By: PATRICK CAIRNS
For many people, investing is scary. It seems complicated and convoluted, and there are so many things one needs to try to understand.
As a result, we receive many requests from readers wanting to know where they should put their money. Given that there are over 1 000 unit trusts and exchange- traded funds (ETFs) from which to choose in South Africa, it’s little wonder that people can feel somewhat overwhelmed. However, investing can really be quite simple.
The important thing is to try to cut out what is really a lot of unnecessary noise, and get to its essence. Investing is about buying assets that, over time, will increase in value so that after a number of years the money you get out is actually worth more than the money you put in.
Stripped of the detail, that is what you are looking for, and it’s not really that difficult to find or buy these assets. They have become so accessible that you can do it from your own home with just a computer and an internet connection, or even just a smart phone.
You don’t need to know the ins and outs of price-to-earnings ratios, company financial statements, and annual reports to know that a basket of blue chip shares is the best long-term hedge against inflation, and these days, buying a piece of each of the top 40 shares on the JSE is easily achieved through the number of ETFs and index-tracking unit trusts that are now available.
Similarly, you don’t need to know everything about the structure of government and company debt to know that bonds provide a dependable long-term income, and just like with shares, buying exposure to a broad bond index is now quite simple.
In the same vein, you don’t have to be an expert on banking to appreciate that cash investments are the safest you can make. You may not get a lot of growth out of them, but you can be reasonably confident that they are secure.
Therefore, if you understand those basics, there’s no reason why you can’t run your own portfolio.
You can even do it with just one investment in each of those three asset classes. This was what I proposed last year when I put forward the idea of the simplest portfolio. Using just three ETFs, this portfolio is basic enough for anyone to manage themselves, and yet still a sound investment.
For those of you who don’t have access to the October 2013 issue of Moneyweb’s Personal Finance, the portfolio looks like this:
Simplest Portfolio (%age allocation between funds)
- RMB Top 40 ETF 40%
- NewFunds Govi ETF 40%
- NewFunds Traci ETF 20%
Of course, this is not the best portfolio in the world, and it can be improved in many ways, but as a starting point for anyone who wants to manage their own money, it is a very good way of getting a feel for each asset class. The reason I am bringing this portfolio up again is to check how well it has performed over the last year. The table below details the returns from the underlying funds and the overall performance of the portfolio.
Simplest Portfolio: 1-year on (performance to 30 Sep 2014)
- RMB Top 40 ETF 13.92%
- NewFunds Govi ETF 5.77%
- NewFunds Traci ETF 5.31%
- Weighted total 8.94%
The most recently-released official inflation rate in South Africa was 6.4%. In other words, this portfolio delivered growth of 2.5% above inflation. That performance is almost exactly in line with the median return of funds in the South African multi-asset low equity fund category, according to figures provided by Morningstar.
What this shows is that showing spectacular growth, the portfolio is matching the efforts of active managers. That shows that it really is that simple to get the kind of exposure that will earn you respectable returns. You don’t need to know all the details-you just need to do it.