How you can diversify yourself to safety with the ‘Rule of Four'
What do you do with your money in a crisis? Do you sell your share portfolio? Do you stick everything in a bank account, in property or in gold?
That's the question that popped up around a campfire I had going with friends over the weekend.
Considering South Africa's junk status, state capture and political unrest that's a question popping up over many dinner tables and even in boardrooms.
Your adviser is likely to tell you to ‘diversify'.
But what does that mean?
How you can diversify yourself to safety with the ‘Rule of Four’
When it comes to investing, savvy money managers advise that you spread your money around. That is, "diversify" your investments.
Diversification protects you from losing all your assets in a market crash. But it also smooths out your returns in the long run – ensuring less volatility and more predictable returns.
The ‘Rule of Four’ is a simple diversification strategy I follow to help me with my portfolio.
Simply put it states that I invest in FOUR investment classes:
1. Local stocks:
These are the shares you invest in on the JSE. I prefer small and midcap shares, they provide higher returns and I look for safety in other investments. My share portfolio is where I take risks, in order to far outperform inflation.
Property is an essential investment class. Many investors will swear by it, others avoid it like the plague. But the fact is that property prices are tied to inflation in the long run, and rental income typically also increases with inflation related amounts. That means, while a strategic property portfolio won’t make you rich overnight, it will give you decent returns at less volatile levels than shares do.
3. Cash and interest bearing investments:
You should always keep powder in the keg. As a first part of the strategy you should have an emergency cash fund which you can access overnight- with enough cash to last you for three months. The rest of the cash you hold should be put in fixed deposits and government retail bonds. You’ll get prime interest rate linked returns.
Whilst this sounds very unattractive in a low interest rate environment – remember interest rates have been as high as 26% in the past.
Even today, you can get 10% on some fixed investments – at a very low risk to you. Cash can also include Kruger Rands.
4. International investments:
You don’t want all your money in South Africa. You should consider investing in offshore shares, bonds and even currency such as dollars and euros. The rand has always been a bad bet against foreign currency. So, even when offshore investments don’t perform in dollar terms they often grow a lot in rand terms because the rand continually weakens. These investments also give you returns that are not in tune with the South African economy.
What the Rule of Four also requires is that I invest roughly equal amounts of cash into each of these investment classes.
So, let’s say you have R2 million in your retirement fund today. It invests around 10% in property, 25% in bonds, 15% in offshore shares, 10% in cash and 40% in local shares.
That means you are invested too heavily in local shares.
So, you should start saving some cash, and invest more into offshore shares, investment properties and cash. These don’t have to be in a retirement fund or through funds. They can be investments you make yourself.
You should look at your entire portfolio on a yearly basis. Consider everything, funds you invested in, annuities, your share trading account with a broker and your bank accounts. Set yourself goals and try to meet them.
Following this simple system will allow you to see much smoother growth on your total wealth in the long run.
Here’s to unleashing real value
Looking to grow your money in the medium term, my colleague, Josh Benton’s Real Wealth
portfolio has delivered his readers 35% average return for the last 7 years. You can take a look here….