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The importance of planning and effective diversificationWhat a year these few months have been!

What a year these few months have been!

A ‘black swan’ event that Covid-19 has been to markets, economies, businesses and individuals on multiple levels is quite simply – unprecedented.

Whilst the debate rages over which leaders and countries have made the correct decisions in terms of lockdowns imposed (partial or full), enforcing social distancing measures, or the more relaxed Swedish stance, will only be felt in the full course of time. Every decision has a consequence, and we are starting to see the economic impact on livelihoods and businesses going under, with the stated aim of flattening the curve of infection – albeit that it lengthens the curve of economic stagnation.

Markets feel the impact of this uncertainty, with no concrete direction yet as to how this will play out, with companies having to shut down entirely, or scale back operations and cut costs having a material impact on earnings and profitability.

Allow me to focus on the investment angle, and not the human element, for the purpose of this article. There is a silver lining when volatility exists - great (global and some local) businesses are now priced at attractive levels, and when one takes the long term investment view, the core of an investment portfolio should always be good quality businesses (equities) which have proven over time to deliver the strongest returns.

It is easy to be seduced by the major daily swings in both global and local markets, with 3 occasions in March alone of 8%+ returns on a daily basis, followed inevitably with a series of converse negative drops a few days later! Trying to time an investment in these troughs can prove futile, because until some certainty returns to the economy, infections peaking and global sentiment returning, the market can deliver both directions of returns.

Investors with a long time horizon who have correctly calibrated their equity allocation based on their risk capacity & risk tolerance should refrain from making short term decisions based on market sentiment. However, risk tolerance is behavioural in nature and can change over time (it is not unusual for investors to overestimate their attitude to risk). The following graph illustrates this concept rather well, showing that the average investor achieves a sub optimal annualised return (in USD) by buying/selling constantly vs. retaining investments in a long term diversified strategy by asset class:

This makes planning and effective diversification an essential part of everyone’s portfolio construction. From the outset, every person thinks about the implications of life and money on a daily basis. Take that one step further and you have to ask the question as to whether you have a long term financial plan or when was the last time you had an overview of your finances?

Our role with our clients is as proxy coaches who understand your priorities and risk tolerance during life’s challenges – this is certainly one of those times. We believe it is important to identify potential gaps in your planning, and to rebalance portfolios that are skewed for whatever reason. We give advice on whether a portfolio may be too concentrated in one region or asset class, and where a better strategy may be diversifying risk by allocating capital into global assets. This is always given in the context of understanding specific long term objectives and cash/income requirements. This then guides one of the main long term strategies which is to ensure assets are diversified appropriately across equities, fixed income, property and cash.

A good example of this played out during the month of March which saw markets worldwide experience 20%-40% reduction in value, for many of our clients we have ensured that they have had a positive ZAR return, with a weakening currency certainly offsetting some global market drops, but fixed income and cash exposure shielding our investors from further pain. The subsequent equity rally in April ensured that those portfolios are looking really healthy at the moment.

Minimising doubt is important during volatile times. In our experience it is important to be rational rather than emotional about your investments and to avoid switching between investments for the wrong reasons.

Information is plentiful and readily available to everyone, particular the plethora of articles and news about Covid-19 and its impact, making sense of this information is often the difficult part. The investment world can be complex to the outsider and often made worse by an industry intent on creating fads to generate sales into the latest “next best thing”.

In truth often the most successful investment strategies are the simplest. The last 100 years has shown that exposure to companies with the ability to grow earnings over time will deliver the best long term return.

We take seriously our role as custodians of our clients’ assets, and will continue to be a voice of reason through time.


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