SHOULD YOU PUT YOUR MONEY UN­DER YOUR MAT­TRESS?

High lev­els of un­cer­tainty raise in­vest­ment fears, but you have to go back to the ba­sics, writes Maya Fisher-French

CityPress - - Business -

The first line of Rud­yard Ki­pling’s poem If is as rel­e­vant to­day as when it was writ­ten more than 100 years ago. “If you can keep your head when all about you are los­ing theirs” is also rel­e­vant to suc­cess­ful in­vest­ing, es­pe­cially in volatile times. With so much un­cer­tainty at home and in­ter­na­tion­ally, in­vestors are won­der­ing if now is the time to move into cash, or take money off­shore – and if you are tak­ing money off­shore, which re­gion or cur­rency should you take it to?

Most of th­ese de­ci­sions were based on the pre­dic­tions of spe­cific out­comes: Will South Africa’s for­eign credit rat­ing be down­graded? Will Don­ald Trump win the pres­i­dency in the US? Will the UK vote to exit the EU? And then, once the un­ex­pected out­come is re­alised, in­vestors try to guess what it will all mean.

With the rand weak­en­ing re­cently, in­vestors are now de­bat­ing whether it will strengthen or weaken fur­ther in the next six months.

In­vest­ment de­ci­sions based on bi­nary events – which can go ei­ther way – are closer to gam­bling than in­vest­ing. Un­for­tu­nately, what in­vestors usu­ally for­get in times of fear is their pri­mary rea­son for in­vest­ing and how they have po­si­tioned their long-term fi­nan­cial plan.

If you have an­other 20 years of in­vest­ing ahead of you, how rel­e­vant is the noise to­day?

While we may be reel­ing from the shock of a Trump pres­i­dency and rev­e­la­tions of state cap­ture, we still buy tooth­paste and milk, and still drive to work and plan to re­tire one day.

The re­tail­ers, banks, me­dia houses, cell­phone firms and other prod­uct providers we en­gage with ev­ery day have not closed up shop – they all con­tinue to op­er­ate, and th­ese are the com­pa­nies we are in­vested in.

The prob­lem is that we tend to in­vest more on emo­tion than re­search and ra­tio­nal­ity. We also tend to buy into a trend, or overex­trap­o­late the cur­rent in­for­ma­tion we have.

For ex­am­ple, if the mar­kets are ris­ing, we ex­pect them to rise for­ever; when they fall, we ex­pect them to con­tinue to fall – lead­ing to the end of the world. Ul­ti­mately, we are driven by ei­ther fear or greed, and very sel­dom by anal­y­sis.

Sha­heed Mo­hamed, in­vest­ment spe­cial­ist at Al­lan Gray, says: “Some of the more than 100 be­havioural bi­ases that psy­chol­o­gists have iden­ti­fied in­clude overex­trap­o­la­tion, which is es­sen­tially re­ly­ing too heav­ily on one piece of in­for­ma­tion, con­fir­ma­tion bias, which is searching for new in­for­ma­tion that sup­ports one’s be­liefs, and the bet­ter known bi­ases of over­con­fi­dence, fear and greed.”

He adds that th­ese bi­ases can in­flu­ence your suc­cess as an in­vestor.

A study of in­vestors in eq­uity funds in the US over the past 30 years shows that the av­er­age in­vestor un­der­per­formed the over­all mar­ket by more than 6% a year due to en­ter­ing and ex­it­ing at the wrong time. South African in­vestors, on av­er­age, are no dif­fer­ent.

Mo­hamed cites the ex­am­ple of South African in­vestor be­hav­iour be­fore and shortly af­ter the global fi­nan­cial cri­sis.

“For the five years prior to the crash in May 2008, the stock mar­ket re­turned close to 36% per year,” he says, which lured in­vestors in droves. Many of th­ese in­vestors in­vested at the top of the mar­ket, pay­ing overly in­flated prices for in­di­vid­ual shares.

This was fol­lowed by one of the worst sell-offs in the JSE’s his­tory, re­sult­ing in R9 bil­lion be­ing with­drawn from eq­uity and prop­erty unit trusts in the first three quar­ters of 2008 as many in­vestors ex­ited the mar­ket in fear, lock­ing in losses.

In con­trast to this ir­ra­tional be­hav­iour, in­vestors who keep their heads in times of un­cer­tainty are of­ten re­warded.

“An in­vest­ment of R10 000 in the FTSE/JSE All Share In­dex (Alsi) at the peak of the mar­ket in May 2008 would have been worth R5 465 at the mar­ket bot­tom in November 2008. But that’s not the full pic­ture: the Alsi re­cov­ered two and a half years later. In­vestors who did not suc­cumb to their emo­tions would have made back their losses and more than dou­bled their money in ab­so­lute terms by Septem­ber 30 2016,” Mo­hamed says.

Rather than pan­ick­ing and sec­ond-guess­ing your in­vest­ment strat­egy, avoid the noise and talk­ing heads on TV and ra­dio sta­tions, and re­mem­ber that dur­ing World War 2, the UK mar­ket reached rock bot­tom when Adolf Hitler toured Paris in June 1940.

Ger­many was reach­ing its max­i­mum level of op­ti­mism, while Europe was drown­ing in pes­simism. Soon af­ter­wards, the war turned and, by the end of 1940, the UK mar­ket was up 40%.

We may not be there yet, but sell­ing out when ev­ery­one be­lieves the world is go­ing to hell in a hand­bas­ket is usu­ally the wrong call.

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