Choosing the right asset class matters

Strategic Asset Allocation (SAA) as a way of structuring an investment portfolio can be very effective when measured over the longer term. The basis of this investment philosophy is that you match your future income needs with the asset class that will provide you with the best risk/return outcome.

As an example we can take an investment in cash vs investing in equities. You will only invest in cash with money that you have to use over the next three to four years because you want a secure investment with guaranteed returns in order to avoid the volatility and unpredictability of the investment markets over such a short term. The downside to investing in cash over the longer term, however, is that your returns are too low, and taxable, so that they will not beat inflation over such a longer term. An investment in equities, on the other hand, will be very volatile over the shorter term but will outperform cash over the longer term and also provide a very good buffer against inflation.

But those are not the only choices you have when formulating a portfolio using Strategic Asset Allocation. You also have asset classes such as government bonds, property, corporate bonds, gold, and crypto; and then, of course, the choice between local and international. If we look at the choice between local and international investment, the last decade was a game changer. Investing in the USA outperformed local investments in equities by far. If you look at the graph below, you will see that $100 invested in the S&P500 ten years ago would be worth $305 now (top line), compared to only $101 if you invested in the JSE (bottom line).

If we take that a bit further, the same can be said when looking at international property versus local property investments. The graph below shows a R10 000 investment in a global property fund (top line), versus the same investment in a local property REIT (Real Estate Investment Trust) on the bottom line. Over ten years the global investment gave you R25 600 compared to the local investment’s R6 000.

The good thing about following an SAA investment approach is that the changes in your selections take longer than when you follow a more trading-orientated approach. The last decade favoured USA assets over local and other emerging market assets but that will change one day and we might shift more toward emerging market assets.


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