RANDS AND SENSE
By Hannes Viljoen
Never let a crisis go to waste! The saying does not necessarily require you to see the silver lining around the dark Russia-Ukraine cloud. What it does require is a decision on your part: to act or not to act.
There are two pertinent investment questions that are worth asking and contemplating now, in this crisis.
First, is your portfolio’s asset allocation correct?
In our view, asset allocation is one of the two biggest factors in wealth management and investing.
If your portfolio aim is to create long-term wealth over the next 20 years, to earn a high return in excess of inflation, and your portfolio over the past two months has been flat, you need to investigate why that is.
If it is because you are heavily invested in cash and income-orientated funds, it might look good in the short term, but over the long term this will not aid in true wealth creation.
If it is because you actively trade your assets, you need to ask if you have just been lucky to be out of the markets over the past two months or you need to take a hard look at when you switched the asset allocation, because if it was near the March 23 2020 and you have not re-invested into equities, you have missed out on a lot of returns.
If your portfolio over the past two months is down, however, you also need to investigate why. (Do not judge your portfolio over a two-month period, I am only trying to make a point.)
If your portfolio is allocated to a broad range of diversified equities, and it is down over the recent past, this might be a good sign. How is that? Because over the long term the evidence shows that being invested in equities is the best asset class for achieving long-term inflation beating returns.
Over the year to date, at time of writing, the broadly diversified MSCI World index is down by 10% in US dollars. So if your portfolio is down, and you are invested in a broadly diversified equity portfolio, you might be in just the right allocation.
(Caveat: if your portfolio is down 50% or 60% over the year to date, it might be a good idea to get a second opinion.)
Conversely, if you have a specific strategy ‒ you want to shelter from volatility in, say, an emergency fund or if you are drawing an income from to live off ‒ this is a good time for evaluation as well.
If your portfolio is flat or slightly up, it might be because you had an appropriate asset allocation to cash and income-orientated investments. Objective achieved.
If the portfolio is flat or up because you had a 50% allocation to oil futures, you might want to revisit.
If the portfolio is down considerably, some questions need to be asked.
Use this opportunity as a scenario test, for now and the future.
The second question, impossible to answer upfront, and the second of the two biggest factors in investing is: will you be able to keep calm when everyone around you is losing their mind?
Will you be able to do nothing, when there are people around you panicking, selling their long-term growth investments, and moving to cash?
Will you be able to look at your investments, recognise that they might be down exactly because they are allocated to the right assets, and quietly proclaim that you are comfortable?
Human behaviour is the reason why investor returns are not equal to investment returns.
Now is an opportunity to panic. So too was Black Monday, the Russian financial crisis, the dot.com crash, 9/11, the Iraq war, the sub-prime mortgage crisis, Eurozone debt crisis, Brexit, Covid and many more.
It is an opportunity not to take.
Scot Sagan said it best: “Things that have never happened before happen all the time.”
And I would urge you to listen to Charlie Munger: “The big money is not in buying or selling, but in the waiting.”
So, following Mr Munger’s words, spend by far the majority of your investment time determining whether your assets are allocated to your bespoke needs.
And then? Wait!
Hannes Viljoen (CFA, CFP) is CEO and Head of Investments at Kudala Wealth