Portfolio management

There are many different types of portfolios / funds, some with legal constraints (such as the requirements of the statute applying to retirement funds) and some without, and each requires a different style of management. Examples are:

- Liability and asset portfolios

- Banks

- Insurers

- Hedge funds

- Liability portfolios

- Government

- Company (when borrowing)

- Asset portfolios

- Securities unit trusts

- Money market funds

- Bond funds

- Share funds (various)

- Property unit trusts

- Retirement funds

- Individuals.

As we know, in the case of financial asset portfolios, the asset classes are money market, bonds and shares. There are various strategies that can be employed in the three markets, as indicated in figures 23-25. (Unfortunately we do not have the space to detail them.)

portfolio management: money market

Figure 23: portfolio management: money market

However, they can all be summarized into a choice of three strategies, and this also applies to individuals:

- Passive management.

- Active management (undertake self or outsource to a fund manager).

- Hybrid management.

portfolio management: bonds

Figure 24: portfolio management: bonds

portfolio management: shares

Figure 25: portfolio management: shares

Passive management involves one or both of two management styles:

- Buy and hold. This is a style that involves buying chosen securities when funds are available and holding them throughout bull and bear markets.

- Track an index. This amounts to buying ETFs and holding them, and is founded on the premise that "the market knows better" or "I will not do better than the market".

Active management involves the undertaking of the three levels of research, as indicated in Figure 26, and allocating funds, and buying and selling securities, according to the outcomes of the research. This can be done by oneself or outsourced to a fund manager.

Hybrid management, also known as the "core and satellite" approach, involves the belief that "the market knows better" for most of the time and therefore buying an overall market index (e.g. an all share index ETF) with say 80% of funds, and allocatin6 20% oneself.

investment analysis

Figure 26: investment analysis

A final word: the objective of investing is to achieve one's FSG as soon as possible, and this entails much more than just investing soundly. It involves conducting one's life with recognition of the rules / codes that apply to the four phases of the life-cycle., and allocating assets wisely over the life-cycle.

Asset allocation over the life-cycle


There is a body of literature called life-cycle investing. It holds that asset allocation should reflect one's age, i.e. that one should assume more risk at a young age (because risky assets furnish the highest returns, and one has time to recover from poor decisions), and reduce risk as one ages. There is much truth in this, but one should keep in mind that the time after reaching your FSG can be long indeed. Below we present our views on asset allocation over the four phases of the life-cycle (assumption: the individual is a successful employee or has a successful small business, and follows the rules expounded earlier). We present Figure 27 as a reminder of the trends in income, expenditure, saving and debt over the life-cycle.

four phases of life-cycle

Figure 27: four phases of life-cycle

Phase 1: 0-20

In phase 1 the individual will usually have zero investment assets, except perhaps a bank account (money market) in the latter part of this phase with minimal funds. Parents may have purchased a motor vehicle for the individual, but this not an investment asset; it is a necessary lifestyle asset.

Phase 2: 20-40

Early in this phase the individual will be expelled from the nest, be employed, and income will rise vertically from zero, reflecting the first salary. Expenditure will also rise vertically, but by less than income, reflecting the contribution to a retirement fund (usually a defined contribution fund; not a defined benefit fund). The contributions to these funds are tax deductible in most countries, and are taxed on receipt of income upon retirement.

As the individual progresses through the phase:

- Income will rise sharply.

- S/he will be married and have children.

- If both partners employed, income will rise to a higher level.

- Debt will be incurred for the purchase of a dwelling (a mortgage bond), which is the largest debt the individual / family will incur.

- Expenditure (including debt service) will also rise, but less so, reflecting the contribution to the retirement fund, as well as additional savings later on in the phase.

The additional savings may be invested as follows:

- In the asset class that delivers the highest return: shares. Risk is higher, but one has time on one's side: volatility is inversely proportional to the investment horizon (and the horizon is long).

- To accelerate repayment of the mortgage (assuming the mortgage agreement permits): it will reduce the period of the mortgage. This is a particularly wise investment when interest rates are high and share returns are low (taxation laws may influence the decision).

- In one's own business, but only if one is a true entrepreneur. One has time to recover from mistakes, which does not apply in the subsequent phases.

Asset class

Indirectly via retirement fund (% allocation)

Own investment

Notes on own investment / debt





Indirect: ETFs and / or SUTs




Zero in this phase

Money market



Direct: funds in bank account





Direct: own dwelling




Zero in this phase

Other real assets



Direct; small in this phase




± 60% of value of dwelling




Table 3: Example of portfolios: end of phase 2

Table 3 presents the approximate state of the portfolio of the individual at the close of Phase 1. Note the following:

- The asset allocation of the retirement fund: this represents their approximate norm. The proportional allocations are amended at times, depending on market views, albeit marginally.

- The family's investment in shares: they do not have the time to analyze shares and rely on the expertise of the fund managers of the SUTs and / or ETFs.

- The dwelling: some scholars are of the opinion that the dwelling should not be part of investment assets, because one needs a dwelling throughout life. This is partly true. To a degree it represents an investment, because it can be disposed of in Phase 4 in favor of a smaller dwelling, thus releasing funds for investment.

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