In this Q&A, he draws on his wealth of investment and business learnings to share practical tips on how to go about diversifying your investment portfolio in order to ensure smooth investment returns.
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What is the best way to diversify your investment portfolio?
In my opinion, from a South African perspective, your investment portfolio should have an allocation to your normal run-of-the-mill equities, bonds and some cash. You should also have offshore exposure in that sphere, along with alternatives like private equity and hedge funds, which IFSA can assist you with. The percentage or amount of allocations you assign to each asset class is 100% dependent on your personal risk profile or the income stream you need from that portfolio.
Why is having a diversified portfolio important? The motivation behind diversifying your portfolio is a fairly straightforward concept. Asset classes, shares, property, and private equity tend to perform better and worse in certain economic times.
Ideally, you want to smooth your returns, securing about 70-80% of the upside of a certain asset class, while minimising your downside. So, having a diversified portfolio doesn’t mean you always get the best performance and assets. It is simply a way to smooth your return profile on your asset value.
Why is it important to invest locally? I think, from a macro-economic perspective, investing locally supplies businesses with capital that can be used to grow their businesses. It offers a good return as well. But there are pockets of excellence that, out of a micro perspective, can provide you with an excellent return profile.
But I think there also rests some responsibility on the investor as well. Ideally, you want to invest in businesses and areas you believe in and are passionate about. Essentially, you want to buy into those companies and managers and help them create an opportunity where they can create jobs for people and add value to the local community.
What percentage of your portfolio should be allocated to offshore investments?
IFSA has its own investment philosophy , but no two investors are ever the same. Percentages are very risk profile dependent. Fundamentally, a more aggressive strategy leans towards greater offshore exposure. You also have to consider your time strategy and where you are investing from.
When you look at South Africa, the reality is that the rand is very volatile. So you don’t want to move around too much between different currencies. But, essentially, in my opinion, you should lean towards 40-45% in the offshore space.
Is it risky to invest in South Africa? I think risk in South Africa is real. But there’s reward as well. So, as part of a well-diversified portfolio, you are losing out on that opportunity without exposure to the local market.
Sure, there is a negative sentiment around the South African economy, which I think is relevant. But I also think we must not forget to dig a little bit deeper. Not everything is doom and gloom – there are pockets of excellence to look out for that will make it worth your while to invest locally. But, again, responsible investing means diversifying and ensuring you partner with the right people .
Where can investors get more advice? Whether you’re a beginner or seasoned investor , you may be looking for that next opportunity to diversify and grow your assets. For many, that next step involves private equity investing and partnering with a trusted management firm.
If anybody needs any advice, information around private equity and diversification, or insight into any financial implication on investments, please contact us . We always welcome the chance to meet with investors looking for their next opportunity.
Book a free consultation with IFSA to get started.
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