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A 78-year-old Fin24 user will soon have R3m to invest. He writes:
Within about a month's time I will get R3m. I am 78 years old, married and live in a retirement village. We need R15 000 per month and would like to invest so that, taking inflation into account, we will have growth.
We are thinking of share and/or a property trust - in other words a balanced portfolio. Information will be much appreciated.
Marius Fenwick, chief operating officer of Mazars Financial Services, answers:
There are a few issues to consider before providing a meaningful answer.
Firstly, no mention is made of the source of the funds.
If the funding is from compulsory funds - a pension fund or retirement annuity (RA) - then the taxability of the income will be treated differently to when the funds are voluntary - discretionary savings or a sale of an asset, for instance.
Naturally, a higher income will then have to be drawn to achieve the R15 000 after tax requirement.
Secondly, you would like growth, while being able to draw R15 000 per month (taking inflation into account too). Is the expectation to increase the monthly income to keep up with inflation as well as grow the capital, or can capital reduce over time while income keeps track of inflation?
For the sake of providing an answer, I am going to assume that the funds are voluntary and that no tax will be deducted from the income.
I am also going to assume that R15 000 per month, escalating at the rate of inflation as well as achieving capital growth therefore preserving the capital, is required.
To achieve this, an investment return of at least 12% per annum must be achieved consistently over the lifespan of the investment (if future inflation is accepted as 6% per annum).
Should the investment return drop to 10%, then the capital will start to reduce after 17 years.
Obviously, if a higher income is drawn or inflation increases or there are negative returns in any given year, then the reduction in capital will start sooner.
Your basic idea of investing in a balanced portfolio is the correct one and will provide the best probability of achieving your set objective. But you also mention specific assets, namely shares and a property trust.
Caution must be taken if this is the only consideration. It is generally accepted that the stock market has run hard since the collapse in 2008 and that shares are fully priced at the moment.
There is a huge disconnect between the different sectors within the share market at the moment. For instance, so far this year the resource sector is down 17% , while the industrial sector is up 9%.
This equates to a difference in performance of some 26% between the different sectors - and we are only half way through the year.
Stocks need to be selected very carefully and exposure must be limited, based on the risk adversity of each client (how much volatility he can stomach).
It will also make sense to invest a fair portion of the share component of the portfolio into offshore equities that are currently better priced than local shares.
The SA geopolitical situation is of concern and we have noticed how offshore investors have started withdrawing from our market as a result of this.
A further withdrawal from our economy by these investors will lead to downward pressure on our stock market as well as the rand.
Most importantly, it is highly unlikely that the returns of the last four years are going to be repeated during the next three years and losses are a real possibility.
Listed property provides a solid yield through rental income and the forward yield of property is around 7%, depending at which funds or stocks you look.
Property, however, is also a growth stock similar to equities and withdrawals, as mentioned above, will have the same impact on the capital value of property.
This is further complicated by the fact that the capital value of property follows a very similar pattern to that of long dated government bonds. This entails that when interest rates increase, the capital value of property will decrease.
We have already noticed severe pull back in the value of property stocks over the past couple of months, partly because of profit taking as a result of the extraordinary returns achieved since 2008 and partly because the market expects the values to drop when interest rates increase.
Property will provide the income required, but capital losses for an extended period is a strong possibility depending when and by how much interest rates are going to increase. Each increase may very well lead to an additional capital loss.
It will be prudent to invest in a managed type fund, but with exposure to other asset classes like cash and bonds included in the portfolio as well.
Offshore exposure also makes a lot of sense for various reasons: diversification among various economies, exposure to additional sectors, access to better priced assets, and rand hedging.
The amount of exposure will purely depend on your risk profile. A broad base guideline will be somewhere between 30% and 60% equities, less than 10% property with the balance in bonds (predominantly inflation linkers and corporate bonds), cash and around 20% to 30% offshore exposure in the various asset classes.
Do bear in mind that your portfolio can and should be changed as economic and market conditions change.
It will be prudent to exercise caution where the market and world economy is today, and rather opt for a more conservative portfolio that can be spiced up in the next couple of years when the world has recovered somewhat.
Bear in mind that selling units to provide income in a down market escalates the problem. For example, if the market (or investment) loses 20% - which is very possible in any given year - and income is drawn at 6%, then a return of 35% must be achieved just to break even again.
Caution must be exercised when income is drawn against any investment.
- 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.
Within about a month's time I will get R3m. I am 78 years old, married and live in a retirement village. We need R15 000 per month and would like to invest so that, taking inflation into account, we will have growth.
We are thinking of share and/or a property trust - in other words a balanced portfolio. Information will be much appreciated.
Marius Fenwick, chief operating officer of Mazars Financial Services, answers:
There are a few issues to consider before providing a meaningful answer.
Firstly, no mention is made of the source of the funds.
If the funding is from compulsory funds - a pension fund or retirement annuity (RA) - then the taxability of the income will be treated differently to when the funds are voluntary - discretionary savings or a sale of an asset, for instance.
Naturally, a higher income will then have to be drawn to achieve the R15 000 after tax requirement.
Secondly, you would like growth, while being able to draw R15 000 per month (taking inflation into account too). Is the expectation to increase the monthly income to keep up with inflation as well as grow the capital, or can capital reduce over time while income keeps track of inflation?
For the sake of providing an answer, I am going to assume that the funds are voluntary and that no tax will be deducted from the income.
I am also going to assume that R15 000 per month, escalating at the rate of inflation as well as achieving capital growth therefore preserving the capital, is required.
To achieve this, an investment return of at least 12% per annum must be achieved consistently over the lifespan of the investment (if future inflation is accepted as 6% per annum).
Should the investment return drop to 10%, then the capital will start to reduce after 17 years.
Obviously, if a higher income is drawn or inflation increases or there are negative returns in any given year, then the reduction in capital will start sooner.
Your basic idea of investing in a balanced portfolio is the correct one and will provide the best probability of achieving your set objective. But you also mention specific assets, namely shares and a property trust.
Caution must be taken if this is the only consideration. It is generally accepted that the stock market has run hard since the collapse in 2008 and that shares are fully priced at the moment.
There is a huge disconnect between the different sectors within the share market at the moment. For instance, so far this year the resource sector is down 17% , while the industrial sector is up 9%.
This equates to a difference in performance of some 26% between the different sectors - and we are only half way through the year.
Stocks need to be selected very carefully and exposure must be limited, based on the risk adversity of each client (how much volatility he can stomach).
It will also make sense to invest a fair portion of the share component of the portfolio into offshore equities that are currently better priced than local shares.
The SA geopolitical situation is of concern and we have noticed how offshore investors have started withdrawing from our market as a result of this.
A further withdrawal from our economy by these investors will lead to downward pressure on our stock market as well as the rand.
Most importantly, it is highly unlikely that the returns of the last four years are going to be repeated during the next three years and losses are a real possibility.
Listed property provides a solid yield through rental income and the forward yield of property is around 7%, depending at which funds or stocks you look.
Property, however, is also a growth stock similar to equities and withdrawals, as mentioned above, will have the same impact on the capital value of property.
This is further complicated by the fact that the capital value of property follows a very similar pattern to that of long dated government bonds. This entails that when interest rates increase, the capital value of property will decrease.
We have already noticed severe pull back in the value of property stocks over the past couple of months, partly because of profit taking as a result of the extraordinary returns achieved since 2008 and partly because the market expects the values to drop when interest rates increase.
Property will provide the income required, but capital losses for an extended period is a strong possibility depending when and by how much interest rates are going to increase. Each increase may very well lead to an additional capital loss.
It will be prudent to invest in a managed type fund, but with exposure to other asset classes like cash and bonds included in the portfolio as well.
Offshore exposure also makes a lot of sense for various reasons: diversification among various economies, exposure to additional sectors, access to better priced assets, and rand hedging.
The amount of exposure will purely depend on your risk profile. A broad base guideline will be somewhere between 30% and 60% equities, less than 10% property with the balance in bonds (predominantly inflation linkers and corporate bonds), cash and around 20% to 30% offshore exposure in the various asset classes.
Do bear in mind that your portfolio can and should be changed as economic and market conditions change.
It will be prudent to exercise caution where the market and world economy is today, and rather opt for a more conservative portfolio that can be spiced up in the next couple of years when the world has recovered somewhat.
Bear in mind that selling units to provide income in a down market escalates the problem. For example, if the market (or investment) loses 20% - which is very possible in any given year - and income is drawn at 6%, then a return of 35% must be achieved just to break even again.
Caution must be exercised when income is drawn against any investment.
- 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.
