I need your advice; my wife has had her pension payout and we don’t have a house of our own, we are renting at the moment. We would like to get a better return on investing R100 000, but ask which bank can give better returns as we went to Standard Bank and would only get R1 419 per month. Is there any other way we can get better returns?

  

Dear reader,

Based on your question I am not sure if you are planning to invest these funds for a longer term, or if you require the funds in a shorter period? Your investment options, and potential return, will differ based on that.

If you require to invest for a shorter term – the alternatives will be investing the funds with the bank, or alternatively choosing a voluntary (accessible) type of investment product, and investing in either money market or multi-asset income type funds. The reason for this is to protect you against market volatility – which comes with the alternative asset classes – equity exposure. The recent rate cuts by the Reserve Bank during the Covid-19 crisis has led to much lower rates in the average money market fund. Many of these funds are decreasing from an average expected return of 7-8%, closer to 5-6% – and possible further decreases are possible.

The alternative to this will be looking at multi-asset income funds. many of these funds include a minimal percentage of equity and property exposure (not significant in this fund), but they also contain bond exposure – which will turn out to be more positive in this time as these potential yields will ensure a higher return. The expected returns of these income funds over the next few months will change from an average of 4-7% to 8-9%, perhaps even more. This is due to the downgraded status of South Africa, and many fund managers specialise in investing in junk-grade bonds. We are expecting a rerating in SA government bonds, which will all lead to an increase in the return of these funds.

My advice on any investment portfolio is to diversify – in terms of fund managers as well as asset classes. The combination of different investment styles, as well as the different behaviours of the various asset classes in different market circumstances are what protect you over the longer term. Depending on your personal situation, risk profile and needs, the weight distribution between these asset classes can vary – but having a diversified portfolio is still advised.

If there is not a requirement to access these funds in the near future, I will advise diversifying more with your asset classes by including growth assets into your asset allocation. This refers to equity exposure, locally and offshore. Equity exposure is more volatile and market fluctuations can be expected – but these are also the real “assets” you will own – and ensuring a higher, above-inflation return in the longer term. Market fluctuations are not something to be afraid of – simply something that needs to be understood. There are excellent opportunities in these times, and in the longer term, the market recovers – volatility never lasts long. It is just imperative not to make emotional decisions when these cycles happen.

  • When investing only in cash-based funds, you can expect an average return of inflation +1 or inflation +2.
  • More diversified portfolios, including equity exposure, will give you the opportunity to expect a return of CPI+5 – CPI+7 or even higher. Just for the reason of market volatility, these investments need a longer timeline to work with, this does not mean the return can’t be exceptional in the shorter term – there are just many more variables in place here. Looking back at the last two months with Covid-19 this can be well understood.

This brings me to another point which is always imperative to consider when structuring your investment. Firstly, the term needs to be defined. This does not mean it needs to be set in stone – but it will avoid disappointment if a strategy can be decided on.

Secondly, the risk needs to be defined. Many investors wish to run to cash when circumstances are uncertain or when markets become volatile – which they will always be. Every asset class holds its own risk – cash as well. It is important to understand that investing your portfolio only in cash will see inflation depleting your investment, and your capital value will not be able to be sustained for long. This is why growth assets are imperative – and to understand that there is a difference between risk and volatility. Volatility can be managed and understood; risk is when you don’t make the suitable decisions in these volatile times.

I will advise speaking to a financial advisor to determine your needs with these funds and deciding on a suitable strategy for your personal situation at this stage.