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Retirement investments: Build a balanced portfolio
‘Don’t put all your eggs in one basket’ are wise words when investing for retirement.
Something that not everyone understands about investing is that it’s not a gamble. Putting your money into your retirement portfolio is very different to putting money on a casino table or on the outcome of a soccer match. The stakes are simply too high to bet on your future without considering the consequences. Which is why a balanced investment portfolio is the preferred way to invest for your retirement.
When you think about it, your retirement savings are supposed to see you through almost as many years as you’ve worked. The last thing you want to do is ‘put all your eggs in one basket’ because if those eggs crack, then you’re going to be left with an unholy mess that’s not worth very much.
Balancing your risk
The best way to avoid the risk that your investments will lose significant value if a crisis like Covid-19 happens again, is to put your money in different types of investments. This is called risk diversification, because you’re spreading your exposure into many different baskets. You can do that by buying shares of listed companies in different sectors of the economy, or in different parts of the world. This should protect you against outright loss, because not all companies do badly at the same time.
But a properly balanced investment portfolio will hold more than just listed shares, because other assets classes react differently to shares. An asset class is the term to describe a grouping of investment types. The most common are listed shares, also known as stocks or equities, but you can also invest in bonds, property and cash.
Bonds are issued by government central banks and by private companies. They’re no different from an IOU note that says you’ll be paid back a certain amount by a certain date. For example, the South African Reserve Bank could offer a 10-year bond at an 8% yield. This means that after 10 years you’ll get your money back, and you’ll have been paid 8% of your investment value every year for those 10 years. Bonds aren’t as volatile as stocks. This means that the price of a bond will not fluctuate as wildly, which can happen with listed shares. Listed property also offers stable returns that tend to be better than cash and bonds.
The downside to the lower risk offered by cash and bonds is that you won’t earn as much in returns. This can be dangerous if they don’t beat inflation, which would mean that R100 saved today cannot buy what R100 at a future date can buy.
How do you balance your portfolio?
Depending on how you manage your retirement savings, you can either work with your broker or financial planner to build a portfolio made of individual investments in different asset classes. Or you can invest in funds that have diversification built in, so that you only need to invest into one fund to get balanced exposure.
Nedbank Wealth offers the share trading platform, while Nedgroup Investments offers Unit Trust Investments has a few options that are worth considering.
The Balanced Fund, for instance, is made up of different asset classes with a maximum exposure of 75% to listed stocks. This helps to reduce risk and volatility and is suited to investors looking for moderate levels of capital growth but without having to create their own balanced investments.
The Core Diversified Fund offers a similar risk profile and offers a low-cost way to invest in local and global asset classes. The Opportunity Fund is also diversified across asset classes, but has a maximum exposure of 60% to listed stocks to helps reduce risk and volatility.
All these funds are also available as a tax-free investment, which allows you to invest a maximum of R36,000 a year and R500,000 over your lifetime.
Choosing how to prepare for your retirement is a very personal decision and journey. This doesn’t mean you have to walk this path alone. We have teams of experienced, certified financial planners able to help you come up with a plan that works for you.
Call us on 0860 123 263 or 021 412 2003, or email clientservices@nedgroupinvestments.co.za to find out more.
