Question

I have a fixed deposit that has just matured and I want to reinvest it.  I don’t know where I should invest the money as I am very worried about what is going to happen in the next elections. What would you recommend?

Answer

It is difficult to make a call on just one investment. You need an investment plan that is robust and can handle different market conditions.  When I draw up an investment plan, I look at the following:

Timeframes

What are your needs over the short, medium and long term. If you need to access a lot of your funds over the short-term then it is important that you do not expose these assets to too much risk. However, if you will only be needing to access these funds after 10 years, we can expose them assets which may go down in value to get a better return.

Country exposure

An investment plan needs to take the location of your assets into account. The common wisdom is that you should have between 25% and 40% of your assets physically located offshore. This could reduce the risk of your personal wealth being decimated by any political instability in the country.

Please remember to structure these offshore assets carefully to ensure that your heirs can inherit easily in years to come.

Risk tolerance

We all have different tolerances when it comes to investment risk. Some of us are comfortable seeing our investments going down over a period if we believe that the asset is going to grow significantly in the future.  Others will have sleepless nights if an investment falls.

Each investment carries an element of risk.  A short-term investment like a bank deposit carries very little risk that you will lose your money over the shorter term.  It does, however, carry a risk that you may not be able to meet your needs in the future if the interest rate does not beat inflation.

Your investment plan should take your risk tolerance into account.   

With a robust plan in place, you can start looking at the implications of events like the sustained load shedding and the coming elections.

Many financial companies use something called the tactical asset allocation which takes political and economic events into account when it comes to allocating assets to the different asset categories.  They would recommend for example that you be overweight or underweight in a particular asset category (like local bonds or developing market offshore equity) when looking at the next six months to a year. This can help guide you when rebalancing your portfolio.

I would caution you not to try and time the market. What is true is that time in the market his way more important than trying to time the market. I have shown this before but if you were outside of the market for the best 10 days over a 23 year period, your returns would have been 45% lower.  We do not know when the market is going to move dramatically.  Many asset managers are saying that the South African market is undervalued, and a lot of the political uncertainty has been priced into it. If the elections result in a South Africa that is better than expected, the markets could grow.

There are a couple of products that your financial advisor could consider. These would include the following:

• Offshore investment

It is easy to move money offshore these days and an offshore investment will immunize you from any fallout from the South African elections. But remember that the offshore market has its own challenges.

• Protected equity

These are investments that typically tie your money up for up for 3 to 5 years.  Your capital would be guaranteed, and you would participate in the upside movement in a particular index.  These products are typically sold in tranches and are usually only available over a six week period.  There are some rather attractive ones on the market at the moment.

• Guaranteed or hedged funds

Here you often have to invest your money for five years. You can get different levels of guarantee for your capital.  The higher the level of guarantee, the more expensive it is to invest in this type of product.

• Balanced Fund

If you have a diversified portfolio and are unlikely to need the funds over the short term, an investment in a balanced fund could be the solution.

So, to answer your question, I would recommend that you go back to your initial investment plan and check that it is robust enough to handle differing market conditions.  (If you don’t have one, I would recommend that you get an investment plan drawn up).  You should get your advisor to give you their current tactical asset allocations for the next year and recommend the best place to invest your money.