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Article by Satrix Investments

Are you comfortable that your investment portfolio is suited to your investment goals?

Satrix investors come from every corner of life - some are enormously wealthy and some are just starting out. The common thread is that they want a better understanding of their index-tracking portfolio. Which index-tracking fund should you choose to invest in? Should you select a few different funds, or only one? We get asked this often and, as more index tracking products are launched in South Africa, we can understand why investors seek guidance. In this article we outline some of the basic rules of investing to help you make good investment choices.

USING INDEX TRACKING FUNDS IN YOUR PORTFOLIO

Step 1. Understand asset classes 

An asset class is a group of securities (investable instruments) which have similar characteristics i.e. they behave similarly in the marketplace and are subject to the same regulations. The four main asset classes are equities (shares), fixed income (mostly bonds), property and cash. Each asset class has a particular level of risk associated with it. The risk level is an indicator of the potential return – higher risk equals an increased probability of a higher return and vice versa.

When making an investment decision, the first choice you are making is which asset class to invest in. Think about the choice you make to either keep your money in a bank account or invest in a Satrix index tracking fund. Here you are choosing between cash or equities.

EQUITIES - Equities are shares of companies which are listed on a stock exchange. Most Satrix funds invest in shares that are listed on the Johannesburg Stock Exchange. These shares make up the indices our products track.  Equity investments are for those who want maximum capital growth and can tolerate short-term price movements and the high risk associated with this asset class. If you’re willing to take on higher risk to increase the probability of a higher return, then this is the asset class for you. You should be prepared to be invested for a longer period, at least 5 to 7 years.

  

FIXED INCOME - Fixed income instruments or bonds are debt investments in which you are effectively lending money to government or companies in order to earn a regular interest payment i.e. a fixed income in interest terms. These funds are for investors looking for a predictable income stream and are associated with a moderate risk level. Be aware however that these funds may experience some price fluctuations in the short-term.

  

CASH - Cash investments include bank deposits and short-term money market assets. They are low risk investments and are highly liquid. Along with the low risk comes a lower level of return.

  

LISTED PROPERTY - Listed companies which invest in local and international properties (viz. shopping centres, industrial blocks and offices) make up the listed property sector.

  

Step 2. Making a choice to follow the whole market or choose specialist areas

Now that we understand more about asset classes, we can decide which asset class is right for us. If you literally do want to "OWN THE MARKET" giving yourself broad market exposure then investing in a fund like the Satrix Top 40 ETF or the Satrix ALSI Index unit trust fund will do just that for you. However, diversification is a powerful investment tool and one you may want to consider. All asset classes don’t move together i.e. as one goes up, another may be going down or remain constant. By combining asset classes, you may be able to lower volatility in your portfolio while still getting capital growth.

  

Step 3. Building your portfolio

 The best way to illustrate this concept is by example.


Portfolio example 1* – I want broad market exposure and am willing to take on more risk. This means a 100% equity fund in order to "OWN THE MARKET"


Portfolio example 2* – I want a more balanced portfolio where I combine asset classes to limit volatility.

*The tables above are for illustrative purposes only. Independent professional financial advice should be sought before making investment decisions.


INVESTING ACROSS ASSET CLASSES

If choosing a single asset class is too daunting to contemplate, then consider Satrix’s multi-asset or balanced funds which are diversified portfolios investing across all asset classes including equities, property, cash, bonds and offshore investments in a single fund. By diversifying your investments, you lower the risk of some of the higher risk asset classes in the fund allowing a moderate or conservative investor to find a fund which suits their risk profile. The Satrix Balanced Index Fund and the Satrix Low Equity Balanced Index Fund are Regulation 28 compliant which means they are suitable to be used for retirement savings too.

Always remember that investing in index funds works best when you use the funds that cover broad segments of the stock and bond markets as building blocks to create a diversified portfolio that matches your risk profile—and that you'll stick with through good markets and bad. Investing is always long term and a well-constructed, carefully thought through portfolio will help you to benefit from all that indexing has to offer.

POSTED : 3 MAY 2017

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