Diversification is the best approach in these uncertain times
It seems that we live in a time when outcomes are only good or bad, heads or tails, yes or no. This is what mathematicians call binary outcomes.
In the battle against state capture, the outcome for our country will either be great or terrible; it’s hard to see a middleof-the-road scenario in the near future. Similarly, the credit ratings agencies will deliver their verdict on our economic future by the end of the year. A positive announcement will be well received by the markets, whereas people will probably panic if we are downgraded. How do investors make rational decisions in this binary world?
Few investors can consistently make money by following an investment strategy that is based on trying to predict the future. This is called market timing, and it is an expensive way to invest your capital. First, you must be able to predict the outcome accurately – for example, the verdict of the ratings agencies on South Africa’s economy, or whether the British electorate will vote to leave the European Union. Currently, the verdict of the ratings agencies might seem obvious, but then so was the Brexit vote and look what happened there.
Second, you must be able to predict how other investors will react to the news. Let’s consider the aftermath of the Brexit vote. Although the London stock market fell initially, it has been on a strong upward trend since and is more than 15 percent higher than it was 12 months ago.
If you decide to sell your shares in anticipation of a ratings downgrade, because you are concerned that the stock market will collapse, you might be making a huge mistake. The most recent comparable country to study is Brazil, which was downgraded in February, but has seen its stock market jump by nearly 40 percent since. It is higher than it was a year ago, so investors who sold in the months before the downgrade are really losing out.
Who can say what will happen to our market and the rand if we are downgraded? It would be foolish to assume that the impact on the market will be negative.
In these circumstances, where the outcome of potentially significant political and economic events is so uncertain, it does not make sense to be too specific in your investment planning; instead, you should aim to spread your risk as much as possible, to ensure that portions of your capital will rise even if events don’t pan out the way you thought they would.
This means you should diversify by investing in a range of asset classes, including cash, bonds, listed property and shares. If the downturn does not materialise and markets rise, your investments in shares and providers and not others.
Earlier this year, Personal Finance was contacted by the chief executive of a private hospital who said his employees belong to a medical scheme that had decided to introduce a hospital DSP. He was concerned that the scheme had not approached his hospital to bid to become the DSP, even though it had won the right to treat members of other large schemes.
“Our experience points to a system that would benefit from greater transparency,” he said.
Earlier this year, the Competition Commission’s inquiry into the private healthcare sector heard many complaints from hospitals, laboratories and doctors about the abuse of the DSP contracting process. Complaints included that certain providers are excluded from the process and that contracts are onerous.
The chairman of the inquiry, Chief Justice Sandile Ngcobo pointedly asked a number of hospitals whether they would be willing to display their prices publicly, and they agreed, albeit somewhat reluctantly.
Debbie Pearmain, a former listed property will rise.
It also makes sense to diversify across different countries and currencies. If you have most of your assets in rands, you should consider increasing your allocation to foreign investments. However, you should do this carefully and not in one batch.
I am not too concerned about owning a range of offshore currencies. If you buy a unit trust fund that invests in a portfolio of global investments, it will be denominated in a particular currency – for example, United States dollars – but this does not mean that the entire portfolio will be invested in the US; it will also be exposed to European, Japanese and other investments.
When you are investing at a time of market volatility, when the price can move dramatically within a few days, it makes sense to spread out the purchase (phase legal adviser to the Minister of Health, says the controversy over how medical schemes select DSPs is symptomatic of the power imbalances between schemes and healthcare providers.
“The outcome of these power imbalances is two-fold: in some cases, smaller, sometimes more cost- effective providers are ignored by larger schemes, and, in others, smaller schemes are able to negotiate less-favourable prices with larger providers.”
EDOs may cut through the stalemate in transparent medical scheme contracting.
Schemes must obtain permission from the CMS to launch EDOs, because, technically, EDOs violate the Medical Schemes Act. The Act states that members who belong to the same option must pay the same contributions. The only grounds for charging a different contribution is the number of dependants a member registers on the scheme, or if a member is a low-income earner.
The CMS will allow a scheme to launch an EDO if the scheme proves that it followed a transparent process when selecting service providers for the EDO, and that cost savings will be passed on to members in the form of lower contributions.
According to the council’s latest annual report, 487 659 beneficiaries belonged to EDOs at the end of 2015, an increase of 12.6 percent since the end of 2014.
Paresh Prema, the general manager: benefits management at the CMS, says most EDOs save costs by contracting with selected hospitals, but some also negotiate discounts with general practitioners, chronic-care service providers, medicine courier services and dispensaries.
Most schemes manage to negotiate discounts of between 15 and 30 percent, he says.
Before the CMS will allow a scheme to launch an EDO, the scheme has to provide the CMS with information about how the providers were chosen and demonstrate that it followed a transparent selection process, he says.
The CMS also insists that schemes show that providers are conveniently located in relation to where members of an EDO live or work.
The CMS checks the marketing material to ensure that it makes it clear that members will have to use providers in a network and may be liable for co-payments, Prema says. it in) over time, to mitigate your losses if you buy just before a major fall in the price. Starting a new investment and then immediately losing value can set you back a number of years. I buy foreign exchange in batches – preferably, at least three batches over a number of months.
Banks generally charge higher fees on foreign exchange transactions when you transact in smaller amounts, so you should aim to make the amounts as large as possible.
Don’t be too concerned about making major changes to your investments when political and economic events become media sensations; the hype is never good for rational investor behaviour. • Warren Ingram is the executive director of Galileo Capital and was the Financial Planner of the Year in 2011.