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Investment strategies for the four “categories” of investors

09 June 2017 Francois le Roux, Dave Mohr, Old Mutual
Francois le Roux, CFP®, financial planner at Private Wealth Management, a division of Old Mutual Wealth.

Francois le Roux, CFP®, financial planner at Private Wealth Management, a division of Old Mutual Wealth.

Dave Mohr, Chief Investment Strategist at Old Mutual Multi-Managers.

Dave Mohr, Chief Investment Strategist at Old Mutual Multi-Managers.

South African investors can barely keep track of developments on the political and economic front, both local and international, with most recently having to grapple with the news that South Africa’s gross domestic product (GDP) contracted by 0,7% in the first quarter of 2017, seeing the country slip into its second recession in eight years.

Francois le Roux, CFP®, financial planner at Private Wealth Management, a division of Old Mutual Wealth, says that many investors across the spectrum will have reason for concern as they move towards mid-2017.

One of the major themes to consider, says le Roux, is South Africa’s local and foreign sovereign credit rating status – downgraded earlier this year – which makes for even tougher decision making when it comes to deciding how to invest your hard earned savings.

Dave Mohr, Chief Investment Strategist at Old Mutual Multi-Managers (OMMM), offers some insight into the current financial landscape investors find themselves in. “After the first bout of ratings downgrades occurred in April, everybody expected two things to happen: that the rand would collapse and interest rates would rise. However, we’ve now suffered multiple downgrades and none of these things have occurred.

“Suffering a downgrade therefore doesn’t necessarily mean local investment markets are going to collapse. This is very much dependent on market expectations – a downgrade would have likely already been priced in to markets before it took place – and what the broader global circumstances are – which are currently positive for emerging markets. Investors must therefore be careful not to base their investment strategy solely on their expectations of a downgrade,” adds Mohr.

Furthermore, le Roux points out that an investor might find themselves at opposite sides of the investment spectrum from others, meaning the same formula likely wouldn’t apply to them. “Investing is not a ‘one-size-fits-all’ approach and a strategy that applies to, for example, a younger investor who is currently sitting on a pile of hard-earned after-tax cash, would not apply to a typical retiree.”

To simplify matters, Le Roux breaks down the four broad “categories” of investors as follows:

Le Roux goes on to explain an investment approach and philosophy which could guide and assist each category of investors to reach sound investment decisions. “Ultimately it’s about investment risk, which each of the above categories of investors will invariably have to incur in some form. However, only the investor him/herself is able to determine with total certainty what monthly income they require to sustain their standard of living over time. Once an investor has reduced this need into a clear income goal, they will appreciate that they need to get their capital invested to generate a certain minimum return to fund their lifestyle.

“This is where most people, especially those like Ms Love Cash, realise that they cannot stay invested in cash for too long, as the sums simply do not add up. When an investor has realised what particular investment return they need, they can be guided in how to construct a portfolio with an appropriate asset allocation to deliver this return over time, using strategies that target a specific return above inflation. Only once an investor has arrived at this point in our advice-led process, can we start looking at the level of investment risk that they would need to and are prepared to incur and make the necessary adjustments to complete the process.”

From here, le Roux gets practical regarding the above categories of investors. “If you are Mr Surplus Capital, and your retirement life plan is intact with sufficient provision for retirement, then you know that you have the luxury of taking on higher investment risk, if your risk tolerance allows you to do so. On the other hand, Mr Still Working – not too dissimilar from Ms Love Cash – could be seeing the same effects of not incurring sufficient long-term investment risk, while Ms Pensioner will see how long her retirement capital will last, given a particular drawdown per month, and annual income escalation to keep track with inflation.

While uncertainty in the local environment remains, and emotions run high as a result, le Roux says that instead of further compounding the problem by worrying how to invest, investors should rather seek clarity about their financial position and long-term planning, and understand what they need to achieve their particular goals. “A sound financial planning process can go a long way to bring more certainty into the equation. An accredited financial planner will assist in finding the most appropriate, tailored investment strategy that will match income needs, while also keeping risk tolerance in mind.

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