Assets are things we own that have the potential to earn more money. During our working lives, we aim to accumulate enough assets to support us while we enjoy our retirement.
Tip: Knowing whether you have enough assets is easy thanks to the Rule of 300.
Assets come in all shapes and sizes. Shares are assets, while cars are not. Houses are lifestyle assets, which means they don’t earn an income, but we might be able to sell them at a higher price than we paid for them. Assets also behave differently in different market conditions. Listed property companies – companies that invest in and manage properties for a profit – are affected by interest rate fluctuations, while offshore ETFs are affected by the exchange rate.
The challenge is to find the right combination of different types of assets, also called asset classes, to ensure we make money no matter what is happening in the world around us. If one asset class is negatively affected by a market or political event, we need to ensure we have a nice combination of asset classes that make enough money to compensate for our loss-making assets. Having different asset classes to protect our money when markets struggle is called diversification.
Luckily ETFs are excellent tools to gain exposure to different asset classes. They cost very little and you can start investing in them with just R100. There are a growing number of ETFs available to South African investors that invest in different asset classes. Some ETFs even invest in different asset classes within the same product.
- Domestic equity: ETFs invested in locally-listed companies, like the Satrix Top 40 or the CoreShares Top50.
- International equity: ETFs invested in companies listed in markets abroad. We have many more offshore options today than we did a few years ago. We like the Ashburton 1200 and the Satrix World ETFs.
- Commodities: ETFs invested in physical commodities, like the Absa NewGold or Standard Bank Rhodium ETF.
- Property: These days we can choose between local property companies and ETFs that invest in companies all over the world. The CoreShares Property is an example of a local ETF, while the Sygnia Itrix Global Property ETF invests in property companies all over the world.
- Bonds: There have been many exciting additions to the bond ETF world. Locally, NewFunds and Satrix offer inflation-linked government bond ETFs. In the offshore space, you have your pick of fixed income options. Ashburton and Stanlib offer World Government Bond ETFs and FirstRand offers dollar-based bonds.
- Preference shares: The CoreShares Preftrax ETF is one of a kind in the local market, offering access to preference shares.
- Mixed bags: NewFunds is leading the charge in the mixed asset class space. By now, their MAPPS products are well-known among local ETF investors. These ETFs offer a combination of shares, bonds and cash depending on your risk appetite. The team lately introduced the NewFunds Volatility Managed ETFs. These products cash out of shares during times of volatility and buy back in when markets are calm.
By combining these asset classes within your portfolio, you can isolate large chunks of your portfolio from armageddon events at any given time. However, finding the right asset balance can be tricky. This week, we asked Galileo Capital’s Warren Ingram to help us allocate assets.
“All investors need some money invested in growth assets that have a good chance of beating inflation over the long term. For most ETF investors, this means they need to buy ETFs that track shares and listed property, as these are your primary growth asset classes.
In order to beat inflation, your minimum amount that can be invested in these growth assets is 35% of your overall portfolio. The balance can be invested in bonds and cash. An allocation of 35% should beat inflation over time, but it is a very low growth portfolio and is really designed for risk averse investors and those who cannot afford significant market drops over shorter periods of time. Most investors should have a larger allocation to shares and property. I think a good average is 75%, while the maximum should be 90% for younger investors or those who can afford to ride out drops in the markets over the short term. The remaining 10% can be invested in cash and bonds as this allocation provides a nice “shock absorber” in big market crashes.”