Asset Allocation Strategy 1: Samantha

Samantha is a recent university graduate. She specialized in Occupational Therapy and has recently been employed at a hospital for children. In essence, Samantha is at the beginning of her career starting from scratch.

The following summarizes Samantha’s income and assets:

  • Annual salary of R252 000 or R21 000 a month.

  • She also won a R50 000 prize in her final year of university in a contest to do with innovation in community outreach. Currently invested in a standard savings account.

The following summarizes Samantha’s expenses and debt:

  • Per her employment contract, she is obliged to contribute to a retirement annuity each month which comes off her salary. She has chosen to contribute R1 000 each month.

  • She has a medical aid costing R2 000 a month.

  • She rents a room in a house for R7 000 all inclusive.

  • She makes payments of R1 500 a month for her new car.

  • She pays R500 towards a comprehensive insurance plan each month.

  • She expects to spend R2 000 a month on food and R1 000 on petrol.

  • According to the current tax rates, she pays approximately R3 900 a month in taxes.

  • Apart from her car payments she has no other debt.

Thus her disposable income is R2 100 per month which she plans to invest.

Her employment contract is such that it is valid for two years and then subject to renewal. She has always wanted to travel abroad for an entire year but understands that gaining work experience is critical for her profession in the long-term, and traveling does not come cheap.

To this end she plans to work and save diligently for two years and when she travels she plans to subsidize her expenses by finding odd jobs in return for either money or board and lodging. To be on the safe side she reckons if she saves an amount of R100 000 by the time she starts traveling it should be enough, though she does not intend to use this full amount.

From the information above we know that Samantha has a short-term investment horizon of 2 years, after which her goal is to travel for a year. Her current salary covers all of her anticipated expenses and there is some left over to put towards her travel savings.

If her salary remains constant over 2 years, the amount she can save is R50 400 (R2 100 x 24). If she had to simply put this under her mattress each month along with the R50 000 prize money, she would have R100 400 after two years and achieve her goal. However, she has learnt that investing under the mattress is not ideal and would like her money to work for her.

Although Samantha knows the importance of saving, she does not have any background in finance and has never read any company financial statements nor could she tell you what the on-the-run 10-year government bond yield is. However, Samantha sets out to educate herself with regards to basic investing principles and reads through information on this site.

After reading and comprehending the material and understanding what it means to invest according to her goals. She decides on an asset allocation of 10% equity and 90% fixed income.

She decides to make use of readily available investment vehicles such as ETFs and unit trusts. In the end she decides to invest the 10% equity in a passive JSE Top 40 ETF and the 90% in an actively managed bond unit trust. The reason she chose a passive ETF for the equity portion is because she likes the idea of being invested into 40 different blue chip shares through one investment vehicle, to her it’s a simple solution.

The reason she chose the actively managed bond unit trust is because she isn’t nearly as familiar with bonds, and she likes the idea of someone managing her money according to a predefined mandate. It brings her peace of mind knowing that the majority of her money used to achieve her goals is being managed professionally.

Her thinking behind the allocation is that the majority of her portfolio (in fixed income) should grow at a rate that results in this portion of the portfolio reaching approximately R100 000 after two years.

She has been prudent in allocating enough money to an asset class that should give her the best chance of achieving her goal. The 10% invested in equity will help with diversification and may hopefully provide excess return so her entire portfolio value is sitting nicely above R100 000 after two years.

Even if the equity portion does not perform well, she still has a very good chance of meeting her R100 000 goal, and she has the option to simply let the equity portion sit for a longer period of time.

Next: Asset Allocation Strategy 2: Trevor and Vanessa

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