09 Sep 2021

Which is the best asset class for you?

A fortnightly podcast series with insight into starting your wealth creation journey.

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Are you keen to start your investment journey but aren’t sure where to start? In this fortnightly podcast series, Investec Wealth & Investment’s investment and wealth managers provide insight into all you need to know as you start your wealth creation journey, unpacking the basics of investing, the market forces shaping investments, the different asset classes and other factors important in building your wealth.

In this, the second episode, Ayabonga Cawe is joined by Kate Stannard, a relationship manager and Paul McKeaveney, an investment manager from Investec Wealth & Investment. They explain how to get the basics right, exploring the various asset classes with which to structure your investment portfolio. They look at the pros and cons of cash, the effects of volatility and inflation and what types of investments are suitable for long-term wealth creation.

Tune in every two weeks for more wealth creation insights.

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The audio of the full conversation with Ayabonga Cawe, Kate Stannard and Paul McKeaveney is available as a podcast here, or wherever you stream your podcasts.

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Transcript – Investec Wealth Creation episode 2

Skip to sections that interest you most, using the time stamps, or read the transcript below.

 

  • Introduction of guests and topic – [00:00]

    Ayabonga Cawe: Welcome back to another episode of our wealth creation series.  In this podcast, we talk about how to get the basics right.  We unpack the building blocks of your investment strategy and how cash can work for you and against you, as well as other alternative asset classes, such as property.

    And, joining me in this discussion is Kate Stannard and Paul McKeaveney from Investec Wealth & Investment.  Now, let me start off with, introducing Kate.  Kate is not only a financial adviser relationship manager, she's also a qualified level 1 kundalini yoga instructor.  She's a Neurozone certified coach and a meditation enthusiast, and she describes herself as somebody who's quite curious about the outer and inner worlds that shape her thinking.  We also have with us, Paul and he's a portfolio manager and fund manager.  And much like Kate, he's somebody who's constantly looking for different ways to stimulate his mind.  He keeps himself very busy with his two young boys, playing squash and golf, mountain biking and just generally having a good time.  Kate and Paul, thank you so much for joining us and I'm also quite interested just as we kick things off and I'll start with you Kate, how you got into investments.  I mean you could have gone into the world of meditation solely.  You know, the kundalini probably would've kept you busy as well but, you know, when did the investment bug bite you?

    Kate Stannard: I think for me growing up, my landscape was coloured by my parents getting divorced, just maybe as a personal thing, but my mom and a lot of other women of her generation were stay-at-home moms and I felt like they didn't necessarily have the skills to look after themselves financially.  Like that role had been performed by their husbands traditionally, and I really wanted to be a woman who looked after my own finances and could empower myself and maybe empower others. That was my initial driver, I guess, was to be financially secure.

    Ayabonga Cawe: Paul, yah, I mean you could've stayed in the outdoors and I'm quite interested I guess in some of your own early experiences and how you were introduced um, to the world of markets and investments.  And yah, seemingly, you've also done some very fascinating and interesting things, travelling all over the world as well.

    Paul McKeaveney: It’s interesting listening to Kate answering that question as well.  I remember, at quite a young age actually, my dad had all these tapes and books and these classes that he had taken on a Sunday morning on investing and it seemed to me that if you just listened to these tapes and read those books then you could make lots of money out of investments.  So, I tried to, as a youngster, to do some of those, you know, listen to some of those courses.  I made some investments myself that my dad helped me with and then I used to check the newspaper basically every day, get the unit trust prices and then plot them on my graph paper with a pen and like a pencil and paper on the inside of my cupboard to see how much money I was making or losing.  And, that worked quite well and then I got a bit more confident and I decided that it was time to pick a few companies to invest in.  So, I remember picking five shares and basically within a year, four of them were worth nothing again.  So, bit of a bit of a mixed bag – and we'll come back to some of the lessons that maybe we learned...that I learned from that experience – but really through you know, my parents getting me going at a young age.

  • Cutting through the jargon and understanding asset classes – [03:39]

    Ayabonga Cawe: You were fortunate in a way you know, to learn a lot of those lessons and even I guess, the big losses.  Um, but of course you would know a lot of people who aren't necessarily in financial services and I must say many of them, myself included, feel very overwhelmed by some of the jargon you know and some of the industry talk there.

    Kate Stannard: No, I think that that's very true.  I think that it can be a very overwhelming industry.  Certainly, I have a lot of friends, um who kind of give me feedback and they're like Kate, it's a whole lot of boring old men, talking in jargon and I don't understand anything and I'm scared to ask questions…you know, I think that Paul is luckily neither old, nor boring.  I really empathise with that feeling because um, I kind of liken it to taking my car for a service.  I'm really not clued up about the inner workings of a car and I feel very vulnerable when I take my car for a service because I don't know if my oil needs changing or my shock absorbers need changing.  I'm really trusting that the person that I take my car to is a professional, but I recently, for example, learnt the other day, that you should change your shock absorbers like every 90,000km. And I thought that was a really useful rule of thumb and I feel like we could do that today perhaps with asset classes which is what we wanted to discuss today and maybe just go through some rules of thumb.  Which might help lay people or people who are not in financial services, navigate their life choices and their financial goals, more meaningfully.  So, I don't know whether ... Paul, do you wanna just kick off and share kind of basically what the building blocks of investments are?  What are asset classes?

    Paul McKeaveney: So, asset classes, it's exactly as you said, are the building blocks of your investment strategy.  At the very simplest level, the main ones would be cash, bonds, equities and property.  Each of these asset classes have very distinct attributes in terms of how they behave and crucially, and we'll come back to this a bit later on, are accessible for the average investor.  I guess from a property perspective you may be saying well, not all properties are accessible for the average investor and I guess that is depending on how big a house you're looking to buy but generally speaking, cash, bonds and equities, would be accessible.  Cash is probably the easiest asset class to understand because we all have a lot of experience with cash and cash is very predictable.  It's basically earning interests on funds on-deposit with the bank.  You know what interest rate you earn and you know it's going to be there when you need it.

    Ayabonga Cawe: Many of us are familiar with cash because yes, we have it in our, you know wallets in many instances and it sounds great, it sounds safe, predictable.  Why don't we just all put all of the money in the cash?

    Paul McKeaveney: So, the silent assassin for cash is inflation.  Inflation is something we're all aware of on a day-to-day basis and we know that through looking at what our shopping baskets costs, what school fees are, what our medical aid fees are…I mean, even electricity prices at the moment are catching a lot of our eyes, and petrol prices.  But sometimes we don't make the connection between what inflation is doing to our savings, especially when we invest in cash.  So, using a very simple example.  If the interest rate on your R100 cash deposit is say 4% and inflation is currently 5%, your savings are actually going backwards in a sense because in a year's time, the prices of the groceries that you want to buy today will be R5 more expensive, while that R100 will only have earned an extra R4 of interest.  So, you effectively short R1.  And that's before tax as well, which we can maybe come and touch on a bit later.  So, you know cash is not a good strategy for long-term wealth creation and inflation is something that's fighting under the surface against you all the time.

    Ayabonga Cawe: And, what are some of the other alternatives?  I mean, you'd mentioned earlier on you know two other asset classes in the form of bonds and property as well.  Um, what's the balance, ideally one should strike there and maybe we can start off with bonds?

    Paul McKeaveney: Okay.  So, now we're getting a little bit more exciting.  So, we've spoken about cash, so let's start with bonds first and then we'll come to equities.  When you invest in a bond, you're effectively lending money to a government or a company who will pay you an interest at an agreed rate and then return your original investment back to you in a certain number of years.  So, the interest rate you earn on a bond, is higher than the cash deposit because you are lending money for a longer period of time and you are taking risk that the company or even the government – if you think about Argentina here for example – may not be able to repay you in full, in case something goes wrong.  In the more highly rated areas of the bond market, these risks are very low, but defaults do occur.  Inflation is also a bond investment's worst enemy although if you are earning a higher rate of interest than you do on cash but because you agree on that fixed rate for a longer period of time, if inflation goes up during that period, the value of the interest you receive as well as the capital that is returned to you, will buy less because it's worth less in real terms.

    Ayabonga Cawe: And, I find that quite interesting, I mean, you say inflation is also the biggest enemy of the bond market.  Many investors might be asking well, what other options do I have to hedge against that particular risk and equities I guess might also be a compelling proposition if we're interested in building long-term wealth?

    Paul McKeaveney: 100%. So, I guess you know, now we arrive at our...probably our most exciting, but also the most volatile, and volatile is a word that you know the community use to describe something where the prices is going up and down all the time.  So, we mentioned that cash and bonds tend to be quite stable.  If you're looking at your share portfolio every day, you'll see that the prices are moving around all the time.  So, that's generally what we mean by volatile.  Um, but the reason that equity is the most important of all the investment options for investors looking to build long-term wealth, is because they've easily produced the highest returns over extended periods of time.  These high levels of returns over the long term are why they are an essential component of any long-term wealth creation strategy.  What are they?  What is an equity or a share?  It's effectively an ownership stake in a business and as a shareholder or an investor in a company, you're sharing the fortunes of that company which are reflected in the profits that, that company makes and hopefully grow, over time.  Equities or shares can also pay you income in the form of a dividend, which is paid out of their profits.  The reason that inflation is less of an issue for an equity investment, is that whatever service or product that the company provides, would generally tend to be linked to inflation anyway.  If you think of a simple example of a retailer.  You know, if the costs of the products that they sell to you go up for whatever reason, um they will tend to raise the selling prices of those products to you as well.  So, equities will tend to provide better protection against inflation and much better growth than cash or bonds over time, as our listeners of Episode 1 um would know, given it was all about the powers of compounding. 

  • Some rules of thumb for asset allocation – [10:49]

    Ayabonga Cawe: Quite an interesting prospect and I want us to maybe take a look at another asset class in the form of property, but before we do that, Kate I wanna bring you in here because earlier on you spoke about rules of thumb, you know, heuristics that we can apply. So that the question that we ask isn't really about I guess what asset class is suitable for me, but rather, faced with whatever risk event in one's financial life, what type of asset allocation or mix is needed to make sure that those risk events don't hit you as hard as I guess many people have seen during this pandemic?

    Kate Stannard: I think that clients don't normally think of what asset class is right for me, but they think of, will I be okay in an emergency and do I have enough to retire on or what do I need to invest in to be financially free?  I think those are the ways in which we obviously think about our own finances and maybe some of the rules of thumb are, I believe everybody should have an emergency fund.  I think Covid has really shown how critical that is.  You know, life happens.  Your laptop breaks.  You have to take a salary cut because of Covid.  You lose your job or whatever the case may be.  And, those kinds of emergency savings really create a buffer around you that makes you feel safe and that feeling of safety is quite expansive and that kind of part of your financial world for me should be in cash.  It should be safe and stable and not subject to volatility because your time frame is quite short.  You may need it for an emergency.  And then I think for building longer-term wealth for becoming financially free as I like to call it rather than retiring, I think that retiring is kind of an outdated concept.  There you need ...There you've got a longer-term horizon for investment and you can afford to take on volatility, as Paul discussed, and there you should really be taking on more of the equity-type investments to really achieve those financial goals, those long-term goals.

    Ayabonga Cawe: So, Paul I guess, you know Kate's, already mentioned the importance of um, at whatever life stage somebody might be, the critical importance of having a corresponding asset class with a certain risk profile that can contribute to building long-term wealth.  What are some of these, I guess, asset classes that could be linked to some of these goals and different life stages?

    Paul McKeaveney: I guess the easiest way to think about them is that they each do something very different for very different people in helping you to achieve your financial goals.  Ranging from the safest but least exciting from a potential return perspective, which is cash as we've discussed, to potentially the highest-returning but also the riskiest asset class, which would be equities.  Everyone should hold a combination of all of them because they will each perform differently at different stages of your investment lifestyle and holding a mixture helps to smooth the investment journey out while meeting the broad objectives of income, security and growth as Kate has touched on.  So, for example, you know a young person who has a long time to save for financial freedom, can afford to take on riskier asset classes like equities because that has historically been the most probable way to maximise long-term wealth creation, but on the other hand, someone that needs to draw an income from their saved assets who may not have a long-term investment horizon, may need to shift some of their savings into bonds and cash.  And, if you have a specific spending requirement in the short term, like a deposit for a house you know, then that money should be kept in cash and not invested in the equity market.

  • Property and alternative asset classes – [14:25]

    Ayabonga Cawe: And, what about property?  Um, I mean I'd also think there would be other asset classes.  You often hear people talking about fine art and wine and all of those other nice things.

    Paul McKeaveney: We have only chatted about the most basic of asset classes so far, being cash, bonds and equities and there are absolutely a few more that we could discuss and maybe you know we can do another podcast in the series a bit later on, going into a little bit more detail of other asset classes, in inverted commas.  Though property I guess, would be one that most of us would have engaged with at some stage or are thinking about getting involved with.  Property has a very long-term track record.  So, we understand what the drivers of property prices are.  We know that the returns are typically linked to inflation, which makes sense when you think about how rental escalations work and how properties are valued.  And, as you’ve said you know, much more exciting candidates for discussion could also include commodities like gold, wine, art, vintage cars, stamps, crypto, you know there's a wide range of candidates for asset classes out there.

    But a very important consideration when we discuss these different, other asset classes, is liquidity. By liquidity, we generally mean, how easily can a public investor access these asset classes? And investments like art, wine and stamps, you know, despite their strong inflation-beating track records, are not easily accessible for the average investor. And another thing to consider is understanding how those asset classes behave relative to the other asset classes we’ve spoken about. Ideally we’re looking for an asset class to behave distinctly to each other.

    Ayabonga Cawe: And, I guess the other consideration Kate, would also be you know especially insofar as retirement is concerned and the timing of the investments as we’ve spoken about, would be potentially maybe you know what implications this would have at different life stages.  So, you probably don't want to be taking crypto um, you know, a few years from your retirement age?

    Kate Stannard: Look, I have to say I don't think I'm a crypto whiz.  Certainly, I'm still kind of getting my head around it as an asset class, truthfully.  But yes, I think one of the things that we haven't really discussed is liquidity, which I think is crucial with regards to any form of investment.  So, whilst you know it might be wonderful for example to buy a beautiful piece of art, it's only worthwhile as an asset if you can sell it again.  And you know I think that there is a certain place for certain types of asset classes throughout the lifestyle journey and I think liquidity is a crucial part of that.  It might be worth talking about some of the things that we see in our industry where I feel like people make mistakes will let them down...will let themselves down with their asset class choices.  Paul, I'm sure you've got some.  Probably, my most obvious one is I see a lot of young people being afraid of investing in equities because they're nervous of volatility.  And, volatility is really just volatility.  It's just going up and down, but that can feel very scary and what I tend to see as a mistake for…especially for younger people is that they don't invest past cash at a time where they really have time on their side.  They've got the benefit of compounding as we discussed in our first episode and they've got that long-term time horizon where they really can afford to take on that price movement but they're afraid, and I get that, but for me that's a major missed opportunity um in one's financial well-being and health.  Paul, what do you think?  What do you see?

  • Points to consider as you approach retirement age – [18:12]

    Paul McKeaveney: I look after a number of retirement funds, um and what I see also quite a big issue in the industry, is that, as people start approaching you know that age of 55, they start to shift aggressively out of their growth assets which are those equities that we spoke about earlier and moving quite quickly into cash and bonds, but the fact is that you know life expectancy is obviously depending on you know your health and you know all those sorts of things, can be...You can still have 20+ years of an investment horizon to still be, um…and living expenses to have to worry about.  So, shifting too quickly into these low-returning, safer, in inverted commas, asset classes, can actually be quite unsafe in the longer term because you're giving up that still quite a long-term investment horizon, depending obviously on your health and lifestyle.  That's a big one.

    Kate Stannard: Yah. And, I think that people are living longer.  I mean, the reality is that we are.  Our lifespans have increased dramatically over the last 100 years and for me, that's a major risk that you mentioned.  And, I think we can mitigate it by moving some proceeds into cash for short-term liquidity needs and income or bonds and then having the rest of the portfolio providing growth so that you're not drawing into the volatility but you're allowing the volatility to work for you.

    Paul McKeaveney: Exactly. I mean, I think sometimes we talk about goal-based investing and you know you can possibly split out those allocations separately.  So, you acknowledge that your equities are your growth assets and you make sure that you've got enough for your income and your rainy-day savings.  And, you don't mix them altogether because I think sometimes that's where the volatility makes people nervous because if they look at just one portfolio in its entirety, it's obviously gonna be moving up and down. But if you separate those components out so that your cash is nice and stable, that the bonds are delivering your income and your equities are all over the show, but they're still gonna provide you with the growth over that long term.

  • Conclusion – love your future self - [20:21]

    Ayabonga Cawe: I think you know, Kate and Paul, if there's any message um that one you know takes from this discussion, is the need to strike that balance. To balance out you know your choice of asset classes informed by whatever liquidity needs or preferences you might have that correspond with the life stage you are at and also, some of the potential or latent risks that one might face. And so, it's about balancing all of these considerations and I think as we wrap up, that for me is the big lesson. But, from the pair of you and maybe Kate we'll start off with you, any last big message that you might want to send to many of the investors who are listening in to this platform. What would that message be and similarly to you as well Paul?

    Kate Stannard: So, I think for me it would be: start early.  I mean I have a running dialogue with a young girl who is kind of 18, 19 and I'm kind of teaching her financial health on the side and you know I said to her start even if you've got short-term requirements. Put a little bit in a unit trust and start early because firstly you start to normalise for example, volatility or movement.  It becomes normal for you and you grow in confidence. And also, you have that long-term time horizon. I really have this kind of view that we need to balance future love and present love.  I feel like all of us are pretty good at loving our present selves, but we need to also love our future selves and for me loving our future selves is paying attention to our finances early.

    Ayabonga Cawe: Thank you so much for that. Paul?

    Paul McKeaveney: Can I steal Kate's answer?

    Ayabonga Cawe: Potentially. Potentially. I like that future love…Present love. I like that.

    Paul McKeaveney: She's spot on. You can't start early enough. I would just add to that, that everybody's circumstances are different, and there's no one-size-fits-all approach. And I think that those conversations are very important to have with your wealth manager or your financial adviser around, what is the most appropriate mix of asset classes depending on your circumstances. You can't just pull a book off the shelf and it's gonna tell you exactly what you need to do. It's a very human conversation that has to be had, based on you. And I guess that would be my number one take-away.

    Ayabonga Cawe: Kate and Paul, thank you very much, for joining us for this lively discussion. That was Kate Stannard and Paul McKeaveney from Investec Wealth & Investment. Bringing to us another episode of our episodes in our wealth creation series, where we took a look at the building blocks of one's investment strategy and, the balance of the choices around asset classes. And also a discussion on some alternative asset classes as well. Until we meet again.

    Ayabonga Cawe: Just a reminder to listen to the first episode of this series if you may have missed it and please stay tuned for more engaging conversations on wealth creation. In our upcoming episode, we'll speak on the importance of the global economy and taking a global view to investing.  If you'd like more information on some of the topics we've covered today or if you'd like to start your wealth creation journey, please reach out to a wealth manager or a private banker. If you're an existing private bank client, you can also access the Investec My Investments Platform to start investing in local unit trusts with reduced minimums of R1000 per month.

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Listen to episode 1

In this first edition, Ayabonga talks to Stephen Silcock and Tebello Rabele.

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