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
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.