What is diversification? Should you care about it? If you do care about it, how do you do it? In this week’s episode of The Fat Wallet Show, we spend some time at the intersection between risk and diversification. We help you think through the role of cash in a portfolio and once again reject the idea that your portfolio should start de-risking in your fifties. Coronavirus or no, modern humans live for a long time. Very few people can afford a multi-decade low-growth portfolio.
We spend a little more time than usual on inflation risk. Inflation is the silent wealth killer. It’s so stealthy, those risk-tolerance questionnaires financial companies make you fill out don’t even ask about it. Just like shares held in the short-term introduces a lot of risk, cash held for a long time introduces risk to your portfolio. We play with the idea of diversifying into other currencies as an inflation hedge.
We even have a little section for those who want to build their wealth with blueberries. For alternative investments, ask yourself:
- Who is the price maker?
- How liquid is the investment?
- How likely is it to beat inflation?
We hope this episode gives you some tools to think through some of these issues in your own portfolio.
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Win of the week: Nokuthula
After discovering the podcast, I went through a phase of being giddy and hysterical for two weeks catching up on all the episodes.
I started my savings journey late. I am not paying extra into my home loan and rather choosing to invest,
I still have upcoming university fees for my niece and nephew who I’m partially supporting and will continue to support until they are independent. I can only do that from my salary as I am not putting any money away for them for future expenses. It is not a watertight plan, but I had to be realistic.
There are many holes to plug but I had to be decisive. Being able to fund my own retirement is paramount. I am continuously working to change things for the better and nothing is off the table, including selling the house and working beyond age 55, but this is where I am now.
Most of my money is saved in Reg. 28 accounts. I only started my TFSA in 2018 and I have been contributing the maximum allowed. I will only start contributing to my USD account in July so it is at zero right now. The breakdown as a percentage of my total monthly contributions is:
- Pension fund: 43%
- RA: 32%
- TFSA: 13%
- EE USD: 13%.
- Provident preservation: 0%
Considering that the TFSA is the last to spend I think the preservation fund will be first, the current legislation allows that I can withdraw the full amount at retirement, but it will only last me a few years. That means my Reg. 28 accounts will have a bit of time to grow outside of the Reg. 28 restrictions. Then I guess it will be EE USD next.
In a South African context, what should one think about in terms of a retirement drawdown strategy? What accounts should one have set up whether it is for FIRE or just FI? Should one also consider a South African discretionary account? I am also wondering if an endowment plan can also be part of the retirement mix. The ones I have seen are being marketed as being good for tax planning for people with a marginal tax rate of 30% or more. I would only go for one that is passively managed with low fees and if such does not exist then I will pass.