Ready for a once-off investment

A Fin24 user says he is ready to make a once-off investment, but he has certain conditions. He writes:

I am looking for a once-off investment in a product or asset class that will provide me with a total return that gives me minimum CPI plus 1% of income per annum and minimum CPI +1% capital growth per annum.

My investment horizon is five years. What do you recommend? Thanks.

 Carol Axten of Mazars Financial Services responds:

The most recent inflation data (CPI) from November 2014 indicates a rate of 5.81%. This indicates an income requirement of 6.81% and an additional 6.81% in capital growth on an annual basis.

The total required return at today’s CPI rates amounts to 13.62%. This is a high hurdle to achieve on a consistent basis, especially considering that globally we are in a period of low yields, which looks set to continue for some time.

Cash is the most secure investment, but given the performance of 5.29% for the year 2014, this falls short of the 13.62% return requirement. To achieve your 13.62% return a considerable portion of the investment would need to be exposed to the riskier asset classes such as equities and property.
 
This in turn will mean a dramatic increase in volatility. Volatility means the investment can move up and down in the short term, but the longer term returns are typically higher for investors who can tolerate these short term portfolio movements.

If we consider the returns in the South African market over the past 10 years, equities have delivered an average annual return of 18% with property leading the way with an average annual return of 21.47%.

It must be remembered that the South African market has experienced a strong bull market over this time period and such events are not typically repeatable.

Global and domestic markets are in an uncertain phase currently. The outlook is dominated by the US Federal’s Reserve's decision on the direction of interest rates and the ECB and Japan's decisions on the implementation of further aggressive loose monetary policy.

The outcome of these factors will have a large impact on the direction of risk assets. The result is that, going forward, there is uncertainty and therefore risk. Given the low yield environment we find ourselves in it will be hard to achieve the required return of 13.62%.

It is advisable to discuss your needs with a qualified financial adviser to determine if you are able to take on such levels of risk in an attempt to achieve the stated return requirement as this strategy could result in temporary loss of capital in the short term that would affect your income.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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