Investors should see through all the noise and not be distracted
• Focus on having the right long-term investment manager with the right low-cost strategy
As Brexit and the US’s apparent appetite for a global trade war continue to unsettle markets around the world, South African investors should not let themselves be distracted and start chopping and changing their own investments.
Just as governments have to be careful not to respond with a knee-jerk reaction to every event, individuals and companies should remain focused on their long-term plans and use all the tools at their disposal to see through the noise.
Markets do not like uncertainty, and stability is important to investors. Uncertainty breeds fear and can often lead to rash or poorly thought out decisions. Right now there is a great deal of noise coming out of the US and the UK, with proposed wideranging changes in direction looking set to destabilise the established world order.
President Donald Trump’s embrace of increasingly protectionist trade policies might have a negative effect on the South African economy. The worry here is that each country responds with its own tit-for-tat tactics, one by one bringing in their own tariffs, simultaneously raising the burden and overall cost of trade for everyone involved. Emerging economies such as SA are especially vulnerable as they are often exporters of resources and produce that are the first targets with such tariffs. They also tend to have less diversified economies to absorb this.
The world is also seeing multiple threats to the future of the EU with Britain’s exit looking not far off, the political crisis in Italy and Poland reconsidering its EU membership. Again, investors should not concern themselves with potential damage to their investments. While certain fund managers will favour some European countries to emerge as “winners” over others, if you ask 10 different managers you will be unlikely to find any consensus on who these winners and losers are likely to be.
It is not possible to know in advance how these factors will affect the markets. For example, after the Brexit vote, when all forecasts were dominated by negative predictions, the FTSE hit record highs and broke record after record.
Forecasting the effect of news events like these is like knowing in advance which shares and funds will do well. Sometimes someone gets lucky and gets it right, but consistently predicting what will happen in future is just not possible.
The evidence shows that trying to predict the future and respond accordingly will stack the odds heavily against you. You erode value and have poorer investment outcomes than if you simply have a little exposure to everything by tracking the index and holding steady over the long term. While it is valuable to stay informed about what is happening in the world, investors should not respond by replacing their longterm plans and policies with short-term, reactive ones.
Many global issues affect the South African economy and investors — unstable commodity prices, a volatile dollar and recessions in countries that are net importers of South African goods, for example — but investors must be careful not to get too distracted by these issues when thinking of their own investments and goals. On a national level this means making good on the plans and policies that have been laid out by the government to ensure SA reduces its debt levels, raises GDP, increases employment and continues to diversify the economy. At national level, diversification of an economy is a crucial line of defence in an everchanging world.
A key component of the US’s resilience is that its economy is diversified.
Rather than being focused on just one area, such as manufacturing or services, the US economy is as strong in oil production as it is in car manufacturing and in financial services, for example.
Where the individual is concerned, investors should adopt the same approach with regards to their investment portfolio. The better diversified it is — including exposure to different stocks, sectors, regions and so on — the better your investments are able to recover from any shocks or setbacks.
Investors should keep their nerves steady. We so often see human behaviour working against our own best interests and we need to be careful to be less emotional and less reactive with our investments. Rather, settle on the right investment strategy and stick with it.
The global noises often result in conflicting messages and, if investors are not careful, they can find themselves chopping and changing their investment portfolio, their manager or their strategy all too often. Losing sight of one’s own goals and changing course as soon as the direction of the news changes will most likely devastate one’s savings and plans.
I believe regular reviews of one’s investment portfolio to check that it is still aligned with one’s long-term goals are crucial. Major changes to a portfolio should be motivated by changes in one’s personal circumstances or one’s own goals, rather than being driven by unpredictable external events.
The same applies in the institutional space. To ensure the best outcomes for their retirement funds, the issues trustees and management committees need to focus on are not what is happening in certain economies or with specific politicians. Rather, they need to focus on what they can control, namely making sure they have the right long-term investment manager with the right low-cost investment strategy. Once this is in place, there is no need to change tack with each new shock.
EVIDENCE SHOWS TRYING TO PREDICT THE FUTURE AND RESPOND WILL STACK THE ODDS HEAVILY AGAINST YOU