Sticking to the plan When the markets are volatile, having a financial adviser is the best way for investors to keep the emotion out of it.
atthe age of 19, Warren Buffett read Benjamin Graham’s Intelligent Investor and credits it as one of the luckiest moments of his life, providing him with the intellectual framework he needed for investing.
In explaining why that was so important, Buffett said: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must provide the emotional discipline.” Buffett’s recipe for success is therefore simple:
Have a sound intellectual framework for making decisions;
Prevent emotional erosion of that framework. Let’s unpack this idea a bit by looking at recent market movements and the associated decisions made by those invested in these markets. The ability to separate emotion from decision-making is inherently hampered when one’s own interests are at stake. Investing other people’s wealth is generally easier than investing your own for one simple reason: control over emotions. It’s natural to be less emotional about someone else’s money than about your own.
When the markets become extremely volatile and there doesn’t appear to be a clear consensus on what is going to happen next, panic can easily set in and investors often behave particularly sensitively in reaction to such volatility. And when investors are nervous, they abandon their investment framework in the hopes of sheltering their assets from future erosion.
What happens ultimately? When the market begins to correct, investors return, but by then it’s often too late. They’ve missed out on part of the up-cycle after having already sold at a low level.
Hypersensitivity to market volatility is a destroyer of successful investment performance. It would be wonderful if, just like Brian Finch in the TV series Limitless, we could take an NZT-48 pill and perfectly time the market. But, sadly, nobody can time the market and it’s unsafe to make conjectures about its ebb and flow: an individual’s financial stability and livelihood could be at risk.
So how can individuals looking to invest their wealth make better decisions? How can investors separate their emotions about investments to help them make better decisions in any given scenario? The answer may take many forms, but a proven winning alternative is to seek financial advice. To use an objective outside resource to negate our emotions, especially those tied to our hardearned cash.
Looking at the rand and the crisis it experienced during 2015: we see the currency depreciated against the dollar by a massive 35% with significant swings both ways since. This level of volatility is not surprising given that the rand is possibly the most traded emergingmarket currency and emerging markets as a whole have come under significant pressure. Understandably, panic and a negative domestic economic outlook have gripped South African investors, who are now clamouring to invest offshore.
The key question, however, is: isn’t it too late? Why invest offshore now when the rand is close to R15/$? Why didn’t investors externalise assets at R 7/$ or R9/$? Some of the biggest fund winners in rand terms during 2015 were funds invested in offshore hedge funds, property and equities. This is not due to performance, but rather currency conversions. After witnessing this phenomenon, investors are now looking to increase their offshore exposure on funds that were balanced 30:70 offshore/local diversified to 50:50 and even 60:40 in favour of offshore assets. We have seen this pattern before as investors flood into the market on the back of returns as opposed to in anticipation of them.
This is where a financial adviser can help identify investors’ hypersensitivity to market and currency volatility. It’s exactly this type of impartial analysis that helps them see the bigger picture. Too often individuals are only able to look at the world economy through a microscope, seeing the effects of the market only by virtue of their portfolio’s performance.
However you choose to invest your funds, make sure it’s for the right reasons, seeking different, uncorrelated returns and not just a knee-jerk reaction to extraordinary economic times. Having a documented plan and sticking to it with the guidance of a qualified, experienced and appropriately incentivised adviser is the best way to achieve this.
Warren Buffett Business magnate and investor