A Fin24 user is looking for the best investment option. He writes:
What are the best investment options I can make?
Marius Fenwick, chief operating officer of Mazars, responds:
Without knowing your personal circumstances, an exact recommendation is not possible.
I will, however, try and guide you by referring to basic investment principles.
Firstly, you must determine what the objective of the investment is and over what period you wish to achieve the objective.
The longer the term of the objective or investment, the more aggressively you can invest.
This means the longer the time horizon, the more exposure you can take to growth assets like shares and listed property.
The shorter your investment term, the less exposure you should take to growth assets.
The term or duration of investments can basically be divided into four categories:
Short-term
Anything less than one year. In this case funds should be kept in cash - preferably a unitised money market.
Medium-term
From one to three years. Here exposure to growth funds should be limited to around 40% and offshore exposure can be included up to around 25%.
Your stable funds or low equity regulation 28 funds are typically what can be used here.
Long-term
Between three and five years. Exposure to growth assets should be increased, but not exceed 75% and offshore exposure could be increased to around 40%.
In this case balanced funds or high equity regulation 28 funds could be used.
It will also be advisable to add an offshore multi-asset managed fund that has pure offshore exposure with around 20% of your funds.
Ultra long-term
Five years plus. Funds allocated to an ultra long-term investment strategy can be invested aggressively.
The longer the term the more aggressively you can invest, even more so if the investment is made by regular monthly contributions.
Here 100% of the portfolio can be invested in growth assets, while offshore exposure can also increase from 40% to 60%, depending on the term of the investment.
Here we will typically consider equity unit trusts, both locally and offshore, in a combination that suits the client’s term of investment and risk profile.
Basic points to remember:
- The main objective of investing must be to beat inflation over time. It is unlikely that after tax cash will beat inflation;
- The higher your expectation of return, the more volatility you will encounter in your portfolio;
- The higher your exposure to growth assets, the more volatility you will encounter;
- Offshore investing adds to volatility as a result of currency fluctuations;
- There is a distinct difference between risk and volatility. Risk is the chance of incurring a permanent capital loss.
Volatility is the amount that your investment will fluctuate and can be upward and downward;
- Most importantly: Do not change your objective once you start investing. If markets correct and the value of your investment moves down (volatility), remain invested and continue to invest.
The biggest contributor to underperformance of investors' portfolios is erratic behaviour by buying and selling units when they believe the market is cheap or expensive.
The best and proven strategy is to remain invested at all times.
- Determine your risk adversity. At what stage will you become uncomfortable when you investment portfolio starts showing negative returns?
This is different for all people and your investment portfolio must match your volatility comfort level. We generally refer to this as your risk profile.
I hope this will assist you with your investment planning.
- Fin24
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