I’m a little over my mid-30s and will have around R1 million in cash sitting in my account shortly (from another investment I’ve wound up). I’m a fan of ETFs [exchange-traded funds] and my main investment is an S&P 500 fund which I’m quite happy with.
My question has two parts. Firstly, how would you spread this capital to ensure decent dollar-cost-averaging? What amounts and over what period?
And secondly, what would you do with the funds in the short term as leaving this cash in my bank account at a 2 or 3% interest rate seems like a bad option?
I will start off by answering what the short-term advice would be. Currently, cash is not doing much for us, with current yields sitting at just over 4%, and inflation at a high of 4.9%. We are losing money by being invested in cash.
We assume that you would like to access these funds in the short term and therefore you will need to be invested in an investment vehicle that allows you to access these funds easily without any restrictions. As you would like an underlying investment option that offers greater returns than cash, we would suggest that you invest in multi-asset income funds. These types of funds invest in a combination of equity, bond, money market, property or derivative instruments with the primary objective of maximising income. The expected potential returns of these funds currently range between 7% to 8% or more.
By investing in a multi-asset income fund you can enjoy potentially higher returns at slightly more risk than cash.
Then with regards to your question about decent dollar-cost averaging. To ensure decent dollar-cost-averaging, a ‘phase-in’ can be done on any investment or a monthly contribution can be implemented.
Using a phase-in approach mitigates the problems associated with trying to ‘time’ the market and currencies, especially in these uncertain times. The general consensus is that it is difficult to time the market, and the focus should rather be on time ‘in’ the market. Should you prefer a phased-in approach – a monthly contribution can perhaps be done over a 12-month period. This way the move in currency can be monitored together with market fluctuations over a longer period of time.
You do mention that you are in your 30s – which means you still have a lifetime ahead of you before retiring. This also leaves you with plenty of time to optimise your time spent in the market. I will overall advise ensuring that you have a well-diversified portfolio – not only in terms of asset allocation (your current offshore exposure is great), but also, by determining your goals and objectives, incorporating the most suitable investment vehicles into your financial plan. Ensuring your portfolio is structured in a way where you are also taking into account your annual tax benefits, and optimising them, but also steering clear of tax pitfalls in your existing portfolio in the long run.
I would advise speaking to an advisor to assist you with the optimal structuring from day one – as some decisions can be quite difficult to change later on.