Every time we open the newspaper, switch on the radio or watch TV we are inundated by information on the imminent collapse of Europe and the impact it will have on global growth. As a result stock markets across the world are extremely volatile so share prices are rising and falling by significant amounts every week. Investors are understandably asking whether now is really the time to invest their money.

We know that in order to outperform inflation over the longer term we need to be investing in so-called “growth assets” which include equities (shares in companies) and property. However these investments can fall in value, especially during uncertain times.

If you have a longer-term view, sitting on cash waiting for the “right time” to invest is also not a solution. If experience shows us anything it’s that it is virtually impossible to guess the “right time” to invest. “Where a lump sum is concerned, timing the market is often a fickle exercise, even for investment professionals,” says Francois Cilliers, CIO of Novare Investments.

So what is the best investment strategy?

The power of the debit order

One of the best ways to save is through a monthly debit order as it reduces the risk of investing at the peak of the market. With a debit order, you are buying shares on a monthly basis which averages out the price you pay for those shares over time. When the market falls you are able to buy more shares, or units in a unit trust, for the same rands which is a lot like shopping during the sales. In fact it is better to be investing when the markets are falling; if you are saving via debit order and you hear the markets have fallen you have reason to celebrate because your money is buying more shares! When markets are rising it just gets more and more expensive, however over time the markets rise which is then beneficial for the lump sum you are accumulating through your monthly investment.

Your time horizon

Before you invest you need decide when you will need the money. “Equity market cycles tend to last between 5 and 8 years. Investors with a long time horizon (10 years plus) would typically be able to take more risk, as they’ll be able to stomach more short term volatility. There is more time to recover from short term losses,” says Nicky Gous, Head of Prescient’s Retail Business.However if time periods are too short to allow the investment to recover “the return of capital trumps the return on capital” explains Paul Stewart, Executive Director and Head: Asset Management at Grindrod Asset Management. This means over shorter-periods of time you should avoid assets that can fall in price and rather consider investing in cash or bonds.

You can save for the next ten years

Stewart says over this longer period of time you should invest in a portfolio with 70% to 80% in high quality local and global equity and listed property with a special focus on emerging markets. Fund managers expect emerging markets to drive economic growth in the future. Fund managers also believe there is more value in the overseas markets than locally so having a fund with exposure global markets would be an advantage.

Stewart says the remaining 20% to 30% should be invested in cash, government and company bonds as well as a small allocation to gold for diversification reasons. A high equity prudential unit trust would meet these requirements.

Five-year investment horizon

Gous says investors with a shorter time horizon, of say five years, have a bigger challenge to generate real returns. “The full equity market cycle may last longer than the investor’s time horizon. The management of downside volatility now becomes more important because the investor won’t have time to recover from a large drawdown,” says Gous, however she says exposure to growth assets like equity is still important as you can’t afford to fall behind inflation.

Gous says in order to have exposure to equities but limit your risks it is a good idea to diversify across different asset classes, including equity, bonds, cash, property and offshore, as this will result in steadier returns. A medium equity balanced fund would meet this requirement, for example the Prescient Balanced QuantPlus<span style=”font-size: small;”>Fund holds a mix of assets, having enough growth assets (SA and African equity) at attractive valuations to deliver inflation-beating returns, while having allocations to offshore, gold and equity protection structures in place to manage the downside.

Stewart says for a lump sum investment with a five year view one should select an investment with 50% to 60% in high quality local and global equity and listed property. The remaining 40% to 50% would be invested in lower risk, interest generating assets as well as a small holding in gold. Gous says given the low interest rate environment, this portion of the fund should invest in invest in low-risk investments that can offer interest rates (yields) higher than cash. This would include Inflation Linked Bonds (ILB), Floating Rate Notes (FRN) and Credit Linked Notes (CLN) which would provide a better prospect to generate returns above inflation.

Gous says for a risk-averse investor, who does not want to lose capital but still needs equity exposure, diversification alone is not sufficient for managing risk. Some alternative investment strategies aim to address this such as positive return funds. Gous says these funds make effective use of derivatives and following a dynamic process, aim to protect capital over a 12 month rolling basis while providing positive real (after inflation) returns over time. (next week we take a closer look at hedge funds which aim to protect your capital)

Two-year investment horizon

Gous says an investor with a very short time horizon (around 2 years) would generally be more risk averse. “Any volatility or negative returns could significantly impair their ability to achieve investment goals,” says Gous who says an investor wants to limit risk and have more liquid assets over this time.

However because our current interest rates are actually lower than our inflation rate (5.5% from cash versus an inflation rate of 5.7%- 6%) there is a real chance that the value of your investment could fall behind inflation and will buy you less than it did when you started saving.

For a two-year lump sum investment the RSA Retail Savings Bond offers a return of 7% per year. However your money is locked in over this period. You could select the one-year RSA Retail Savings Bond and roll it over for a further year if required. Alternatively you could invest in an income fund unit trust that is diversified across various financial instruments which the aim of delivering returns above inflation.

If you are investing for a year or less, then a money market fund or fixed deposit with your bank is the best option.

This article first appeared in City Press