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Johannesburg - As financial problems go, not knowing what to do with a bundle of money isn't the most heartbreaking of predicaments.
Still - deciding where to invest a lump sum amount - from a property sale, inheritance or lottery win, for example - can be agonising, particularly if you need the money to work really hard.
Even for small amounts, it is crucial that you devise a clear strategy for the funds, and not leave it where you can get your (with respect) grubby paws on it. Many a cash windfall has been whittled away by day-to-day spending.
If you are not investing for a specific goal (like buying a house) and the money should help fund your retirement, it is best to speak to an accredited financial adviser to make sure your investment will suit your risk profile and is diversified enough.
Crucially, you also need to consider what tax benefits you can get if you are putting away money for your old age.
An investment of 15% of the non-pensionable salary, for example, can be made to a retirement annuity for tax purposes, says Diaan Janse van Rensburg, portfolio manager of Verso Multi Manager.
Apart from retirement savings, the other consideration is when you want to use the money.
Short term (one to two years)
You can't afford to take any risks. The share market might beat other asset classes in the long run, but it is as fickle as your weird Aunt Bessie in the short term. If the market takes a dip, your cash will shrink.
Consider money market or income funds. Money market funds are mostly invested in short-term government bonds (bonds are basically IOUs - the borrower agree to repay an amount plus interest).
Money market funds, available from unit trust companies, have yielded between 7% and 8% over the past year. Income funds are invested in longer-term debt instruments and returns ranged from 2% to 8.5%.
For large amounts of more than R1m, consider a reputable dividend income fund or preference shares. This will eliminate income tax on interest received, says Gerrit Viljoen, a certified financial planner of Ultima Financial Planners.
Preference shares are usually issued by big banks, and pay a fixed dividend - usually a percentage of the prime rate - every six months. They are traded on the JSE. (Dividend income funds will also invest in preference shares.)
Medium term (two to five years)
Viljoen says that with a time frame of three years, he would invest up to 30% in shares while the balance could go towards cash (money market), bonds and property.
"If the allocation to cash is higher than the investor is comfortable with in terms of income tax on interest, a protected equity strategy where the use of downside protection is done through a put option could be considered instead of the cash portion."
A put option is a contract that gives the owner the right to sell a specified amount of shares at a specific price at a specific date in the future. Basically, you are hedging yourself against a drop in the value of your share investments.
"The risk (volatility) of this portfolio could produce a return of +27% to -6% in any one year and a 9% chance of a negative return in any one year. Over any three-year period the risk of a negative return is negligible," says Viljoen.
If the investor has a longer time frame, more equities should be included in the portfolio.
Long-term (more than five years)
With a time horizon of more than five years, the investor can target a return of inflation plus 5%, says Viljoen.
Such a portfolio would consist of 65% shares, 10% property, 15% cash (money market) and 10% bonds. The volatility of this portfolio would be +40% to -18% over any one-year period and the risk of a negative return over any one year would be 23%. Again, over longer than five-year time periods the risk of a negative return would drop exponentially, he adds.
For those who want to stay invested for longer than seven years, Viljoen would recommend investing directly in shares or in one of the top unit trusts such as Allan Gray Equity, Coronation Top 20 or Prudential Equity.
"The volatility would be much higher, but then the investor should be aware of it as the portfolio will at all times be fully invested in equities."
Some ideas on what to do with different amounts:
R10 000
Craig Gradidge of Gradidge-Mahura Investments :
This is a small amount that restricts the ability of the investor to get a meaningful exposure to a number of different funds.
The strategy for someone older than 35, who has paid off debts and has a five- to ten-year timeframe, would be to invest in a balanced fund with a reputable fund manager which has a long performance track record. We would favour a fund with some offshore and property exposure.
We would look for such a fund in the Domestic Asset Allocation - Prudential Variable Equity unit trust category. These funds allow the fund manager to reduce exposure significantly, should the market become bearish during the investment period.
Paul Theron of Vestact:
We would advise the client to open a low-cost brokerage account and to take a long-term view.
With R10 000, we normally buy clients one share - either MTN or BHP Billiton.
Adrian Goslett, CEO of RE/MAX Southern Africa:
I would put it towards a savings plan for a holiday, car or property renovations.
R100 000
Craig Gradidge of Gradidge-Mahura Investments :
For this investor we would have a core exposure to a balanced fund as above, but add an exposure to a general equity fund (for potentially higher returns over time), a listed property fund (for inflation protection, and risk management from low correlation to equities), and an offshore fund (for diversification and a hedge against currency weakness).
The larger investment amount allows us some scope to increase exposure to areas we believe are undervalued, while the core balanced portfolio ensures that there is active management being undertaken by an experienced team or individual during the investment period.
Paul Theron of Vestact:
With R100 000 or more we advise clients to buy our 10 favourite stocks for a long-term portfolio: MTN, BHP Billiton, Sasol, Impala Platinum, PPC, Aspen, Richemont, Massmart, African Bank and City Lodge.
Adrian Goslett, CEO of RE/MAX Southern Africa:
I would try to reduce any outstanding debt, for example your home loan.
R1m
Craig Gradidge of Gradidge-Mahura Investments :
Larger investment amounts introduce another important variable into the mix - tax.
An inappropriately structured portfolio could add significantly to an investor's tax liability, reducing returns significantly once tax has been deducted. For this investor we would have a slightly different approach to the above investors. The larger amounts allow us to tailor a portfolio to the specific situation of the investor.
We would have 30% in a balanced fund as the core holding, 20% in a share portfolio with a bias towards high-yielding shares (for tax efficiency and higher expected returns), 10% in a private equity fund (for risk management from the low correlation to equities, tax efficiency, and higher expected returns), 10% in listed property (for inflation protection and risk management from low correlation to equities), and 20% offshore (for diversification, a hedge against currency weakness, and tax efficiency).
Note that the offshore exposure for R1m and R10m would be direct exposure using the investor's offshore allowance, hence the tax efficiency element.
(The offshore exposure for the R100 000 investor would be via an asset swap fund, hence the absence of the tax efficient element. The reason for this is affordability, as most direct offshore options have high minimums in rand terms.)
Finally, we would keep 10% invested in cash to take advantages of opportunities that may arise during the term of the investment.
Adrian Goslett, CEO of RE/MAX Southern Africa:
I would settle my home loan, speak to a financial adviser and spread the balance over a multi-tiered risk investment portfolio.
R10m
Craig Gradidge of Gradidge-Mahura Investments :
The portfolio will be structured similarly to the R1m portfolio, except that the cash exposure would be reduced to 5% while the private equity exposure would increase to 15%.
This is to ensure that the interest generated by the investment is not too much higher than the tax exemptions allowed by the South African Revenue Service (Sars).
Such an investor would certainly have to worry about after-tax returns, but the principles guiding asset allocation and investment strategy are very similar to those for investors with the smaller amounts. Diversification remains an important risk management tool, and tax efficiency is critical. (It is important to note, though, that we structure portfolios to maximise after-tax returns rather than to minimise tax liability.)
Adrian Goslett, CEO of RE/MAX Southern Africa:
I would settle my home loan. I would look to invest in one commercial and one residential property to create an annuity as well as capital growth.
I would then speak to a financial adviser to spread a large proportion of the balance over a multi-tiered risk investment portfolio - and use some of it to take my extended family on holiday.
- Fin24.com
