What type of investor are you: The Protector

Over the past month we’ve been exploring different types of investors. In this article, the last of our five-part series on this topic, we explore the final type of investor: The Protector.  If you feel that you may fall into this category, read on. We look at what drives them, how they tend to invest, and some of the pros and cons of this approach to investing. By learning about some of the typical pitfalls you may be susceptible to as a Protector, you can hopefully avoid making potentially detrimental investment choices going forward, and instead take advantage of your strengths. 

Profile

Do you prefer to avoid risk whenever you can? Do you believe that slow and steady wins the race?  When it comes to investing, is the risk of losing money one of your primary considerations? If so, it’s likely that you are a Protector. You want stability, not volatility – you want to protect your money and grow it safely, and you’re willing to accept lower returns in exchange for capital preservation. As a result, you invest primarily in conservative assets like cash and bonds rather than riskier assets like equities; and in terms of unit trusts, you prefer Money Market and Income funds over Equity or even Balanced funds.

While this may seem to be a purely winning strategy on the surface, there are both pros and cons to this type of approach, all depending on your investment goals -- we look at these below.

Pros

A more conservative investment portfolio has historically offered more stability and thus a more consistent, dependable investment experience over time than more aggressive portfolios. Investors in these portfolios will therefore be less tempted to panic and pull out of the market when faced with losses in turbulent times. Because cash and bond portfolios are less risky, your capital doesn’t face the higher probability of losses that is associated with more aggressive portfolios. Did you know that making up for lost capital takes a surprisingly long time and an exponentially greater return than you might expect? For example, a 10% loss requires a subsequent 11% gain to break even; a 50% loss requires a 100% gain to break even and a loss of 70% requires an astounding 233% gain just to get your capital back. As such, conservative portfolios are most appropriate for investors with shorter-term investment goals who can’t afford  losses within one or two years’ time.

Cons

The biggest disadvantage of being a Protector is, of course, the fact that because you want to avoid risk and preserve your capital, you are likely to achieve lower returns over time than The Balancer or The Risk Taker. Missing out on higher returns could be a real detriment to your financial well-being. You might, for example, find that the spending power of your capital is eroded by inflation. The world is currently in a high inflation environment, with South Africa’s inflation rate now beyond the Reserve Bank’s target band of 3-6%. If your investments aren’t beating inflation, you’re essentially going backwards, particularly if you’re investing for a longer-term goal such as retirement.  At M&G Investments, our Inflation Plus Fund aims to outperform CPI by 5% (before fees) over a rolling three-year period.

As we discussed in our in this series, basing your investment decisions solely on sentiment – in this case how you feel about risk – is itself a risky approach. Your asset allocation should rather be based on your financial goals and how much time you have to achieve them. For example, investing for your child’s tertiary education is typically a medium-term goal – so rather than investing only in cash and bonds, you would normally have enough time over 5-7 years to be able to include equities and listed property in your portfolio as well.  Simply investing in a conservative portfolio, where potential returns are lower, increases the chances that you won’t get you to your goal.

More specifically, if you’re saving for a long-term goal like retirement, a conservative portfolio is certainly not the optimum choice. You have many years to compensate for any losses from equity and bond market downturns, and compounding your returns over time will work powerfully in your favour. Even if you’re approaching retirement age, you should think twice before starting to invest more conservatively. Living another 20-30 years beyond retirement, when you’re not earning a salary or contributing towards your retirement pot, means you’re likely to need to hold some riskier assets like equities in order not to run out of money in retirement.

There are always pros and cons

To summarise, each type of investment comes with its own set of pros and cons. Equities, for example, have historically produced high returns compared to other asset classes, but this comes with a lot of volatility which, over the short term, could result in significant losses. This is why we always say that equities are a longer-term investment (seven years or more).

Bonds and cash, on the other hand, should be seen either as shorter-term investments up to three years (given their lower risk and level of returns) or as a diversifying component in a well-balanced, multi-asset portfolio. Your financial adviser is a good source to turn to when structuring the right portfolio for you.

As mentioned above, this is the final article in our series What Type of Investor Are You?.  The goal of the series has been to provide some broad-based insights into different types of investors, as well as some information that, hopefully, will help you to become a more informed and therefore better investor, all with the intention of helping you to successfully reach your financial goals.

For more information, contact our Client Services Team on 0860 105 775 or emails us at info@mandg.co.za.