Rebalancing, asset allocation and diversification sound like words from a fund manager’s brochure. They’re actually the basics that stop your portfolio looking like a braai gone wrong: charcoal on one side, raw mince on the other.
By The Money Maze | Listen to the episode: Spotify
Most investors spend their energy on which share to buy. Fair enough, it’s the fun part. But the boring decisions about how much goes where, and how often you tidy up, do a lot more of the heavy lifting over time.
Asset allocation: the real secret weapon
Asset allocation is how you split your money between asset classes:
- Equities (shares), local and offshore.
- Bonds, which pay interest.
- Cash.
- Listed property (REITs).
- Commodities or gold, if you’re feeling spicy.
Each behaves differently. Equities grow the most over long periods but bounce around a lot. Bonds and cash are steadier but grow slower. Property sits somewhere in between and pays income.
You’ll often hear that “90% of returns come from asset allocation”. That’s a famous misquote. The 1986 Brinson, Hood and Beebower study found that asset allocation policy explained about 90% of the variation in a pension fund’s returns over time, not 90% of the returns themselves. The point still stands, though: the mix you choose drives your experience far more than whether you picked Bank A or Bank B.
A young investor with decades ahead might hold mostly equities. Someone nearing retirement usually wants more bonds and cash, so a bad year on the market doesn’t wreck their plans. South African retirement funds are guided by Regulation 28 of the Pension Funds Act, which caps equities at 75%, with offshore exposure limited to 45% since 2022. It’s a useful reminder that even the regulator thinks you shouldn’t go all-in on one thing.
It’s like a braai shopping list. You wouldn’t rock up with only steak and forget the pap, wors and garlic bread. Get the mix right or the meal flops.
Diversification: because bad things happen
Diversification isn’t owning 20 JSE shares that all fall together when Eskom sneezes. It’s spreading your money so one disaster doesn’t take the whole portfolio down.
Spread across:
- Sectors: banks, miners, retailers, healthcare, tech.
- Regions: South Africa, the US, Europe, emerging markets.
- Asset classes: equities, bonds, property, cash.
- Currencies: offshore assets can cushion you when the rand weakens.
The JSE is concentrated. A handful of large companies, plus big resources and financial sectors, make up much of the index. So a “diversified” local-only portfolio can still be heavily exposed to a few names and to the rand. Our episode on index weighting and free float goes deeper on that.
Diversification won’t stop losses. In a crash, most risky assets fall together. What it does is reduce the damage from any single mistake, so you live to braai another day.
Rebalancing: the quiet discipline
Rebalancing is the part people skip because it feels backwards. Why sell the thing that’s doing well? Because if you don’t, your portfolio drifts into a risk level you never chose.
Say you start at 60% equities, 30% bonds and 10% cash. After a strong year for shares, equities are 75% of the pot. You’ve now got a more aggressive portfolio than you planned, just in time for the next correction.
Rebalancing means flipping the wors before it burns: trim what’s grown too big, top up what’s fallen behind, and get back to your target mix. Two common approaches:
- Calendar-based: check once or twice a year and reset.
- Threshold-based: only act when an asset class drifts more than, say, five percentage points from target.
Keep costs in mind. Every trade has brokerage, and selling outside a tax-free savings account or retirement fund can trigger capital gains tax. Often the cheapest way to rebalance is to direct new contributions to the underweight asset rather than selling anything. Pick a date you’ll remember. Boxing Day works, when you’re too full to do anything else anyway.
An illustrative example
This is a made-up example for explanation, not a recommendation. Take R10,000 split like this:
- R6,000 in a local equity index ETF.
- R2,000 in a global equity ETF.
- R1,000 in a bond ETF.
- R1,000 in listed property.
Over a year, local shares rally 25%, global shares go nowhere, bonds return 8% and property 6%. The pot is now about R11,640, and local equities are roughly 64% of it instead of 60%. Rebalancing means trimming the local ETF by about R500 and spreading that across the laggards. Small moves, done regularly, keep the plan honest.
Stokvel Starter Pack
- Asset allocation: how you split money between asset classes. The biggest driver of how your portfolio behaves.
- Diversification: spreading risk so one failure doesn’t sink you.
- Rebalancing: resetting to your target mix so risk doesn’t creep up.
- Regulation 28: limits on how SA retirement funds can invest.
- Drift: what happens to your mix when you leave it alone.
Takeaway: It’s not about predicting the next winner. It’s about choosing a sensible mix, spreading your bets and having the discipline to tidy up.
Want the full braai version? Listen on Spotify. And if you’d like the Maze in your inbox, join the free Maze Mail list.
More from The Money Maze
- ETFs vs Unit Trusts: NAV and TER Explained
- Beta, Volatility and Defensive vs Cyclical Stocks
- Index Changes, Rebalancing and Weighting Explained
- Why ETFs and REITs Trade Below NAV
Sources
- Brinson, Hood and Beebower, “Determinants of Portfolio Performance”, Financial Analysts Journal, 1986.
- Treasury publishes final amendments to Regulation 28, SA Government, July 2022.
- Impact of the offshore limit increase on retirement portfolios, PPS.
- Capital gains tax, SARS.
This is not financial advice.