Highlights in this issue:

*** Shortcuts to picking winning shares...
*** Getting what you want with asset allocation...
*** Protecting yourself with diversification... and more...

From Gary Booysen on the top floor...

Dear Investment Academy Reader,

I’ve already looked at the tools you can use to pick a winning share. And you should already be well on your way to using both fundamental and technical analysis to select the perfect shares. For your technical analysis, you should be using charting software like Cycle Trends. But remember, even though these packages can give you the edge, you’ll need to keep your eye glued to news. It'll crunch a hundred years of history, but it won't predict the next time Trevor Manuel decides on a spur of the moment resignation. For that, you’ll need to do your homework or enlist the services of a Stockmarket Sleuth like Werner Robberts.

You might be able to pick shares, but just picking winning shares isn’t the most important part of building a portfolio. Equally important is how shares behave in relation to each other. There are two important concepts that need to be discussed here: Asset allocation and diversification. Today, we're going to look at asset allocation and next week we'll delve into diversification.

Asset classes
There are a huge variety of instruments available to the private investor that can store wealth. Professionals find it useful to divide up these “assets” into broad classes. When choosing what to include in your portfolio, you need to first work out the broad asset classes you need to target to achieve your goals. But what are the different asset classes and when do we use each one?

Cash is king
If you’re chasing large investment returns then this asset isn't for you. Cash may earn itself the title “asset class”, it won't earn you much interest. It’s often seen as the least risky of all the asset classes but, as with most investments, risk is proportional to returns. Cash will earn you a very low rate of interest (zero if you’re actually stuffing currency under your mattress). It does have the benefit that it’s immediately accessible although it's eroded by inflation and subject to risks associated with foreign exchange fluctuations. Every investor should hold some cash

Word is bonds
Although bonds are seen as the haven of the super rich, but they've been opened up to the South African investor through government retail bonds. They're backed by the South African government, which is essentially borrowing money from the public. They promise to pay you a fixed interest rate over the stipulated period of time and this is usually above any rate you’ll get on a money market account. The current fixed rates are 9.25% on a two year, 9.50% on a three year and 9.75% on a five year bond.

Safe as houses
This phrase might be a little contentious these days, but property is still a solid investment. If you have access to finance, now is a good time to be buying houses. But remember, rates are at the bottom of the cycle and we’ve just seen a housing market bubble. If you’re looking to invest now, don’t expect prices to rocket overnight like they once did. It took ten years for property to recover after the last housing market crash. Also, it’s important, if you own a home, not to classify it as part of your portfolio. If you want exposure to the housing market, perhaps try investing in listed property instead.

Diversified equity portfolio
This is the most risky of all the asset classes, but it's the asset class that's also shown the best returns over the long-term. If you have any unit trusts, a retirement annuity or company pension plan, you probably already have exposure to this asset class.

Next week, we’re going to look at how to protect your portfolio with diversification.

Until then – keep learning!

Gary Booysen
for the Investment Academy