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Financial shocks should not destroy your wealth

Personal Finance

“Downgrade” and “junk status” are scary words for investors to hear, but as long-term savers we should focus on sage advice from investment professionals: responding to developments that have uncertain, long-term implications is likely to destroy wealth.

Momentum Investments says human nature favours strong reactive behaviour to system shocks, but radical changes to investment portfolios in response to developments are to be avoided.

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“History has shown that, despite the regular occurrence of shocks in financial markets, the optimal wealth-maximising strategy for investors over time has been to stick calmly to well-constructed financial plans and stay invested throughout short-term volatility,” says Momentum economist Sanisha Packirisamy.

Shaun le Roux, a fund manager at PSG Asset Management, says investors should not panic or take steps that could be detrimental to their portfolios in the long run.

“The political situation is very fluid and if the current political direction is reversed in the months ahead, as some believe it could be, we could be closer to an excellent buying opportunity than to the start of the descent,” he says.

Beanstalk, a robo-adviser initiated by independent financial adviser Mark Moir, says in its newsletter there is no quicker way to erode your wealth than to put your immediate, emotional self into the driving seat of your future.

“There is a lot that isn’t going the way of investors right now, but time and experience over decades tells us that sticking to your long-term wealth plans is the best thing you can do at times like these,” Beanstalk says.

Packirisamy says there are diametrically different implications for financial investments, depending on the response of the ANC leadership to South Africa’s ratings downgrade to junk.

If political and economic policy responses are favourable – what Packirisamy calls the “wake-up-call” scenario – the ratings outlook could change from negative to stable, and policy adjustments could eventually result in South Africa’s bonds regaining investment-grade status within a couple of years.

With such a response, there could be a period of rand strength, with local asset classes outperforming global asset classes, all other things being equal.

More specifically, local government bonds and listed property could perform particularly well, with locally focused equities outpacing shares whose fortunes are driven by foreign earnings.

In contrast, should there be a denialist response from the ANC and government to the ratings downgrades, accompanied by continuing factionalism, patronage and fiscal slippage, there is likely to be a trend of continual ratings downgrades in coming years.

Momentum calls this the “slippery slope” scenario, which would result in continuing rand weakness, with global asset classes outperforming local asset classes, and local cash and equities (particularly shares with large global revenue bases) outperforming local fixed-income investments.

Packirisamy says both of these diametrically opposed scenarios can be best managed by investors having well-diversified portfolios with exposure to a wide range of asset classes, each of which would behave differently in the given scenario, thereby minimising the volatility of the portfolio.

In short, in a diversified portfolio, different asset classes and investments will be affected differently, depending on how markets react and which scenario transpires.

Packirisamy’s advice is echoed by Lesiba Mothata, chief economist of Investment Solutions, who says that, in times like these, investors need to hold on to a diversified and long-term investment strategy.

“Even as a political storm is once again battering South Africa, history has shown that, in the long-term, markets have the ability to return to fundamentals even when short-term noise, especially from the political sphere, creates much angst,” he says.

Le Roux also recommends diversification across currencies, geographies and industries. He suggests you think long term and avoid forecasting.

“We have witnessed a string of inherently unpredictable political events over the past year-and-a-half: Brexit, Trump and Zuma. Constructing a portfolio to match your predictions about future events carries very high risk if you are proved wrong,” he says.

Don’t be scared of doing nothing

If you are already well-diversified and your adviser suggests doing nothing, don’t mistake this for complacency, the robo-adviser Beanstalk says in its newsletter.

Your adviser should have recommended investments in the best managers to deliver returns over the medium to long term. The past 18 months may not have delivered much, but “doing nothing is actively doing something” and is “arguably one of the most difficult things an investor can and should do”, Beanstalk says.

Mathias Sithole, the head of public sector and corporate consulting at Liberty Corporate, says saving for retirement requires a long-term focus, often 20 to 30 years into the future. Recent market volatility highlights the importance of developing an investment strategy that targets your long-term goals, while being robust enough to withstand short-term market fluctuations. It is imperative to remain objective and avoid “short-termism” and ­knee-jerk reactions when making investment decisions, Sithole says.

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