While the ebbs and flows of markets are always going to keep investors on their toes, it appears South African investors may be too quick to chop and change their portfolios during times of heightened economic uncertainty and market volatility.
And as growing geo-political tensions show that volatility isn't going anywhere quickly, knee-jerk reactions are likely to be detrimental for investors’ portfolios and ultimately lead to disappointing investment returns.
This is according to Doug Abbott, Schroders South Africa country head, who refers to the Schroders Global Investor Study 2019, which after surveying more than 25000 investors across 32 countries found that most made immediate changes to the risk profile of their investments during the volatile final three months of 2018.
“The end of 2018 was a particularly volatile time for not only the South African economy, but also the broader global economy, with the MSCI World index of global equities falling sharply amid rising geopolitical risk and growing concerns for the global economy. In response to this market volatility, 74percent of South African investors made changes to their portfolio’s risk profile.” Interestingly, Abbott says, the nature of the portfolio changes made by South African respondents in response to the period of heightened instability were quite fragmented.
“The study shows that South African investors are equally likely to decrease (41percent) or increase (39percent), the overall risk profile of their investments in response to market volatility. Furthermore, 27 percent moved some or a significant proportion of their portfolio into cash.
“Ultimately, this implies that people became fearful and made hasty investments decisions - something that is never advisable to do,” he says.
These rushed portfolio switches undoubtedly contributed to the short-term investment approach that many South African investors appear to be taking, says Abbott.
“The study shows that the average South African investment horizon is 2.8 years, but 39 percent of local investors stay invested for less than a year, which is similar globally (2.6 years and 41 percent, respectively).
“Breaking the results up demographically, we found that South African millennials appear to be less patient than older generations, holding their investments for an average of 2.2 years compared to the 3.8-year average holding period for baby boomers and a 4.4-year average for Gen X.”
According to Abbott, most experts advise against investing in shares for any period shorter than three years.
“Some even say it should be no less than five years. This is because it’s not possible to read the market (without the aid of a crystal ball) and in any shorter period there is less time to win back any losses.”
Based on the belief that geopolitical risk isn't going away any time soon, Abbott urges investors to take a longer view - even during periods of heightened uncertainty.
“With the rise of China, as well as the rise of populism, it is our view that geopolitical risk is set to continue plaguing markets on a global level. Locally, political risk continues to be a major factor, which ties into regulatory uncertainty and ongoing exchange rate instability.”
Abbott says that while ignoring these risks and remaining invested for longer may mean greater volatility over the short term, this strategy is likely to leave investors better off in the long run.
“Instead of chopping and changing portfolios in times of heightened volatility, it is therefore critical to look through the uncertainty: our goal at Schroders is to deliver investment solutions that reflect investors’ needs through time and which also suit their risk appetites,” he says.