Despite a strong market performance, which saw the JSE rally 20% over the past quarter, investors have opted for more conservative investments and are wary of equities. This is according to the latest quarterly figures from the Association of Collective Investments. Asset allocation and fixed-interest funds made up the majority of investments, accounting for 80% of inflows. Pure equity funds only received 14%, or R2,6billion.
Asset allocation funds, which tend to act for short-term gain, invest in equities, bonds, property and cash. But investors have been opting for funds with lower equity weighting. Fixed-interest funds invest in bonds and cash.
With a strong equities bull market over the past two years, investors should be flooding the market, but this is not so. “It is understandable that people are feeling nervous after five stock market crashes in six years,” says Paul Hansen of Stanlib, referring to the crashes between 1996 and September 11 2001.
The risk remains of being too cautious and not having the correct level of equities for long-term investment needs. Over time, equities offer superior returns and are the best cure for inflation.
Hansen says he has seen first hand how terrified people are of investing in equities. “Despite two years of a strong bull market, the inflows into equities have remained relatively low.”
His advice is that people return to investing with long-term needs in mind, and focus on how they allocate assets rather than timing the market.
“If people had stuck to a strategic asset allocation strategy rather than trying to time the market, they would not have put all their money into small caps and tech stocks at the end of the Nineties or sent all their investments offshore when the rand was R13 to the dollar,” says Hansen. “They would have experienced less of a loss and would not be so nervous of the markets today.”
He says it is time to return to the basics of investing: diversification and long-term asset allocation.
Equities play an important role in any portfolio based on time horizons. On a 10-year graph of the stock market, the five crashes will appear as major corrections, but a 30-year graph will show them as small blips on a long-term upward line.
As a rule of thumb, take a 100% equity asset allocation and subtract your age. This will give a ball park figure of what equity exposure you should have. For example, a 60-year-old should have 40% in equities and a 20-year-old should have 80%.
Too much choice
Part of the investment problem is too much choice. With the introduction of the Financial Adviser and Inter-mediary Services Act, advisers are unwilling to make recommendations that carry short-term investment risk.
Stanlib has created five portfolios based on five risk profiles, ranging from aggressive to conservative.
Paul Hansen recommends looking at a current risk profile rather than investing through fear. A 30-year-old with little debt could invest in the aggressive portfolio, which has 87% in equities, 7,5% in property and 5% split between cash and bonds. The moderate-aggressive fund would be more suited to a worrier. It holds 72% in equities, 10% in property and bonds, and 7% in cash. The conservative option would suit a retired 70-year-old, with its 15% exposure to equities and 45% in cash. — Maya Fisher-French