Last week we explored the qualities that an individual investment brings to one's overall portfolio. The starting point is understanding the nature of your current portfolio.
A good way to simplify what has been the topic of many a doctoral thesis, is to draw a grid of the portions of your portfolio as they can be logically grouped, and the economic factors and influences on them.
It is important to include as broad a spread of your investments as possible, such as your pension fund, all annuities and saving accounts.
For the purpose of this exercise, you could leave out the house you live in if you are not too concerned about its behaviour as an investment, especially if you are planning to live there into retirement.
One of the benefits of member choice is that you know more about your retirement fund and how it is invested. Regular fund valuations also put us in a better position to know how it fits into our portfolio.
I usually leave out cars, art and other household indulgences as I doubt they will provide me anything other than joy in my old age.
If you are doing this with your spouse, try to keep the debate as to whether the state-of-the-art mountain bike is an investment to a minimum and rather focus on the larger portions of your asset base!
Once you have drawn up a list of your assets, think about the impact of each of a number of economic factors on that part of your investments. Don't get too technical, just put a tick, cross or zero next to each factor, depending on whether the impact will be positive, negative or have no effect. If you're not sure, just leave it out. You will soon see a picture emerging - the idea is to get a general, overall view.
Here are a few examples of the factors you should include in a list of influences and expectations:
- Interest rates;
- The rand;
- Local economic growth;
- Global economic growth and stock markets;
- Confidence shocks (for example, political);
- Local stock market;
- Potential for providing income;
- Potential for growth; and
- Potential for reducing volatility.
These factors do not behave independently, and the list is by no means exhaustive, but it is a good start for an "influence inventory", to provide the basis against which new investments can be assessed. You should ultimately be most satisfied with the mix of results for the last three factors (under the expectations heading) - showing what the portfolio result is likely to be.
Click here for a very simple example of how you can assess your portfolio. In the example portfolio, over two-thirds of the portfolio is dependent on local stock market performance to some degree. While at first glance it may look as if the equity exposure is a little low, once the pension fund is taken into account, the equity exposure can actually be quite high from time to time.
A weaker rand will not devastate this portfolio, but it will also benefit little should the rand weaken.
I set the impact of global growth on the pension fund performance as neutral, as the fund may have too few rand hedges at the time, and as a result may not reap the benefit.
It appears as if the portfolio will probably miss out somewhat on the global picture, so the addition of a fairly conservative, income orientated global fund (for example, with a good dividend yield and perhaps some bonds or preference shares) should be considered as this will probably balance the picture. In the new portfolio in the example below, some investments have been reduced to provide for a new investment in an income-orientated global fund. The yields of these funds are not great, but are better than cash offshore.
Once you have assessed your portfolio in this way, you should have a clearer idea of where you should be looking for your next investment.