Q: What type of unit trust should I invest in to obtain maximum growth for the next 20 to 25 years? I am 22 years old and would like to have an ‘extra fund’ available that I can use to retire early, buy a investment property, travel or start a business. If I invest a R50 000 once-off lump sum and contribute R500 per month, increasing the monthly contributions by 10% per year, what would the estimated value be if invested for 20 years in a moderate or aggressive fund?
Dez Tswaile - Masthead Financial Planning
Unit trust investments generally have the following four main asset classes available to be invested in, both domestically and offshore:
- Cash/money market
Asset allocation will refer to how an investment is spread across different asset classes (diversification/diversified investment) to achieve certain investment objectives. An ideal well-balanced investment portfolio will be diversified across asset classes, because this will expose the portfolio to growth potential in the market, while offering some downside protection by removing the risk associated with being exposed to only one asset class.
Diversification refers to spreading your investment portfolio across different types of individual assets, sectors, regions, investment styles and asset classes. The aim is to select a collection of investment assets that, when put together, have lower risk than any of the individual assets.
The benefits of diversification
Allocating your investments to a diverse group of assets may increase the overall portfolio return and remain positive, even if a particular asset makes a loss. The end result of the different diversification methods is the same – total portfolio returns become less dependent on the performance of one particular share, sector, region, style or asset class.
The opposite of a diversified portfolio is a concentrated one. An extreme example would be if your portfolio is completely invested in one particular company, regardless of your conviction in the decision. If your view turns out to be correct, your concentrated portfolio will deliver better returns than a diversified one. However, if your view turns out to be incorrect, your portfolio would be severely punished.
With unit trusts, you can own a diversified portfolio in one of two ways:
- You can combine single asset class unit trusts, e.g. a general equity unit trust, a bond unit trust and a property unit trust (multi-fund approach or fund of funds), or
- You can invest in an asset allocation unit trust, which is a unit trust that is allowed to invest in all the asset classes, in line with a predetermined risk profile and investment objective/target. This type of unit trust would typically be managed by one portfolio manager who makes all the investment and asset allocation decisions on behalf of the investor.
Taking into account the values and objectives provided in your question and discounting some missing information – such as present or future values of the income requirement at retirement, the value of property, expenditure requirement for travel and business requirements – one can assume anything between R650 000 (future value or R180 000 in present value) and R1.4 million (future value and R286 300 in present value) accounting for reduction in yield (ceteris paribus).
The difficulty of building a diversified portfolio is deciding how much to allocate to each different asset class. An experienced authorised financial advisor will be able to help you identify some of the missing factors and then build a diversified portfolio that is right for you.
*This illustration cannot be considered to constitute advice and you are here recommended to consult with your preferred investment financial advisor.