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Investing
Sunday, July 28, 2013 - 10:15
Longer the better

An investment horizon is the total length in time an investor is expected to hold a security or portfolio. Knowing an investor’s investment horizon aids in optimising the portfolio with enough risk assets. Gerbrandt Kruger of Seed Investments, gives an example.  “If one is saving for a holiday in a few months’ time, the investment horizon is less than a year and thus the investment needs to be of low risk. On the opposite spectrum is a person saving for their retirement that is more than 10 years away. They would be able to take on more risk and get a better average return over the period.”
One of the biggest risks when there is a mismatch in the investment horizon and the level of risk in the portfolio, he says, is the risk of permanent capital loss. “When you disinvest from a portfolio while it is at a loss, this is then realised and the possibility to recoup the loss is removed.”
To illustrate this we look at three portfolios with different levels of risk:
• Multi Asset Low Equity portfolio – Moderately Conservative
• Multi Asset High Equity portfolio – Balanced
• General Equity portfolio – Aggressive

For ease of calculation we used the average manager return for each of the above ASISA categories. The rolling returns were calculated for different time-periods to simulate different investment horizons for each of the portfolios.
The graph shows the range of possible returns for each of the portfolios for different investment horizons. The returns were annualised for periods longer than one year. If you were invested in the Low Equity portfolio your return over one year would have ranged between -1.2% and 23.3% depending on the start date of the investment. Looking at the one-year range of returns, all of the portfolios experienced at least one year where returns were negative.
“The first thing that you will notice from the graph is that the range of returns become smaller and smaller as the investment horizon is increased,” observes Gerbrandt. “Secondly, the minimum return increases. For the Equity portfolio the minimum over a one-year period was -33% and over a five-year period 6%.
When looking to make an investment with a three-year investment horizon one can consider a fund in the MA High Equity category. Over a rolling three-year period the chances of a capital loss are reduced with the probability of providing a better return over the period than a fund in the MA Low Equity category. A portfolio invested 100% into equity will not be an ideal investment as you run a risk of having a capital loss at the end of the three years.
“As with everything else in life nothing is certain,” he says. “These calculations were performed on historic data. But while the average return, minimum, and maximum return will differ for future investment, the crux still remains relevant. One needs to select the correct level of risk for your portfolio depending on your investment horizon of the investment.”
 

Copyright © Insurance Times and Investments® Vol:26.7 1st July, 2013
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