Dave asks: Assuming I have a respectable portfolio of equities (local and overseas), cash and property and no bonds, what would you regard as the best mix, in terms of the percentage, of these three asset classes? I’m 65, so high-risk stuff is out of the question.
Maya replies:
Clearly the answer depends on your particular circumstance and whether this is your only investment and what income you need to generate. However, Sunel Veldtman, director at BJM Private Client Services, makes some very important points, particularly around risk:
1. Your time horizon. Given current life expectancy, at 65 you might have to provide for another 25 years.
2. You need to consider your tax rate. If it is high and you don’t have retirement vehicles, then safer assets (cash, bonds) are penalised from a tax perspective. We pay a lot of attention to this in our asset allocations.
3. Safe assets should be housed in retirement funds. Outside of your retirement vehicles — especially after tax — safer assets like bonds and fixed interest are unlikely to beat inflation. Inside retirement vehicles, higher exposure to these assets and property is desirable since there is no tax charged on interest in a retirement product.
4. Understand the real risks. There is more risk in having too little growth assets and running out of money in the long run than having the market risk or short-term volatility of those growth assets.
5. Longevity. Previously, a 40% equity exposure might have pulled you through your five to 10 years of retirement, but now we are talking about 25 years. Therefore you probably need a higher percentage in equities and property of a combined 50% to 75%.
6. Consider income funds for managing bond/cash exposure. Cash and bonds should make up about 40% of the portfolio.
7. Diversify. Diversification dissipates risk over time.
8. Rands in retirement. We only recommend offshore assets for funds that you don’t require during your retirement and certainly not if you require income from those investments as there is too much currency risk. We do not like a large percentage of offshore assets in retirement funds either for the same reason.
These comments are for information purposes only and should not be construed as advice.