Patience and sticking to a plan can reap rewards
Investment decisions that are influenced by fear, vanity or greed are one of the worst decisions an investor can make, says Kim Rassou, a portfolio manager at Old Mutual Wealth Tailored Fund Portfolios.
Do-it-yourself investors tend to focus on the markets, the economy, the asset manager s performance and even individual stocks and physical offshore properties,” she says. Without a plan, they tend to build their portfolios from the bottom up, focusing on investments piecemeal rather than on how the portfolio as a whole is serving the investment objective.”
The risk that these decisions are based on irrational assessment, however, is exceptionally high. Nonprofessional investors, explains Rassou, tend to trust “their gut but generally don t ’ understand market valuations, nor the underlying forces driving the performance of Facebook, Apple, Amazon, Netflix and Google (the socalled FAANG companies), for example.
It follows that these investors wouldn t necessarily ’ understand the full impact of Covid-19 on the FAANGs, whether these stocks are currently trading at fair value, or if they re overpriced or in bubble territory,” she points out.
Nor do they realise owning offshore property often comes with a huge cash obligation, leaving them at the mercy of changes in legislation, economic instability, tax implications and ongoing costs that are often US dollar-euro hedged.
Although these asset classes are not a problem in themselves, without guidance
investors may inadvertently expose themselves to an unnecessary gamble,” she says, adding that going offshore requires some strategic thought and planning on behalf of both the client and the financial advisor to ensure a journey meant to lower risk doesn t ’ result in the exact opposite.
Investing offshore requires that fundamental investment principles are followed. The first rule, says Rassou, is to set a clear goal that guides the offshore investment strategy so the portfolio is appropriately structured to meet specific goals rather than the other way around. Allowing the strategy to deliver on the investment goal through asset allocation requires sticking to the plan.
Second, risk needs to be managed through the choice of markets invested in. Developed “and emerging markets, for instance, have different risk profiles and characteristics that influence whether certain markets are more or less at risk,” she explains. Developed markets tend to be highly competitive, efficient and liquid which means a low-cost index strategy might be more suitable for capturing global market performance because of the broad exposure and lower fees.”
Stocks that score highly in environmental, social and governance (ESG) criteria are good investment targets, she reveals, adding that incorporating ESG considerations could even become a source of outperformance as there is some guidance on how to avoid potential bad apples.
Asset allocation is critical, says Rassou, with a wellstructured offshore portfolio, based on reasonable expectations for risk and return and sufficiently diversified to limit exposure to unexpected events.
Finally, don t forget to factor in the management and transaction costs. Costs create “an inevitable gap between what the markets return and what investors earn, but keeping expenses down can help narrow that gap,” she advises. Markets are unpredictable and can t be controlled but you — can manage your costs.”
She concludes that successful investing is often about discipline, patience and not panicking or changing the investment strategy based on market volatility.
NONPROFESSIONAL INVESTORS TEND TO TRUST THEIR GUT BUT GENERALLY DON T UNDERSTAND ’ MARKET VALUATIONS