Best recipe for your asset mix

WHEN the market is booming and the prices of your shares are rising all the time, how often do you revisit the balance between your shares, bonds, property and cash investments?

WHEN the market is booming and the prices of your shares are rising all the time, how often do you revisit the balance between your shares, bonds, property and cash investments?

If you last reviewed this mix more than two years ago, it is time for a checkup.

Over the past 10 years, the South African stock market has grown investors' money by a total of 20% a year. This is an astounding return and is far higher than the normal growth generated by the stock market. The returns have been 33% higher than you would normally expect over a 10-year period.

This is very unlikely to be repeated in the next five years.

Does this mean you should sell all your shares now? I think not. Most other investment classes are not very attractive at this time: cash is not king, government bonds are not looking rosy and listed property faces headwinds from rising interest rates.

If you are a moderate-risk investor and started your portfolio in 2009 with 50% of your assets in shares and 50% in bonds, you will probably now have 61% of your assets in shares and 39% in bonds.

However, if the stock market goes through the same sort of crash as we saw in 2008, you could have a loss of capital far greater than you can tolerate. This means you need to take proactive but rational action to protect yourself.

It is impossible to predict a stock market crash so there is little point in selling shares now in anticipation of a crash.

The stock market can remain expensive for years, which means you would lose out on all future growth and dividends if you became a cash investor now. A strict regime of rebalancing your asset mix is your best method of protecting yourself against huge losses.

The numbers show that investors who maintain a disciplined rebalancing strategy will generate better investment returns over the long term.

Take a case where investors rebalance a portfolio that had 40% in bonds and the balance in global shares on an annual basis from 1998 to now.

In that scenario, the figures show that the rebalanced portfolio still goes up when the market does well - but importantly, it does not fall as far when the stock market drops.

The reason is simple: a strict rebalancing discipline forces you to sell assets which are more expensive and to buy those that are cheaper.

As we know, over long periods you will be a successful investor if you buy cheap assets and sell them once they have become expensive. Automatic rebalancing achieves this objective for you in a rational, sustainable manner.

This type of strategy also helps when stock markets are very expensive (as they are now) because you don't have to second-guess where markets are going to decide what to do with your own money.

Rather, you simply focus on your asset mix to ensure that you have the correct allocation to each type of investment.

If the market crashes, you will be in a position to buy into shares again at a better price because you will have sufficient money in other asset classes, such as cash and bonds, which will provide the capital to buy shares at good prices.

Ingram is director of galileocapital