higher levels of risk. I refuse to let capital and returns be eradicated by stock turmoil, fees and underperformance (as no guarantees are given) hence my preference for guaranteed investments such as fixed deposits. I’m seeking ways to grow my funds with high rates and low-risk. I might be searching for unicorns but dreams are important.

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“In investing, what is comfortable is rarely profitable” – Robert Arnott.

In a world of unicorns, bulls and bears, finding the right solution and not missing out on opportunities can be daunting and a bit overwhelming. There are many different products, asset classes and fund managers. Local or offshore, conservative or higher risk? These are difficult decisions to make. My advice is to start a financial portfolio with the guidance of a wealth advisor helping to determine your goals and risk appetite.

What we consider as ‘risk’ is, however, the number one mindset change we need to make. Are we afraid of ’risk’ or are we afraid of volatility? These are two very different concepts.

Understanding how asset classes perform, and the different risks all of them hold, will make it easier to navigate markets and investing.

Each asset class plays a different role in your portfolio and holds different risks, as well as different potential returns. In the long term, higher returns will require taking on more volatility and riding out market cycles.

As in the lyrics of the song ‘Something just like this’ by The Chainsmokers and Coldplay, you will need to decide “Where’d you wanna go? How much you wanna risk?”

The table below displays the calendar-year returns of indices representing the different asset classes over the past ten years to July 2019.

Portfolio & asset classes Jan- July 2019 2018 ’17 ’16 ’15 ’14 ’13 ’12 ’11 ’10 ’09 ’08
SWIX equity index 6.6 ‘-11.8 21.2 4.1 3.6 15.4 20.7 29.1 4.3 20.9 29 ‘-21.7
MSCI World equity index 17.7 2.1 11.7 ‘-6 31.1 16.3 51.5 22.3 11.5 1.2 4.1 4.8
Local property (Sapy) 4.8 ‘-25.3 17.2 10.2 8 26.6 8.4 35.9 8.9 29.6 14.1 4.9
Local bonds (Albi) 6.8 7.7 10.2 15.5 ‘-3.9 10.1 0.6 16 8.8 15 ‘-1.0 17
Global bonds 3.3 15.1 ‘-2.9 ‘-10.4 28.9 10.1 18.2 8 29.8 ‘-6.4 ‘-17.0 ‘-1.0
Local cash (Stefi) 4.3 7.3 7.5 7.4 6.5 5.9 5.2 5.6 5.7 6.9 9.1 11.7

Source: Momentum

This shows that asset classes are all volatile in their own way and timing them is often impossible. How volatile they can be is, however, different. The graph below shows the returns of a few different portfolios over the past few years.

It compares the following allocations:

  • An enhanced interest portfolio: a multi-manager cash-type portfolio (with the bulk of the portfolio accounted for by 77% local cash, 22.5% local bonds).
  • A Regulation 28 portfolio: this is aligned to the typical, regulated allocation required for an investment in a pension/provident fund or retirement annuity (the bulk of the portfolio is accounted for by a local equity allocation of 44%, foreign equity 27% and local cash 20%).
  • A portfolio targeted at meeting post-retirement income or stable growth needs (local cash 14%, local bonds 16.5%, local equity 28.3% and foreign equity 34.5% with small holdings to the remaining asset classes).
  • A global equity fund (94.6% foreign equity, and small holdings to other asset classes).
  • A combination 50/50 exposure to a local and global equity fund (resultant asset allocation 40% local equity, 54.7% foreign equity, and small holdings to other asset classes).
  • Lastly a flexible global feeder fund (with the bulk of the portfolio accounted for by a 42.7% weighting to foreign cash, 25.6% to foreign bonds, 28.7% to foreign equity).  

Annualised returns

Source: Morningstar Direct, PSG Wealth

If you were invested in cash in 2019, you would have received an average return on your investment of 7% to 8%, as mentioned in your question. For the same period, if you were invested offshore, the story might have looked quite different. The one-year return for the S&P500 (according to Bloomberg at the time of writing) is 27.94, and the Dow Jones 27.19%. The one-year return for the JSE is 15.967%. Referring back to my first diagram – this can change very quickly. In 2008, the local market dropped 21.7%, the recovery also happened that quickly again in 2009.

Investing in growth assets (equity exposure) will deliver a higher return over the longer term, but this will also be more volatile. There will always be market and economic cycles – riding the wave and not making any emotional decisions is the important part. When investing in equities you’re buying components of a company. If this is a fundamentally good company, your ownership will always have value; the unit price will just vary as markets move up and down. It is only when you sell these units at a low price that you are ‘losing money’.

Paul Samuelson said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Having a long-term mindset when it comes to investing is imperative – without this mindset you will always be disappointed or get tied up in the emotional roller-coaster of market cycles.

Different asset classes hold different risks

Asset class Risk/return drivers Role in portfolio
Listed property (For example Real estate investment trusts REITS) ·  Risks and rewards of ownership  ·  Diversification
·  Interest rates ·  Generation of return
·  Rents ·  Protection against inflation
·  Capital gain/loss on sale of direct holdings  
Local shares ·  Risks and rewards of ownership ·  Diversification
·  Exchange rates ·  Protection against inflation
·  Political uncertainty ·  Generation of return (Growth assets)
·  Local economic uncertainty  
Foreign shares ·  Risks and rewards of ownership ·  Diversification
·  Profits of foreign companies  ·  Generation of return
·  Exchange rates ·  Protection against inflation (Growth assets)
·  Foreign investment risk ·  Foreign currency exposure
Bonds • Rights of a creditor • Diversification
• Interest rates • Income generation
• Creditworthiness of issuer • Protection of capital
• Duration  
• Reinvestment risk  
• Inflation  
Cash • Rights of a creditor • Diversification
• Interest rates • Income generation
• Inflation • Protection of capital
  • Cushion for unexpected expenses
  • Reserve to take advantage of unexpected opportunities

Source: Adapted from here.

I believe in first determining your goals and deciding on an appropriate strategy from there. The strategy will probably also be different for the different products in your portfolio:

  • Why are you investing? Is the focus on retirement or is this a shorter-term goal?
  • How close are you to retirement?
  • Do you have an emergency fund – or are you depending on these funds in a crisis situation?
  • What is your risk appetite? Defining what you see as risk here is important. It is important to understand that investing only in cash is a risk by itself – inflation and interest rates can have an impact on your investment.
  • What term do you have to work with? For investors closer to retirement, it is important to remember that your investment term does not end at age 65. This is only the start of a new investment term for probably another 30 years.

Building a successful portfolio will require you to ensure you have comprehensive planning in place for every aspect of your life: risk planning (life cover, income protection, medical aid), fiduciary planning, as well as structuring your investment portfolio. This will not only focus on retirement but on shorter-term financial goals as well.

As our lives change with time so do our portfolios; it’s important to make these changes in different phases of life. This will also look different for every person as financial circumstances and goals differ, and risk appetite will not always be similar for everyone.

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