Accepting that consistently high returns are probably in the past is the most important investment tip for 2013, according to Marius Fenwick, Chief Operating Officer for Mazars Financial Services.
“Don’t expect the returns we’ve seen, especially not from the same asset classes. And if you want higher returns, be prepared to take on more risk.”
Fenwick says listed property, which has delivered excellent returns of late, is likely to disappoint over the next few years with lower returns and a possibility of capital loss.
Nor is cash by any means a good investment. Fenwick insists that investors avoid keeping cash in the bank unless they intend to spend it within two years. “Even pre-tax returns on cash are below inflation. Cash should only be a parking ground for money in between transactions.
“Government bonds are also likely to disappoint,” he says, “and with equities we anticipate a lot of volatility going forward, although equities are still the asset class of choice for decent returns over the longer term. For the first time since the late-90s, offshore equities are expected to outperform local equities over the next three to five years.”
Whatinvestors should do
When it comes to investing there is no crystal ball, but for every type of investor, from young professionals to retirees, specific asset allocation guidelines can assist in building and preserving wealth.
The low interest rate and higher inflation period we are heading towards will prove a difficult environment for generating strong, real returns using only conservative low risk assets. Accordingly, Fenwick says investors will have to increase their risk appetite. Even popular guaranteed income products are fatal in long term wealth creation. The guaranteed amount that pays out after five years is eroded by inflation and at seven percent annual inflation the original capital amount’s real value is almost halved after 10 years.
A challenge facing retirees is where they should put their money to preserve it and earn an income.
“Retirees must continue to look at growth assets. When retiring at age 65 one must still plan for an investment horizon of at least 15 – 25 years depending on your health and family history. A typical retired investor should have an equity exposure of around 30 percent to 40 percent, an exposure to listed property of five to 10 percent, and the remainder in specialist income funds which includes exposure to commercial bonds and inflation-linked bonds. Of these investments, around 30 percent should be offshore,” says Fenwick.
Long-term conservative investors should invest around five percent in property, 20 percent to 30 percent in equities and the balance in specialist income funds, while moderate to aggressive investor should put 50 percent or more in equities and the rest in specialist income funds with some 10 percent property exposure.
As a rule of thumb for offshore investing, choose offshore equity, where Fenwick says aggressive investors should have around 40 percent offshore exposure within their portfolios, and conservative investors should have 20 percent to 30 percent.
There is also some embedded value in selected offshore property.
The above applies to lump sum investments. When investing by way of regular contributions, much more risk can be taken on and the above limits to equities and offshore exposure can be increased by at least 50 percent.
Rand cost averaging will ensure that over an extended period, optimum growth will be achieved. The important factor is to stick to the program and continue with the contributions even when markets drop.
Going the distance
The key to investing, however, is really to look forward and be as long a term investor as possible.
“Returns do eventually come through and even though we cannot rely on past performance to get us through investing in 2013, we can take comfort in knowing that a long-term approach will add up favourably in the long run,” Fenwick concludes.