Anything without structure is just chaos. Occasionally, you luck out and produce something magnificent from that chaos, but more likely, there has been a guiding hand. Take those multimillion-dollar abstract works of art, for example. Those colours didn’t land on canvas by accident, and yes, sometimes it takes the artist’s own interpretation before even the initiated can understand what was intended. But if you haphazardly slap paint on canvas and mix without any sense of the end result, you’ll produce something in an unappealing shade of “sharky,” that beloved 1970s wall colour, somewhere between manure and khaki.
Postponing the hard work of bringing order to your finances when life is already trying to drown you, debt, bonds, kids and career, is entirely natural. It feels overwhelming, and some goals are so far in the distance that it’s easy to convince yourself there’s plenty of time. Just start. Put a few ideas on paper. Dream a little. At least you’re thinking about it. (My planning eBook from the beginning of the year is still available free on request, and subscription to our database is also free.)
Educating yourself on wealth and investment is one of the most effective ways to make the topic less intimidating. Everyone starts somewhere. It’s one of the reasons I produce content so prolifically – often so that I can continue to learn, and pass those learnings onto you. I’ve watched readers and clients slowly grow more confident, post by post, become less susceptible to conspiracy theories, the windgat at the braai or the Twitter feed, and outright scams.
A great place to begin is by developing a clear understanding of each asset class: the risk profile, volatility, and capital risk; Tax implications; Long-term prognosis; how inflation erodes returns; the drag of fees on performance and where ETFs and Unit Trusts fit into the picture.
Broadly, these are the major asset classes: Equities, Fixed income (bonds), Cash and money market, Property, Commodities, Alternatives (hedge funds, private equity, private credit, infrastructure).
How do we choose? Take a little of everything and hope for the best? Has anyone ever bought those mixed packets of seeds for a garden, where you can get an instant Chelsea Winner in one sprinkle? (Yeh, me too – with little success). Do you gravitate toward the juiciest returns last year, the most talked-about, the one with the longest track record? That’s the norm. You could go down the serious analytical route, but unless that is your day job, doing that analysis properly would take months (Over 1,900 in RSA alone), and by the time you’re done, everything will have shifted, and you’ll need to start again.
This financial behaviour is well-documented. It’s called “choice overload” or the “paradox of choice.” When an abundance of options makes it difficult to decide, the result is decision paralysis, anxiety, and dissatisfaction with whatever you eventually choose. Rather than feeling empowered, people become overwhelmed, leading to procrastination, poorer decisions, and regret. It’s especially relevant in investing, where too many options cause paralysis or persistently suboptimal decisions. With that in mind, let me have a stab at simplifying things, starting with the least ‘volatile’…
Money market: This is a good place to start SAVING, the precursor to investing (and often confused with the same thing). Saving is typically short-term, with capital preservation as the priority. Volatility of an asset class is usually directly related to its return, and yes, it is on a spectrum (isn’t everything these days). At one end, you have stick-it-under-the-mattress (but whether this is any safer than in a bank in SA Inc is debatable) – the other end is probably something like Bitcoin, with wild swings up and down. On the one end, capital preservation is effectively guaranteed; on the other end, you could lose it all (and more if you’ve leveraged yourself).
Historically, lower returns can be expected with that investment conservatism, which needs to preserve the capital, and unless at least a portion of the interest is reinvested, capital won’t grow. ‘Living off the interest’, even in the medium term, is a recipe for a hard lesson in capital erosion from inflation. With interest rates where they are at the moment, you can make this portfolio sustainable by only taking, say, 4% of the interest, and re-investing the rest. A money market account is ideal for an emergency fund, for example.
Investing, by contrast, is long-term and should deliver above-inflation returns over long periods of time (typically 8+ years). Interestingly, the RSA ‘fixed income market’ has had a very good run for many years and continues to do so, thanks to RSA Inc having (at least temporarily) ‘tamed’ inflation. RSA inflation is at the same level as most developed nations – but because we (or, specifically, the SARB) want to protect the rand, we have to offer a ‘risk premium’ on our interest as an emerging nation, hence the real return (after inflation) that has been circa 4% or more recently, rather than the long term circa 0-1%. This return we have been enjoying is usually the return we can expect from property or equity.
Bonds: These are often secured, guaranteed and longer-term investments, offering a higher rate of return, not a huge difference from the money market of late, but over the long term, the real returns should be at least 1% higher.
Once again, like money market, if you ‘live off the interest’ (it isn’t actually interest, but SARS treats it as interest, so let’s keep it simple) then you’re going to get capital depreciation. What you can buy with R1m today is not going to be the same as what you can buy with R1m in 5-10 years’ time. These ‘fixed income’ assets feature extensively in balanced investments and pension funds, and if you want to access them as an individual, there are some Unit Trusts (careful of the fees), but also Retail Bonds and (interest-bearing) Pref Shares (more risk but treated almost the same). Now onto the ‘higher growth’ (and more volatile) assets…
Unit trusts/ Collective Investment Schemes (CIS): Probably the most widely used investment vehicles. When introduced, they democratised investing by offering genuine diversification to anyone, not just those with the critical mass to build a portfolio of 15 to 20 stocks. There are now over 1,934 unit trusts and 70 ETFs in South Africa alone, and around 8,000 ETFs globally, with 1,500 new ones launched globally last year (51 in RSA).
Interestingly, perhaps, AI is expected to accelerate the passive management trend considerably, making it even easier to replicate the role of “expensive” active human managers. There is already a trend among ‘active’ managers to use a passive core of assets, and active handpicked satellites to ‘sweeten’ the pot.
A unit trust bundles shares so investors can participate in a diversified portfolio without needing several million bucks upfront. ETFs work similarly at low cost with minimal human intervention. Both are excellent while you’re building wealth and don’t yet have the critical mass for something more tailored. Picking the ‘right’ ones for your portfolio and your specific objectives and circumstances, though, is less obvious.
The asset class, or mix of classes used in the portfolio, is probably your first port of call. By mixing asset classes (as found in Balanced funds), you can reduce their volatility. A natural way to ‘hedge your bets’. Rather than defaulting to the ‘best known’ or ‘best advertised’ or ‘biggest’ UT, try prompting AI (I prefer Claude for this sort of question – it ‘hallucinates/ lies’ less than Copilot. Go for 3 or 5 years, over short periods of time, you will have the outliers who make a bet on a sector, which, if it pans out, they win big, if it doesn’t, not so much… In the next part of this series, I will start to cover equities and how you can build these into your wealth portfolio.
Articles and Blogs:
Legacy Series Part 4NEW
Legacy Series part 3
Legacy Series Part 2
Legacy Series Part 1
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement
Spoiled for choice
Who needs a plan anyway
8 questions you need to ask about retirement
What to do when interest rates drop
How to survive volatility in your investments
What to do when interest rates drop
Difficult Financial Conversations
Financial Implications of Longevity
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement
To catch a falling knife
Income at retirement
2025 Budget
Apportioning blame for your financial state
Tempering fear and greed
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post)
Pre-retirement – The make-or-break moments
Some unconventional thoughts on wealth and risk management
Wealth creation is a balancing act over time
Wealth traps waiting for unsuspecting entrepreneurs
Two Pot pension system demystified
Cobie Legrange and Dawn Ridler,
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za