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Needing money to grow without much risk

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A Fin24 user is wondering about whether to take a bigger risk with his investments, but then also standing a chance of having his savings grow faster. He writes:

I initially invested R5.2m with Stanlib in November 2007 and promptly lost almost R1m in the 2008 crash.

I left the money with Stanlib and continued to lose and eventually sold my home for almost R3m and scaled down.

I have now invested R4.2m in government retail bonds for five years and am getting 8% and 7.5% (my money was invested on two occasions).

My home is worth R2m and is paid.

What concerns me is inflation. I know my capital is safe, but there is no growth.

I have just read the ETF advice you gave the man of 58, who has R9m and I wondered how applicable that was to me.

I am 71, fit, healthy and intelligent, but unwanted in the workforce, so I can't augment my income and I realise that I need growth.

Is it achievable? Obviously, I am nervous to risk capital, but I can withdraw from the retail bonds if I want to.

Mike Brown, managing director of etfSA, responds:

At an age of over 70 capital protection is an important component of an investment strategy.

However, with many people living well into their 80s or 90s, not focusing on growing capital past the age of 70 can also lead to problems of not having sufficient capital to finance your old age.

In your case you have R4.2m in retail bonds, and will receive an income of some R300 000 per year, but no capital growth whatsoever.

On maturity of the retail bonds, over the next five years, you will receive back the amount invested, namely R4.2m.

You will receive the interest payments for the next five years, but this interest rate is fixed and you will not benefit if interest rates rise over this period.

One option to consider might be to split the R4.2m, with say R2m withdrawn from the retail bonds, to look for capital growth in other types of assets.  

As you would have 50% of your capital still in interest bearing assets, you would be able to structure a capital growth portfolio, without allocating funds to bonds or cash.

In such circumstances your asset allocation strategy could look as follows: (Remember, over periods of three to five years or longer, 90% of investment returns typically come from having the correct asset allocation mix.)



The table below shows a portfolio comprising ETFs that give passive index tracking exposure to the above asset allocation.

The benefits of using ETFs are low costs, pure exposure to the total return of the asset classes, low risk and low volatility.  

Seven ETFs are used to provide an index tracker portfolio that gives access to a total 782 individual shares across different market sectors, countries and asset classes.

The portfolio, therefore, has substantial diversification, which reduces risk and enhances performance potential over time.
 
The table shows that over the past five years to May 28 2014, this R2m investment would have grown to R5.25m, an appreciation of 163%, or by some 32% per annum.

Please note, this performance might have been distorted by the investment start-up period (2009) being at the bottom of the market.

However, if you had purchased the portfolio in early 2008 (before the general equity market crash), the total return performance to date would still have been some 21% per annum.

Also, it must be noted that historic investment performance might not be replicated in future.

However, there is still significant incentive for you to invest part of your capital in growth investments, which could very likely increase your capital over the next five years or more, to enable a higher capital sum for retirement.

In order to keep costs as low as possible, which is a critical factor as well. An investment platform like etfSA Investor Plan is one such an example.


- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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