Needed: R20k per month from R2.5m investment

A Fin24 user has just sold his property and wants to know where or how to invest the proceeds. He writes:

I’ve just sold my property for R2 500 000.00. I need R20 000.00 per month for expenses.

Should I invest my proceeds in an 11% guaranteed return, or should I invest the whole amount in a unit trust (Coronation Industrial)?

I have enough to cover my expenses for the next two years.

Matthew Chapman of NFB Financial Services Group responds:

As always with specific queries like this, it is important to understand your full financial position. Other important information such as current income and expenses, investment portfolio composition and asset allocation, assets and liabilities and investment goals will allow for a more bespoke and appropriate recommendation.

For the purpose of answering this question I will note the following:

• I’m going to assume that you do not need this money for a new property.

• A drawing of R240 000 annually (R20 000 monthly) represents a rate of 9.6%, which can be considered unsustainable in the long term. We would usually recommend that clients draw no more than 4% to 6% from their portfolios, to preserve the real value of the investment.
  
  Assuming a return of 11% and income increasing annually in line with inflation of 6%, your money would run out in about 18 years from year two when you start to draw an income.

• We would caution against a guaranteed double-digit return. These types of products, if legitimate, are often accompanied by lock-up provisions and other liquidity issues.
  
  If cash offers a pre-tax return of around 5.6% at present, it would be difficult to guarantee returns close on double that. It would also be wise to also investigate the taxability of this return.

• The fund you make mention of – the Coronation Industrial Fund – has performed fantastically over the past couple of years but it must be noted that this is:
  

  1. a pure equity fund and
     
  2. a sector specific fund.
     
  
  This presents a number of issues:

  • As you are looking to draw income from the portfolio, we would not recommend that you invest in a pure equity fund. This is because you cannot  afford any major short-term volatility while relying on the portfolio for income – imagine the fund falls 15% and you draw 9.6%, you would have effectively lost a quarter of the value of the portfolio before the effects of inflation.

  • Sector specific funds, as the name suggests, can only invest in stocks within the certain sector, in this case industrials. While we have seen the likes of Naspers [JSE:NPN]; Richemont [JSE:CFR]; and SABMiller [JSE:SAB] providing outstanding returns of late, there is no guarantee that this sector will continue to outperform for the long term. It’s a common error to look at the best performing fund of yesteryear and expect it to achieve the same excellent returns year on year – this sadly is not the case, partly due to an effect called mean reversion. In terms of equity investing, it would be in your interests to invest in a fund that not only actively allocates between specific stocks, but sectors as well.

All in all, if you are relying on the investment to provide you an income we would urge that you reduce both your risk preference as well as income need. Investing in a blend of cautious and balanced mandated unit trusts with a drawing rate of 5% (R10 417 per month) would give you a better chance of preserving the real value of your capital while still allowing for growth - thus allowing for greater longevity of income.

As this cannot be construed as formal financial advice, it would be in your interests to contact an independent financial adviser who will be able to provide professional guidance as regards your entire financial plan and risk profile.

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