Investing where safety comes first

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Published on moneyweb.co.za

Q: I'm looking to invest R100 000 for returns of around 10%-12%, in a safe environment where I don't lose the money I originally invested.

A: I think it’s important that we get the correct framing for what you are asking in your question. You refer to the following three issues: return, time and risk. It’s important to briefly unpack each of these to understand how they will affect your investment.

Return

It is vital that your investment outperforms inflation to protect and grow the buying power of your money. The amount by which your investment outperforms CPI is called a real return, ie: if inflation is currently at say 5% and the return you are wanting is 10% to 12% then the real return you want is CPI+5% to 7%. If inflation grew to 10% then the equivalent return you would need is 15% to 17%.

To outperform CPI by this margin you need significant exposure to equity in your investment strategy, which in turn talks to the risk you need to be exposed to.

Risk

Risk or volatility in an investment is normally associated with the possibility of losing money; this should however be seen in a different context if you are investing in a normal vehicle such as a unit trust fund, as opposed to something which is speculative. Having a high equity allocation in your investment strategy means you will be exposed to higher volatility especially in the short term, but this reduces the longer you stay in the investment strategy.

The slide below shows that in the 1900s, in 68 out of the 100 years equities had a positive return. If you broaden that window period to five years, then in 95% of the five-year periods equities had a positive return and there was never a ten-year window period which finished with a negative return.

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In an investment strategy that is targeting the return you want, there will be a 70% to 80% allocation to equity, with the balance being made up of a mixture of property, bonds and cash. This mixture will reduce the risk/volatility slightly. The slide below illustrates the risk that this investment strategy will have over one, three and five years of having a negative return.

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Source: Client Care

Time

As you can see there is no 100% guarantee that you can get the return that you want over five years without the chance of losing money. The slide below shows the likely range of returns one could expect in an investment strategy which is targeting the return you want. You can see how over time the chance of a negative return on your initial investment reduces and after seven years it disappears.

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Source: Client Care

In summary, you either need to lower your return expectation or lengthen the time horizon for your investment.

Ideally you should consult with a properly qualified financial planning professional who can assist you with your financial planning needs.