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Money: How To Build A Portfolio For A Range Of Different Outcomes

The future is more than likely to be uncertain. It’s important to build portfolios for a variety of possible outcomes, instead of focusing on a single expectation and/or forecast. An umbrella fund investment could be a solution for an employer to safeguard his/her employees’ financial future.

Over the past three years, the fixed interest asset class has been the top performer in South Africa. The All Bond Index (ALBI) and money market assets returned 8.9% and 7.4% respectively, in comparison to the lower returns of the FTSE/JSE All Share Index (ALSI) at 5.1% and inflation at 4.7% over the period.


Using cash as a base

A savvy investment manager should start your investment on a blank slate, meaning 100% cash. He/she will then select investments that based on normal valuations should outperform cash with a margin of safety. The same process can be applied when allocating assets offshore, and this can be very valuable, serving as cover for the uncertainty of the future.

South Africa is a comparatively small emerging market with a current and fiscal account deficit which traditionally have been funded by overseas investors. However, should funding be withdrawn due to loss of faith in the government’s ability to control the deficit, it could affect fixed interest investments. Even though it’s a hypothetical example of a future path, it should be taken into account when building a portfolio and choosing between international or local investments that could otherwise have similar expected returns.  

Weighing up long-term opportunities from a variety of assets

Don’t let market fluctuation sway you from investing in an asset class or share; if it’s not performing well today, it doesn’t mean it will stay that way in the future.

A lot can depend on the investment managers, if they invest in shares contrary to popular opinion and/or current practice, with the intent of outperforming in the long term, they can be more susceptible to periods of under performance.  If investment managers invest in shares they felt were undervalued, and these subsequently fell further in value, should their valuation remain unchanged, the potential gain is higher when prices reach a fair value; this bodes well for future returns.

Diversifying through Africa ex-SA assets

The ability to earn returns from numerous sources, in different situations is more often than not, the key to a diversified portfolio.

Investors may feel that investment in other African countries (Africa ex-SA) may be far riskier than in South Africa. However, it should be noted that there isn’t a reason that a diversified portfolio consisting of African debt, if purchased at the right price, should present a more significant risk of loss than investment in South African debt.

Interestingly, certain Africa ex-SA bonds have been top performers over the last three years, giving strong returns.  If all of this sounds daunting, it’s a good idea to speak to an independent financial advisor (IFA). He/she can discuss your portfolio with you and make appropriate recommendations based on your financial goals.

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