Di­ver­si­fi­ca­tion is the best ap­proach in these un­cer­tain times

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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.”

DIS­COUNTED OP­TIONS

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.

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