How best to invest house sale funds to get capital growth and income?

It would be advisable to invest in equities as well as local income and balanced funds.

I don’t have a pension but a small investment and I’m waiting for the sale of my home. Where would be the best place to invest these funds to get capital growth and an income?

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Dear reader,

I don’t have a lot of information (your age, investment term and risk profile) so the answer to your question will be more generic in the hope that you will get a satisfying reply.

The current investment environment has made investment advice seemingly more difficult than 12 months ago. The offshore markets have taken a real beating and the local market has been volatile as well. Investors tended to be much more cautious with investing during the first four months of 2022.

Choosing the correct plan takes careful consideration and one must factor in the aim of the investment, do you need an income and what is your investment term?

With your aim of having capital growth and an income, it would be advisable to invest in both equities (local and offshore) as well as local income and balanced funds. The combination will allow you to have less risky assets in your portfolio from which an income can be derived and the balanced and equity funds will assist in growth within the portfolio over both the medium and longer term.

Income funds are funds that may hold interest-bearing assets (cash and money-market instruments and bonds). Over time, if invested only in these types of funds, the investor carries an inflation risk, as returns may not beat inflation during the investment term, especially as inflation is rising locally and internationally.

Balanced funds are portfolios that invest in different asset classes. The cash and bonds components offer a degree of protection, while the equity component could offer capital growth without taking on too much risk in the markets.

Aggressive funds are those that seek above-average returns through capital growth and equity allocation in both local and international markets. Do note that aggressive funds also come with increased risk. You must be able to accept that values may decline for certain periods, as we are experiencing now, thanks to the impact of rising inflation and interest rates and, of course, the Russia/Ukraine conflict. However, history shows that markets will recover. Sometimes the recovery takes longer and at other times markets (and values) bounce back quickly.

A comparison over the last 10 years of a diversified portfolio consisting of these funds would have performed as follows:

Source: Morningstar

Over the long term, offshore markets have outperformed local markets, but with the recent global turmoil, the local market looks more favourable. That is not guaranteed to be the norm going forward.

South Africa faces several challenges that need to be addressed before global investors will start investing again. Issues such as Eskom, Denel, and other state-owned entities (SOEs) need urgent attention. As do strategies to address corruption and mismanagement. Therefore a diversified portfolio in both these markets and a variety of asset classes is advisable.

Chasing last year’s winners is seldom a sound investment strategy as these funds rarely perform the same way over consecutive years. When making investments it is important to always keep your investment horizon in mind.

It is not a good plan to invest in riskier assets/funds when your horizon is only short to medium term.

The opposite is also valid – when you want to invest for long-term growth, you cannot invest in conservative assets/funds.

The prudent thing to do is to consult with a financial advisor who will assist in building an investment strategy according to your needs and risk profile.

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