A few weeks ago I wrote a piece titled “the biggest investment decision of your life” ( https://www.wealthwoke.com/the-biggest-investment-decision-of-your-life/), in which I outlined the risks involved with having all, or even most, of your investments in one country.
Investment theory and empirical evidence suggests that a simple lack of diversification is reason enough to make a South African dominated portfolio a ludicrous proposition.
This position was backed up this week when I received my second quarter investment reports from the various funds in which I am invested.
My Retirement Annuity (RA) is invested across a combination of funds through the Allan Gray platform – namely the Allan Gray Balanced Fund, Coronation Balanced Fund, Foord Balanced Fund and Investec Opportunity Fund. (For those of you who read my piece – https://www.wealthwoke.com/is-my-allan-gray-ra-still-all-that/ – I have not yet moved my RA as I am still assessing all available options – more on that another time).
Due to retirement fund legislation, 70% of RA assets are required to be invested in South Africa, so it’s a reasonably good proxy for a local investment.
While my Allan Gray statement makes it difficult to actually work out the percentage that my overall RA decreased by (they only provide a Rand amount for the change in unit prices), it looks like it dropped by around 1% over the period.
That’s quite disappointing, given that the ALSI was up around 2% between April and June. I have requested the reason for this negative return, but for now I can only deduce that its due to some combination of investment fees (my fees average 1.33% across the funds); underperformance by one or more of the funds and; the drag caused by the returns of other asset classes in my RA such as bonds and cash (Regulation 28 does not allow more than 75% of the assets in an RA to be invested in equities).
Whatever the reason, I have less money in my RA on 30 June than I did on 1 April.
On the flip side, my offshore portfolio, which is invested in a diversified range of global equity and bond funds and ETFs, was up around 2.5% for the quarter. I am only about 40% invested in equities in this portfolio, so even though my individual bonds and bond funds performed well over the period, it’s expected that I didn’t match the 4.2% return delivered by the MSCI World Index. The Rand was almost exactly flat over this period so my Rand returns on this portfolio match my Dollar returns.
My best performance over the quarter, however, came from the most unexpected source. Yes, my much maligned Bitcoins rose from the dead and delivered a staggering 300% return. Who knew?
The point of all this is not to quibble over the minutiae of the individual returns (though I fully expect I will have some attentive souls ready to point out some miscalculation of mine). Rather, the point is to highlight the importance of diversification in a portfolio. The idea is that if you split your investments between a whole bunch of uncorrelated asset classes, regions, currencies or individual counters, you will not be as adversely affected if one of these underperforms.
In the next quarter we could just as easily see South African equities outperform their global counterparts, or Bitcoin take a bigger dive than most of Mike Tyson’s opponents.
More importantly, over the long term, being well diversified means that you are protected from the systemic risks presented by individual countries, markets, asset classes or currencies.It’s rare that the entire portfolio would be wiped out by any single event.
In simple terms, it’s a bad idea to put all your eggs in one basket – unless it involves betting on Novak Djokovic to win Wimbledon on Sunday (I’m kidding, don’t do that – although he probably will win).
Or to put it in Johnnie Cochran speak – when it comes to investing, if you don’t want to cry, you must diversify.