Four Investments to protect your portfolio and grow your wealth

Whenever fund managers speak about investing, you’ll invariably hear the words asset allocation, diversification and reducing volatility. These things are all investment components you should make part of your portfolio to ensure you are safe in a crisis, and raking in returns when the market booms.

So how should you do this?

Well, what if I told you that four simple investments could diversify your portfolio, and set you up for long term growth?

It is called the ‘Shield’ portfolio.

The ‘Shield’ portfolio is a portfolio that gives you downside protection, smooths out volatile returns, and allows you to sleep well at night. When I think of the image of a shield, I see a family crest. The shield is divided into four quadrants and each quadrant contains a different symbol. Just as these used to represent the strength and vitality of families, so does the shield portfolio represent the strength of your investment portfolio.

Basically, the shield portfolio splits your investments in FOUR. Each segment represents a different asset class.
They are: CASH, BONDS, STOCKS and TANGIBLE ASSETS.

By splitting your investments in these four classes you are diversifying your portfolio. That means that the returns you get on one asset – will (in theory) be uncorrelated to the returns on the other.

So, in a year where stocks do badly tangible assets, bonds and cash could prop up your performance, and in a year where stocks shoot the lights out, cash and bonds ensure you still get a steady, safe return on the rest of your portfolio.

But the question always comes down to – how much should I put in each asset class… And then more specifically in what investments. For example, when you look at tangible assets – should you invest in gold, property or art?

And with stocks, how much should be in penny stocks, how much offshore etc.

The four quadrants to asset allocation with the Shield strategy

Quadrant #1 – Keep your options open with cash

Here I’m talking about cash in a bank or money market account which you can access almost immediately.

The biggest benefits of holding cash are…

It protects you from market risk – the risk of losses arising from asset prices and volatility.

It gives you optionality – when markets fall for any reason, having cash on hand gives you the ability to buy shares or other assets at a bargain.

Of course, you must be aware of interest rates. You see, in a low-interest rate environment, your cash won’t earn you very much.

Sure, it won’t be at risk in the market. But inflation won’t be kind to your purchasing power.

On the other hand, in a high interest rate environment, cash can protect your wealth from inflation due to the high yields you could earn.

At present a 15% cash allocation will allow you to put some firing power into investments that have been beaten down.

Some cash investments to consider are money-market funds, money maximisers from banks, and even holding some dollars, Euros or Pounds via exchange-traded notes (ETNs)

Quadrant #2 – Not risk free – but lower risk than shares: BONDS

Bonds, especially US Government bonds, have always been seen as “Risk free”. But they are not.

Don’t ever forget that, despite all their assurances, governments can and do default on their debts.

So why own bonds at all?

Well, bonds pay you interest on the cash you invest in them. They are relatively low risk, and unlikely to cause the kind of losses you could see in stocks.

In a high interest rate environment, bonds typically pay you much better yields than cash investments.

Today, you can own in different types of bond investments, such as a ETFs i.e. – Satrix GOVI ETF

The benefit of a bond ETF is the fact that you have liquidity – meaning you can access your cash by simply selling the ETF.

Then you can also consider the popular RSA Retail Savings Bonds. These are fixed rate bonds that typically pay higher returns – anywhere from 9%-11% depending on which bond you choose (2,3, and 5 year).

The only catch is that your money is tied up for 2, 3 or 5 years into these bonds.

That said, with current risks, I would allocate 25% to bonds.

Quadrant #3 – Higher risk, higher return: Investing in stocks

The worst thing to do right now is to sell ALL your shares.

Sure, the JSE took a beating in the first half of the year…But it has recovered remarkably thanks to optimism surrounding the GNU. On the other hand, US markets have performed incredibly during the first half of the year and now have taken a bit of breather.

This is why diversification among many different stock markets is crucial – when one market falls, another will rise.

I’d go for a 40% allocation here. I would split 15% in riskier growth stocks like penny shares, 5% in the JSE Top 40 (probably through an ETF like the Satrix 40 ETF) and 20% split in offshore investments such as the S&P500 and World ETF – which gives you exposure to a basket of international shares in the USA, Japan, China, the UK and more.

Quadrant #4 – Real assets could be your best friend in a crisis

Tangible assets should also form part of your portfolio.

This would include things like Gold and other precious metals such as silver, platinum or palladium. It could include property, art or even oil.

As we’ve seen this year, a combination of war, political uncertainty to due global elections, and a slowing global economy with high debt has pushed both gold and silver prices much higher.

In fact, both real assets are two of the best performing assets in 2024 so far.

An easy way to own gold, silver and so is though ETFs and ETNs. I prefer the ETF for its liquidity, and cheaper transaction cost.

Not to mention the security risk you have with gold in your house these days.

My total allocation for tangible assets is 20% right now.

Here I’d split your allocation of 7.5% gold, 7.5% silver and 5% listed property for the consistent dividends.

No investment or allocation strategy can protect you from the worst type of financial calamity – but it sure helps to have your eggs split into these four baskets.

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