Balancing income with share investing

I hear there is great value to be had in investing in shares right now, but I am reluctant to risk tying up most of my money. How do I find the right balance to maintain cash flow but also make the most of any current opportunities in the market?

Name withheld

Struan Campbell, PSG’s Wealth Manager: Securities of the year from PSG Wealth Umhlanga Rocks Stockbroking, responds: Yes, there is value to be had in shares at the moment, although one could argue there is always value, provided you are willing to do the hard work to uncover it.

If you are living off your investments, with no active income being earned, you would be wise to retain at least 12 to 24 months’ living expenses in an income fund. In this way, sudden market movements, as experienced in March last year, would have a lesser effect on your monthly income. You would need to be careful about investing all of the balance in equities, because these are a risky proposition in the medium term.

If you are still actively employed, keeping a cash safety net of a few months’ income is always a good idea. From there, start dipping your toe into the share market.

If you have substantial funds to invest, retaining the services of a discretionary manager to run a managed portfolio on your behalf will yield the best longterm results.

With small amounts and a DIY strategy, look first to “holding company” stocks – that is, listed companies that earn their returns through multiple businesses. This inherently creates diversification, because the share you are buying is driven by the success of a range of underlying companies. Stick with quality counters. As you gain confidence, slowly pick more focused companies, but be very careful on playing the penny-stock market with small amounts of money. Trading costs and liquidity constraints can destroy returns.