Balancing your investment portfolio

The main challenge facing investors is earning acceptable returns on their investments while managing the risks involved.

Investing intelligently boils down to making a calculated trade-off between risk and returns. The trick is to diversify investments, take into account the period of time available before the money will be needed and, at the same time, earn reasonable returns on the capital without taking undue risks. While the broad principles of sound investment apply in all cases, no single set of circumstances is the same for any two investors. Each person’s needs and means differ and for that reason investors require expert advice and guidance from specialised financial planners and fund managers.

How to build a balanced portfolio

The trickiest part of building a balanced portfolio is the “how”. It is crucial to diversify investments across the different asset classes in such a way that they work together to form a portfolio that is able to beat inflation over time and offers acceptable returns. You don’t have to adopt an all-or-nothing approach if a portfolio consists of diversified and well-managed investments in cash, property, bonds, and equity.

Unless returns on investments at least keep up with inflation, the investor will find that over time he is unable to maintain his standard of living as the cost of goods and services become increasingly more expensive. This is where the available time period to invest comes in. The longer the period available for the investment before the money is needed, the more risk an investor can afford to take. And the higher the risk, the bigger the potential return will be in the long term.

Asset classes

Cash is the safest asset class but provides the lowest return over time. This asset class covers investments such as on-call deposits in banks, cash management trusts and similar short-term interest-bearing investments. According to the risk/reward principle, cash investments are the safest but will in the long term not beat inflation or show capital growth.

Bonds generally offer higher returns or yields than cash but are not as stable in the short term.Bonds are interest-bearing investments that involve a longer period of maturity – usually some years. Government, municipalities, parastatals, and corporate companies borrow money from investors by issuing them with debt instruments, called bonds. By holding a bond, an investor is usually entitled to an annual cash interest payment that is fixed at the time of purchase. While this locked-in interest rate may seem safer, it actually exposes the investor to more risk because if inflation or short-term interest rates go up during the period to maturity, the investor loses out. Bonds are low to medium term risk investments and provide low to medium returns over time.

Property as an asset class potentially offers investors healthy capital growth, depending on the period of the investment as well as the specific point in a property cycle in which the investment is made and the price paid for the property.

The last asset class, equity, carries the highest risk but offers the best potential for capital growth. Off-shore investments are viewed by many as a separate asset class which can add great value to a portfolio from a diversification point of view.

Stick to your goals

There is sometimes too much focus on an investor’s risk profile in stead of on growth and returns needed in the long term. Investors should stick to their original investment goals and reassess their investment goals and objectives if a major life event such as a retrenchment or ill health occurs. If the situation looks to be temporary, such as a retrenchment, the long-term investment goals and strategy should remain in place. Proper financial planning should provide for enough emergency cash during a period where the loss of income is experienced.

Consult your Financial Advisor to ensure that your investment portfolio is optimized according to your investment objectives and your individual needs and circumstances.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs.