Construction of assets in a portfolio
Once the investor's risk profile, goals and timelines have been established he or she can begin identifying assets that meet those criteria. A key determinant of successful long-term investing is about finding the appropriate assets that match your risk profile and that will place you on a path to achieving your goals, as well as then having the discipline and patience to wait for the strategy to pay off.
Different asset classes
Cash
Cash investments include money in bank accounts, savings accounts and term deposits and can provide stable, low-risk income in the form of regular interest payments.
Shares
Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. Shares also provide returns in the form of capital gains if sold at a higher price than what was originally paid. Shares are one of the most popular asset classes and offer investors direct exposure to company performance.
Bonds
A bond is a debt instrument issued by a government or corporate to support spending and obligations. Essentially an investor is lending money to the government or corporate and in return receiving interest on that loan. This is known as a fixed income instrument as interest payments known as coupons are received by an investor in fixed percentages over the term of the bond. On bond expiration the investor receives his or her capital back. Bonds are generally less volatile than equity but offer higher returns than cash.
Property
Property exposure can be obtained through physically purchasing an investment property, acquiring property company shares on the JSE, or through a real estate investment trust (REIT). A REIT is a company that owns, operates, or finances income-generating real estate. REITs pool the capital of numerous investors and acquire assets in the form of properties. This makes it possible for individual investors to earn dividends from real estate investments without having to buy, manage or finance any properties themselves. The entry cost into a REIT investment is the price of a single share.
Building the correct portfolio
Building a balanced fund means having exposure to these different assets that assist in reducing portfolio risk and as well as allow that investor to achieve his or her goals. The typical asset classes that we will explore in a compilation are shares/equity, bonds, property and cash.
The proportion of assets per profile below are for example purposes only and are to give you an idea of some of the combinations one can use to meet different risk profiles. Please make sure to always consult with an investment professional before making any decisions around final compilation of asset classes.
The short-term investor
Cash
The risk-averse or medium-term investor
The risk-averse investor will be looking at assets with low risk and steady incomes. This will also be true of the medium-term investor since there may not be time to ride out major volatility by the time they aim to reach their goals. The typical compilation will include low exposure to equity and high exposure to fixed income instruments such as bonds or money market accounts offering fixed interest rates.
- Shares 20%
- Bonds 40%
- Cash 40%
The cautious investor (someone close to retirement)
The cautious investor, although sensitive to risk, will be willing to take on more risk than the risk-averse investor above. They would typically look at more exposure to higher-growth assets such as shares and property, but still have most of the portfolio aligned to low-risk investments such as cash and bonds.
- Shares 30%
- Property 10%
- Bonds 30%
- Cash 30%
The long-term investor
The long-term investor is someone looking for exposure to multiple assets, willing to take an element of risk but looking to balance his or her portfolio with some cash and bond investments. This investor is looking for an element of growth and has time to make back investments should they depreciate capital levels.
- Shares 40%
- Property 20%
- Bonds 20%
- Cash 20%
The high-growth investor
The high-growth investor is someone looking to grow funds aggressively and who has a much higher threshold for risk. This investor understands that capital is being risked and is not investing with money that he or she can't afford to lose. Most of the portfolio will be high-growth equity and property investments with little to no investments in lower-risk vehicles.
- Shares 70%
- Property 30%
The above refers to building and constructing a portfolio on your own. An option for investors looking for a balanced fund, is to invest in unit trusts, as unit trusts are compiled with the above asset classes with both goal and risk in mind. By reviewing the fact sheet, investors can understand the risk involved with the fund as well as what the fund sets out to achieve. A unit trust can be a one stop shop for the beginner investor looking for access to the markets in a balanced and diversified manner. For the experienced investor, unit trusts can also be utilized to diversify overall portfolio risk, by incorporating certain unit trusts into their overall investment and savings portfolio.
When balancing a portfolio, its always key to understand both your goals and the risks you are prepared to take on your saving and investing journey.
If you are at all unsure as to how you should compile your investment portfolio, make sure you speak to an investment professional.
