Considering the plethora of investment products in the market, deciding what to buy or sell can be a challenging and daunting process. In a recent webinar hosted by CoreShares and EasyEquities, we shared our thoughts on the best way to go about the decision-making process.
First off, it is important to understand that the ideal investment portfolio will differ from person to person, based on their specific goals and appetite for risk, explained Chris Rule, Head of Product and Client Solutions at CoreShares Asset Management.
As a starting point, every investor should define their goals and desired outcomes. In other words, will the invested funds be used for retirement, emergency situations, kids’ school fees, a holiday, or a combination of these short-term and long-term events?
By determining your goals, and thus your investment time horizon, you can construct your portfolio accordingly.
If you are primarily saving for retirement in 30 years’ time, it would make sense to include equities and property in your portfolio, for example, since these assets tend to deliver superior returns over long timeframes. On the other hand, if you are saving to fund a holiday in a year’s time, a cash investment may be more appropriate.
You should also consider your appetite for risk. Are you comfortable with risky assets that have the potential to deliver above-market returns, such as individual stocks? Alternatively, you may be a more conservative investor – in which case, low-risk low-return assets such as bonds would be more appealing.
Since these are highly personal preferences, this is an important starting point. And by fully understanding your goals and risk appetite, you have narrowed down the list of potential investments.
The next step
Outperforming the market is relatively straightforward – in theory at least. If you successfully ‘buy low and sell high’, you will generate strong returns.
In practice, however, timing the market is exceptionally difficult due to the large number of variables at play.
In the five years to end-June 2020, 95% of active fund managers underperformed the S&P SA 50 Index – which tracks the 50 biggest JSE-listed companies – after taking fees into account. This trend can be seen across the globe and over different time periods.
The fact that only 5% of professional investment managers beat the index – which represents the local market – shows just how tough stock picking really is.
John C Bogle, founder of the Vanguard Group, famously said: “Don’t look for the needle in the haystack. Just buy the haystack!”
This idea has gone mainstream, which is why exchange-traded funds (ETFs) have surged in popularity in recent years. ETFs offer investors easy access to a basket of securities, and by minimising costs while delivering market-related returns, they are challenging to beat – even for professionals.
ETFs keep costs low by pooling funding and because they do not require research-intensive active stock picking. They also offer diversification – an important aspect of investing that reduces risk.
However, there is still a place for stock picking. An investor with relatively high risk appetite could construct a portfolio that has high exposure to the market as a whole – via ETFs – along with smaller bets on individual stocks.
It is also useful to diversify a portfolio by asset class, since different types of assets outperform under different market conditions. For example, while South African property assets have fallen out of favour, property has a strong track record of outperforming in the past.
You can also diversify your portfolio further by including offshore assets. While these come with additional risks, including currency fluctuation risks, this strategy can help you to achieve your overall goals.
Ultimately, we are firmly of the view that goals-based investing gives you the best possible shot at success.
We invite you to watch this on-demand webinar to explore these concepts further:
Prior to CoreShares, Chris spent time at Grindrod Bank where he was primarily involved in balance sheet projects and fund management. He was instrumental in the development and growth of Grindrod Bank’s ETF business (the precursor to CoreShares) and is currently responsible for product development, research and all capital markets activities. He has over 9 years’ financial services experience across investment management and investment banking. Chris holds a B.Comm.Hons (Financial Analysis), and is a CFA charterholder.
How to decide what investment products to buy or sell
Go to Episode 4 – How can I trade offshore via the JSE?