Out of the 700 unit trusts available only a handful of them have managed to beat the ALSI index. So, how can you be sure that you are invested in the right funds?
The first point in selecting investments is to consider your personal Risk factors such as:
1. Time Horizon
Rule of thumb:
Short Term Investments: Cash, Fixed Deposits and Money Market Funds
Medium Term Investments: Equities, Bonds and Above
Long Term Investments: Equities and Property
2. Asset Classes
All assets have various degrees of risk attached to them. Generally equities are considered to be the most risky, whereas cash is considered as least risky. However, lower risk investments hardly out perform inflation that erodes the value over time.
Equities and Property are the best performing asset classes over the long term and historically have out performed cash and bonds. I will post the returns of cash,bonds, equities and property in a future post.
3. Diversification
Investing across the asset classes spreads risk. It is highly unlikely that all four asset classes will have negative returns at any given time. Just like my Grandmother always used to say “never put all your eggs in one basket”.
Therefore one should never be fully invested in a single asset class. To reduce risk a balanced portfolio invested in all the asset classes is a good investment strategy that reduces risk.
4. Fund Managers
A recent study found that larger fund management companies outperformed smaller asset manager companies in South Africa. This is because larger companies have far more resources at hand than smaller ones. So, when choosing an investment you are better off selecting larger asset managers than smaller ones.
Another good risk strategy is to consider investing in more than one management company, as every fund manager has a different style. Again, a good strategy would be to invest in different fund managers. Asset manager companies launched Multi Manger Unit Trusts to give investors exposure to other managers. The down side though is these funds cost a lot more to administrate, in my view it is better to select a basket of unit trusts.
