I want to invest R5 000 a month for a minimum of three to five years. Which portfolio would be good for me in terms of return and risk?
Alexi Coutsoudis, a financial adviser at PSG Wealth in Umhlanga Ridge, responds: To answer your question, I will have to assume the following:
You have no high-interest debt or home loans;
You are maximising your contributions to an employer’s pension or provident fund or a private retirement annuity fund, and your retirement planning is on track;
You have an adequate (savings that can cover expenses for three to six months) and accessible emergency fund in place; and
The investment you want to make is for a specific need or goal and is not for the long term (seven years or longer).
When it comes to constructing an investment portfolio, the point of departure is to ascertain what your goal is. The next question is, how much risk you are willing to take to achieve your goal? A higher return inevitably comes with higher risk or volatility.
Three to five years is not considered a long-term investment, and this will affect the percentage of high-risk assets that are appropriate for your portfolio. I will use the time horizon you indicated to define your acceptable risk level.
Over short investment periods (less than three years), your greatest risk is market risk, which occurs when growth assets, such as shares and listed property, decline sharply. Over these periods, fixed-interest investments, such as money market funds, or income funds (which have exposure to money markets, bond markets and other interest-yielding assets) are suitable.
As your investment horizon is longer than three years, market risk reduces, but the risk that inflation will erode the real value of your money increases. For this reason, it is more efficient to add exposure to growth assets in a cautious investment mandate. This generally allows asset managers to have exposure to shares of up to 40% and to invest 25% to 30% of the portfolio in offshore assets. These funds often aim to outperform inflation by three percentage points over rolling three-year periods.
Given that you will be investing monthly, you will further reduce the risk of volatility, because you will benefit from rand-cost averaging, which, put simply, averages the cost at which you invest and smooths out volatile investments. Because of this, you may want to consider increasing your risk budget slightly by using funds with a moderate risk profile. These funds allow managers to invest up to 75% in shares and aim to outperform inflation by five percentage points over rolling five-year periods.
My final recommendation is that you seek advice from an adviser who has the Certified Financial Planner certification, who will take your specific needs and situation into account and provide you with tailored advice.
MANAGING MY SHARE PORTFOLIO
When I was in my 20s and early 30s, I enjoyed learning about the stock market and spent hours researching shares before investing. I no longer have time for this and have been neglecting my investments for a while. My portfolio has grown, and I think I may have to appoint a portfolio manager or adviser. What are my options?
Grant Meintjes, the head of securities at PSG Wealth, responds: Deciding to view your share investments as part of your investment portfolio is an important step. This is not an all-or-nothing decision, and you can incorporate some advice or leave the day-to-day decisions to your adviser. The difference between the two comes down to the extent to which you allow your financial adviser to make decisions on your behalf.
With advised portfolios, your adviser won’t make any changes to your portfolio without checking with you first. He or she will share his or her research with you, but won’t act unless you specifically instruct him or her to. You are kept in the loop on every single decision, which can be a great source of comfort. However, this approach also has disadvantages. If you cannot be contacted immediately, or are not in a frame of mind to consider portfolio adjustments, you may miss out on opportunities.
With discretionary portfolios, you and your adviser agree on an investment strategy and mandate upfront, and your adviser can act on this strategy without checking with you before every trade. This means your adviser can take advantage of short-lived market opportunities, protecting the whole book or single shares in the portfolio. For this approach to succeed, the parties must trust one another. You also need a clear agreement on how often the adviser will report back, and how success will be defined.
For many investors, giving up control seems like a huge leap of faith. But one of the mental shifts investors need to make is to understand that an investment portfolio itself does not necessarily offer an advantage. Rather, the potential benefits lie in the prudent management and efficient allocation of your capital. Clinging to control can undermine this process and hamstring your efforts to create wealth.
If properly executed, a discretionary portfolio will reflect your preferences and intentions. While you may give up control on individual trades, you retain control of the overall portfolio direction and composition.
Given your background in investing, you may enjoy staying “hands on” and opt for the advised approach. But if your time is now better spent elsewhere, a discretionary portfolio may suit you better.
Your adviser will work with you to understand your long- and mid-term objectives, your attitude to risk, your capacity for loss, and how any investments can be optimised or adjusted. Once your discretionary manager has a full picture of your financial circumstances and goals, he or she will be able to create a portfolio that suits your needs.
UPDATING MY INSURANCE
I took out an insurance policy covering my home and its contents when I bought my property four years ago. How often does the policy have to be updated, or can I assume that my insurance cover will still be adequate today, given that my premiums have increased every year?
Bertus Visser, the chief executive of distribution at PSG Insure, responds: Because insurance policies are renewed every year, many people simply forget about them. This can be a costly mistake.
If you have to claim five years down the line, and you haven’t kept track of your policy and cover from year to year, you could be in for a nasty surprise. Research has shown that about 40% of policyholders are under-insured.
It is your responsibility as a policyholder to check whether your policy needs to be adjusted and whether the sum insured is still adequate.
A good insurance adviser will initiate a review process with you annually and discuss the revised terms and conditions imposed by the insurer, or seek alternative quotations if necessary.
Here are three questions to ask when reviewing your insurance:
1. Do you need to include new items in your household contents cover? The replacement value of your household contents is likely to change from year to year, and should be updated in your policy. Some items, such as electronics, may have decreased in value over time, whereas others, such as art or furniture, may have increased. Remember, you need to think about how much it will cost to replace these items today, not what you originally paid for them.
Most people add items to their household from year to year – any new items need to be added to the policy, including any valuable gifts you received.
2. Is your homeowner’s insurance adequate? Your property should be insured for how much it would cost to replace it. This amount is based on current building costs, including professional fees, which increase from year to year. If you’ve done any renovations or made improvements that have increased the value of your home, you need to notify your insurer.
Keep in mind that mortgage bond insurance is not necessarily sufficient, as it simply increases with inflation, whereas building costs increase at a rate that exceeds inflation.
3. Have your circumstances changed? Marriage, divorce, having a baby, or buying a new property can affect how much insurance you need and may mean that you need to adjust your policies. Be sure to keep your insurance adviser informed of any significant changes in your life so that he or she can make recommendations based on your new circumstances.
Resist the temptation to cancel your cover. Consumers are feeling the pinch of a sluggish economy and many are looking for ways to cut costs. As a grudge purchase, insurance is often the first item to be ditched. This is a big gamble that could land you in dire financial straits if anything goes wrong. Speak to your insurance adviser about how you can reduce your premiums without leaving yourself exposed.
Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.