YOUR MONEY: Are retail bonds a safe investment?

Question:

I’m 73, retired and braving the wind in Betty’s Bay. I’m not Bill Gates by any means and depend on interest from modest investments to keep afloat. I’m considering RSA retail savings bonds as they offer the best rates for fixed (or inflation-linked) five-year investment. Disappointingly, I have had no reply to two separate e-mail inquiries over the past few weeks. Consumer website Hellopeter is filled with similar complaints from investors. Poor communication aside, internet information on the topic of retail bonds seems to suggest they’re a safe investment. Which is reassuring — but then again, that’s what they said about the Titanic. I’d appreciate any comments you might have.

— Bruce M

Answer:

I will of course need much more detail on your portfolio and income requirements to provide more accurate advice. But there are a few principles for optimising any portfolio and even more so in retirement, when an income is required.

When constructing a resilient, “all-weather” portfolio, one asset class can never be seen as an alternative to another. They all move in cycles and need to be combined to complement each other as they provide different outcomes and behaviours, and different tax consequences and returns throughout different cycles. You need to include cash, bonds and growth assets (equity exposure), both local and offshore.

You ideally need to achieve two things when requiring an income from any investment: keeping up with inflation (real inflation) as well as your income drawing, and ensuring the capital will not erode for as long as possible. Active management and a strategic approach will lead to changes in asset allocations over different market and economic cycles. In an ever-changing national and global environment, your portfolio needs to be able to change accordingly as well.

Navigating the bond market should be done with great care. A few principles to keep in mind:

• Bonds can be volatile in uncertain times — a few cases have been recorded where they reacted similarly to equities in times of change. The duration recommendation on bond exposure is in fact longer term — two to three  years.
• This is an interest-bearing asset class, meaning that over the age of 65 you have an annual exclusion of R34,500 on interest earned; any growth over and above that figure will be taxed as income at your marginal rate.
• Bond rates also move in cycles when interest rate environments change. The yields are attractive now but they will start changing again in the next few months as the interest rate cycle changes.
• Investment vehicles also need to be considered well, ensuring tax efficiency, as well as estate planning.

Navigating our investment approaches remains an ever-changing activity, and adapting your strategy will be key to ensure resilience and optimal performance with minimum risk.

— Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

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