Without fully understanding and considering your total financial position we are unable to give you any specific financial advice. I will however give you an idea of how we would approach an investment of this nature and would encourage you to chat to your financial advisor to ensure that any decision you take is consistent with your overall financial plan.
When confronted with a decision to invest a lump sum, we believe it is important to formulate an overall economic view that will inform the strategic asset allocation decisions up front and then this view should be revisited as often as is necessary, to provide direction to any tactical adjustments that may be required.
For the foreseeable future, we expect that equity markets will offer at best, high single-digit /low double-digit returns.
We cannot rule out the possibility of a financial shock impacting both global and South African markets at some point over the next few years and, as such, we believe that the relative certainty of achieving inflation-beating returns in money market and fixed income investments is extremely attractive in the current environment.
With this in mind, we believe that it is prudent to be more conservative upfront and tactically adjust exposure should the investment landscape change dramatically.
Our medium-term view on the rand is more bullish than most others.
We believe that political uncertainty and negative emerging market sentiment has hurt the rand and at current levels it is most probably slightly oversold. Taking these factors into account, it is possible that the rand might weaken further in the short term, but perversely could strengthen over the medium term (one to three years) in the absence of further political shocks.
Using the above as a backdrop, we would recommend a two-tier approach to your investment decision. This approach is designed to position the lump sum in a relatively low volatility investment, where you will have easy access to your funds should you require them, with the debit order being positioned in a more growth-orientated manner.
You currently have a lump sum of R150 000 available to invest and we would suggest investing this amount into a collection of money market and fixed-income unit trusts. The main objective of this investment is to protect your capital and achieve inflation-beating returns in an uncertain environment.
We would select unit trusts with relatively short duration (duration measures the sensitivity of a bond’s price to the move in interest rates), limited equity exposure and limited offshore exposure as the rand’s movements could introduce unwanted volatility into the portfolio. The conservative nature and daily liquidity of these types of unit trusts allows you to switch these funds easily, achieve inflation-beating returns and protect your capital.
The second part of your question pertains to your R4 000 monthly contribution. By contributing to an investment periodically, you can take advantage of a phenomenon known as ‘rand-cost-averaging’. Rand-cost-averaging means investing a fixed rand amount (R4 000) on a regular basis, regardless of the share price. Should prices be trending downwards, your monthly contribution will purchase progressively more units with each subsequent month; the opposite being true if prices are increasing.
This allows you to gradually enter the market and build a meaningful position over time, without having to choose a specific entry point.
We would suggest buying into two or three stable or balanced funds (technically classified as either South African multi-asset low-equity funds or South African multi-asset medium-equity funds) using this monthly contribution.
Stable and balanced funds are slightly more aggressive than the fixed interest unit trusts mentioned above and, as such, will have both equity and offshore exposure.
However the equity and offshore exposure is capped in these investments and both mandates would still have a decent exposure to money market and fixed income, which reflects our more conservative approach in the current environment. The nature of these investments means that they are more geared towards long-term capital growth and as such will complement the relative certainty of the lump sum investment.
Peter Nurcombe-Thorne is a director of the Rosebank Wealth Group.
If you have a question that you’d like to submit to one of the advisors listed on Moneyweb’s Click-an-Advisor section, please contact firstname.lastname@example.org