This Heritage Month, let’s celebrate the diversity of financial products
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By Hester van der Merwe
Each year on September 24, we South Africans celebrate our diverse cultures and traditions, while keeping in mind that we all belong to the beloved rainbow nation. In times not hampered by social distancing and Covid safety measures, many companies celebrated this day by encouraging employees to wear traditional clothes and bring dishes from their cultures to share in a heritage feast. In my mind’s eye, I can see the festive table laden with a colourful menagerie: putu pap with sheba, biriyani, creamy morogo, souskluitjies…
Contemplating all these delicacies, and all our different variations of the same dish – just think of all the lamb curry recipes out there – I realised that all the different financial products, put together on a table, would look much the same.
The best instrument for the job
Eating soup with a fork will cause all kinds of trouble, but this does not make the fork a bad utensil. In the same way, you have to choose the financial instruments in a portfolio carefully, to ensure that you use the right one to fulfil each requirement.
Take a money market account, for example. Even in a low interest rate cycle, such as the one we’re in currently, a money market account remains the instrument of choice for an emergency fund. This is because the job of an emergency fund is to be available at short notice, not to deliver capital growth. A money market account would be a very poor choice for an investment where long-term growth is the objective.
Another instrument sometimes used for an emergency fund is a bank account with a notice period attached. Even though the capital value will not fluctuate and the interest rate may be higher with this kind of account, the main requirement of immediate access is absent, thus making it unsuitable for emergencies.
Eat your greens
We all know that a plate of greens is an essential element of a healthy diet. You can’t bypass the beans and make a beeline for dessert! Likewise, a portfolio cannot be constructed solely from products that give a nice, secure feeling. To achieve your long-term investment objectives, you need to include capital growth instruments. This means investing in equity (by way of unit trusts or directly), even though markets are volatile and you’ll have to stomach fluctuations in the capital value of your portfolio.
During market wobbles, it’s crucial that you don’t make emotional decisions, as this may cause a permanent capital loss in the portfolio. Stick to your long-term financial plan and contact your Certified Financial Planner (CFP) if you feel uncomfortable.
A well-balanced plate
Putting mashed potatoes and putu pap together on one plate is probably a bit much, even though each dish is delightful on its own. In the same way, a financial portfolio should be constructed with care, making sure that it’s balanced and well-diversified. Don’t put all your eggs in one basket, in other words.
It’s important to note that using two different administration platforms does not bring diversification to a portfolio – the instruments and underlying assets will determine that. These are some of the factors to consider: asset class (cash, bonds, equity, property), geography (local and offshore), political (legislation differs from one investment destination to the other), sector- and fund manager diversification.
It seems daunting, but with the assistance of a specialist, a well-diversified portfolio will reduce risk and might even enhance returns in the long term.
That’s not an olive…
Have you ever come across a lovely olive on your plate, only to have your mouth set on fire, eyes and nose streaming? It’s a chilli, not an olive!
The same unpleasant surprise can befall you if you don’t understand all the attributes of your various financial products. Make sure you know exactly what you have in your portfolio: How long is the waiting period for income protection? Will you receive monthly payouts if you become disabled, or just a lump sum? Will your spouse receive 100% of your pension in the event of your death, or a reduced percentage?
Enjoy the feast!
Contact your Certified Financial Planner (CFP) and make sure all the financial products in your portfolio are diversified and aligned with your objectives, and that you understand the attributes of each instrument. If you don’t have an adviser and you’d like to set up an appointment, visit www.fpi.co.za for a list of CFP professionals near you.
Have a happy Heritage Day celebration!
Hester van der Merwe is a Certified Financial Planner at Ultima Financial Planners and the Financial Planner of the Year for 2020/21.