Simplifying the investment options available on EasyEquities

The investment world is filled with jargon and complex structures. In S.A there are more than a 1000 unit trust funds to choose from. There are many options out there that instil so much fear and anxiety in the average investor that they don't want to educate themselves or don't even know where to start. As a registered CFP and being in the industry for many years, studying funds and tracking them, I want to showcase a solution for the average investor's needs over their lifetime.

This article is not a financial plan but showcases investment options for different investment term needs available on EasyEquities. EasyEquities makes it easy to open an account and the interface is user friendly. 

Everyone talks about index ETF’s and funds, but generally they are only discussing long term investment options. Personal finance is more than just long-term growth, you need a plan and a strategy to invest over different investment terms. You will have a need for an emergency fund, short term savings for a holiday or saving up for a vehicle or deposit on a house and typically a pension fund where it becomes trickier as pension funds are regulated by regulation 28. 

The dilemma we have is, how to invest, where to invest and which funds to invest in. We will cover these topics. Before we get started, we will give some background on what regulation 28 is, asset allocation, touch on an easy-to-use investment approach called core-and-explore investing approach and finally we will discuss the investment options.

Regulation 28

Regulation 28 forms part of the pension fund act. The regulation aims to protect retirement fund members by limiting the exposure to certain asset classes. The below table illustrates the current limits within the regulation 28 framework. 

Asset allocation

Asset allocation is the mix of asset classes (like those in the table above) within a portfolio to control the risk and return relationship in a portfolio. It is important to note that asset allocation drives long term performance. This can be a whole blog on its own, but for now just think of the risk and return relationship. The more risk you take the higher your returns should be.

Core-and-explore investing approach

The age-old argument of active vs passive management. The core-and-explore investing approach solves this problem as it is a mix of passive and active management. The idea is to have a strong underlay of low-cost index funds that provide market returns. Blending more active investments with the index fund should hopefully give index beating performance. 

Core: 

As the core holding in any portfolio, you want to invest about 70% in a low-cost index fund. The benefits are the low costs, broad diversification, less anxiety of choosing winners or avoiding losers and they are self-cleansing, meaning the winners stay in the index and the losers fall out. 

Explore: 

For the explore part you can choose an active manager that will hopefully add alpha above the market index. Since picking the right manger has its own risks, we recommend keeping this to a minimum as it is a less stress form of investing. There is no prerequisite to have the “explore” part of your portfolio, it's just for those who want to dabble outside of the low-cost tracker funds.

Defining investment terms

Defining your investment term is crucial as generally the concept of higher risk, higher reward applies. The more risk you take the longer your investment term should be. Hence by investing for a specific term you control your risk and give yourself a higher probability of achieving your investment goal. The below terms are an indication of when an investment will have to be used for a specific need. For example, in an emergency, your emergency fund investment should be available within 3 days, or you are saving up for a vehicle in 4 years, then medium term investing would be relevant for you. 

Emergency:       0 to 3 days

Short-term:        0 to 2 years 

Medium-term:    2 to 5 years 

Long-term:         5+ years 

Emergency funds (Not available on EasyEquities,yet)

For emergency funds you want easy accessibility, no volatility at a low fee. Best to go directly to the asset manager, open an account, and invest in their money market account. No admin fees should apply which is a savings for you, increasing your return on investment. 

Short term (Available on EasyEquities)

For short term needs (0-2 years), income funds work well as they generally have a yield higher than money market funds but have slightly more risk. The funds can be used to save up for deposits for houses or investment properties, vehicles or even a holiday. 

Medium term (Available on EasyEquities)

For the medium term you can take some degree of risk. Using balanced funds is a great way to introduce risk which should deliver higher returns over a 2-to-5-year period. 

You have two options: Either blend Income funds, as shown above, with the balanced funds to suit your goal or use the core and explore approach with balanced funds only.   

Core-and-Explore: 

As explained above you want a strong underlay of low-cost indexation funds blended with active managers. Invest about 70% in an indexation fund and split (if you want to) the rest. An important note, if you do not have any views on active managers or you're a novice investor, stick to the low-cost indexation funds only. 

Note on table below: The first two funds are indexation funds and the last two are active fund managers.

Long term (Available on EasyEquities)

For the long term you can have discretionary investments or retirement funds which are governed by Regulation 28. For retirement funds use the balanced funds explained under the core and explore section in medium term (see above) as these balanced funds comply with regulation 28. For discretionary long-term investing with the aim to build long term wealth, the core and explore approach is recommended again.

Core-and-Explore: 

As explained above you want a strong underlay of low-cost indexation funds blended with active managers. Invest about 70% in an indexation fund and split (if you want to) the rest. An important note, if you do not have any views on active managers or you're a novice investor, stick to the low-cost indexation funds only. 

Note on table below: The first three funds are indexation funds and the last three are active fund managers.

In conclusion

You should notice two things, firstly the more conservative the investment options the less return you are going to receive. This is based on the asset allocation used within these funds. Secondly, active managers charge a higher fee as their inset costs are higher but should be competitive when looking at after fee return numbers.

Your investment needs should align with your term that you require the money. Using the EasyEquities platform and the funds discussed above will provide you with clarity on investment terms and investment options that will help you achieve your investment goals and simplify the dilemma of how to invest, where to invest and which funds to invest in.

Click here to open your account with EasyEquities and receive a FREE R50 to start your investment journey.

* This is not financial advice, please do your own research on funds. 

* Historical returns are not a guarantee for future performance

* Fund returns change daily and should be used for illustration purposes only.

* Fund costs were obtained from EasyEquities. Fund performance from Fundsdata.

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