| Home | Numbers | I Like |

Monday 20 November 2017

What To Invest In?

Doodling won't help.
It seems that similar thoughts cross the minds of this blogs readers at similar times. Must be something in the personal finance water.

The latest trend seems to be people asking which products I am allocating my investments to.

So in the interests of saving myself typing the same email response over and over again, I thought I would put it down into a blog post, and that would hopefully satisfy everyone’s curiosity.

Now of course, and as always, the below is not financial or investment advice, and you should decide on your goals, do a proper risk assessment, make up your own mind, and all that jazz. It is also definitely not a recommendation to buy any of the products I mention - I most certainly do not know the ingredients of the secret sauce (only Nandos knows that!)

Okay, let me start at the very beginning (some say it's a very good place to start.)

My Approach

Long before I decide on what products I want to invest in, I take a big step back. I first ask myself two questions:
    1. How much local exposure, and how much offshore exposure do I want?
    2. Which asset classes are best suited to me and my goals?
Only after I am comfortable with the above two answers, do I ask the question:
    3. Which products should I be investing in?

Local Or Offshore?

The first asset allocation decision I make is how much exposure do I want locally and offshore.

Broadly, there are two schools of thoughts with regards to this:
  1. South Africa is such a small part of the world's investable markets that you should rather just invest everything globally. South Africa currently makes up 0.78% of the FTSE All World Index, so why allocate more than 0.78% to locally? There a quite a few proponents of this strategy for example Patrick over at Investor Challenge (check this blog post for his thinking). I can certainly see the merit to the argument.
  2. We earn in Rands, we spend in Rands so we should be investing in Rands. Do everything local. Simon and Kristia over at Just One Lap like this approach, especially in light of the fact that a lot of the companies on the JSE earn revenues outside of South Africa. Again I see the merit in this argument.
So which way to go? For me personally, sometimes with decisions like this I find it is best to cheat, and so I go right down the middle.

My geographical allocation:
  • 50% Offshore
  • 50% Local

Geographical split
Of course the geographical split of your investments is a very personal decision which everyone will need to make for themselves.

There is nothing wrong with going 100% local, or 100% offshore – as long as your decision makes sense to you and you know your reasoning.

I think it is worth mentioning that even a 100% local equity investment can have significant geographical diversification. (Our Top 40 derives somewhere between 60 and 75% of revenues from outside South Africa).

Which Asset Type?

The next decision to be made is about asset classes.

The four broad asset classes are:
  • Equities (a.k.a. shares, a.k.a stocks)
  • Property
  • Bonds
  • Cash
Each of these have different risk and return profiles, and are quite dependent on your timeframe. (For more info on asset classes, you can check out this guide by Satrix)

For me personally, I need quite an aggressive approach if I want to reach my goal of being financially free by 45. Historically, equities have given the best long term returns, however property has also been most impressive. So I have settled on the following asset allocation:
  • 80% Equities
  • 20% Property
Others may not be comfortable with such an aggressive approach and want to include some Bonds and/or Cash. Nothing wrong with that!

Putting Geographical and Asset Allocation Together

Knowing my geographical split and asset allocation decision, it's now time to put it all together.

Combining the 50/50 local/offshore split, with my 80/20 Equity/Property split, I arrive at the following asset allocation target:
  • 40% Local Equities
  • 40% Offshore Equities
  • 10% Local Property
  • 10% Offshore Property

Deciding on the Products

Only now is it time to start looking at products and deciding which ones can best implement my chosen allocation. This means finding products with costs and risks on the lower end of the spectrum.

For me this is the way I am implementing my allocation:
  • 40% Local Equities – Coreshares Equally Weighted Top 40
  • 40% Offshore Equities – Satrix Worldwide
  • 10% Local Property – Proptrax 10 *
  • 10% Offshore Property – Coreshares Global Property *
* Update:
As per this article, for local equity exposure I will now be buying:

  • 40% Local Equities - Satrix 40 ETF
As per this article, for my Local and Global property allocation, I am now buying:
  • 10% Local Property - Satrix Property ETF
  • 10% Offshore Property - Sygnia Global Property ETF

After mentioning the above products to people, I often get asked follow up questions like "What about an Emerging Markets ETF?", "Should I invest in the Top 50 ETF?" and "Isn't the big exposure to Naspers in a Top 40 ETF a good thing?"

All valid questions. And all questions you will need to answer for yourself. Nothing wrong with adding an Emerging Markets ETF to the offshore equity component to spice things up a little. What about an S&P 500? Sure why not. If you think a vanilla Top 40 ETF is the best way to do local equity, then go for it.

It's all your decision, and there is no right or wrong answer, as long as you are comfortable with the possible risks and know why you have made the decision.

Whole Portfolio

It is important to view this geographical and asset allocation in terms of the whole investment portfolio. Don't forget to include all investment products.

Personally I have a Pension fund, Share matching options, a preservation fund, discretionary investments and TFSA’s.

Some of these I have full control of (e.g. TFSA), some I have partial control over (e.g. Preservation fund) and some I have no control over (e.g. company pension fund). Where I am able to, I adjust the asset allocations to try best meet my targeted allocation. I know I will never get my exact allocation because for example, my company pension forces some of my investment into Bonds and Cash.

Every so often (usually annually) I do a check on my allocations and make sure nothing is drifting too far off course. If some components are lagging, then I adjust my buying to try get everything back in line.

Advantages Of Targeting A Specific Allocation

The nice thing about targeting an allocation is now you get to ignore all the "Position Your Portfolio For X"  type articles which appear pretty regularly - where X can be "State Capture", or "A Weaker Rand" or most recently "A Coup In Zimbabwe"

Doing it this way makes it easier to ignore the media noise and protects us from our investments' worst enemy - ourselves!

Till next time, Stay Stealthy!
 - ~ - ~

If you enjoyed this post, it has been scientifically proven that you have a 96.78% chance of liking future posts.
Don’t argue with statistics, sign up to the mailing list and get the newest stuff delivered to your inbox!