Bad news has been dominating the news cycle in recent months. As South Africans, we have been bombarded by stories of corruption, a possible grid collapse and an increased risk of sanctions due to our government’s stance on the Russia/Ukraine conflict. By Johann Rossouw
The constant negativity can cause even the most seasoned investors to panic and sell their investments at the wrong time - thereby destroying long-term wealth.
In this article, we will explore how investors can prioritise sound investment principles and drown out the short-term noise.
Diversification and Risk Management:
Diversification is a tried-and-true strategy for reducing risk in an investment portfolio. By spreading investments across different asset classes, sectors, and geographical regions, investors can mitigate the impact of any single political event or policy change.
As South Africa forms a tiny portion of the global economy, it does not make sense to put all your eggs in the SA basket. This does not, however, imply that you need to sell your entire SA portfolio and pack for Perth! Therefore, a sound and balanced perspective is needed, and it is crucial to ensure that you receive independent, objective financial advice.
Consult a Certified Financial Planner
Your financial plan should be a manageable document but beware of making changes to your portfolio in response to short-term market noise. Changes to your financial plan should only be made in a considered manner and as a result of a change in personal circumstances or objectives.
You should regularly meet with your financial planner to ensure that your portfolio is sufficiently diversified and well-equipped to weather any political storms that may come its way.
Your financial planner also needs to act as a sounding board and explain the implications of potential “rash” decisions on your portfolio.
Keep a Long-term Perspective:
Investing with a long-term perspective is a fundamental principle that successful investors adhere to. Political noise tends to be short-term in nature, often driven by sensationalism and media coverage. Economic cycles, market trends, and company performance have a more significant impact on investment returns over extended periods. By concentrating on long-term objectives, investors can reduce the impact of political noise and avoid reactionary decisions that may harm their portfolios.
Maintaining Emotional Discipline:
South African moods are generally influenced by two factors: the performance of the Springboks and the strength of the rand. When news of the Lady R broke, the rand weakened to R19.80 to the dollar. If you followed your emotions, rather than rational thought, you would most likely have made a costly investment decision. The rand has since strengthened to R18.17 per dollar at the time of writing.
Emotional discipline plays a vital role in successful investing. Political noise often triggers emotional responses, which can lead to impulsive decision making. Fear or greed fuelled by political events can drive investors to make irrational choices that deviate from their long-term investment strategy. By tuning out political noise and focusing on a disciplined approach based on research, analysis, and a well-defined investment plan, investors can avoid emotional pitfalls and stay on track towards their financial goals.
In the lead-up to an election, the volume of political noise will only increase. It is therefore crucial for investors to put on some noise-cancelling headphones and focus on basic investment principles. If you can sit tight and ride out the volatility, you will have a better chance of enjoying long-term returns.
* Rossouw is Associate Financial Planner at Fiscal Private Client Services
PERSONAL FINANCE