Surfing the peaks and troughs of uncertainty

The year-end is a great time to reflect on your investment portfolio and see where it is. For anyone invested in the local market it was a good year. Year to date, the JSE All Share has increased 21.4% while the Top 40 is up 19% — a very impressive bull run.

However, as we go into 2018, there’s a lot of restlessness creeping into investor sentiment around the outcome of the ANC’s elective conference this coming weekend.

As an investor, you may find it difficult to map out a clear investment direction for your portfolio. This is especially true if you’re considering rebalancing your portfolio, but you don’t want to make a decision based on current events — especially because you don’t know the full extent of their impact.

So how do you protect your interests?

You can hedge your investments. Hedging is a risk-management strategy that is used by investors, both individuals and institutions. The purpose of hedging is to minimise your chances of losses should you find yourself in a risky situation.

While you may think this is something that’s only good for experienced hedge fund managers with fancy offices, you too can manage your personal portfolio using some of the basic principles of hedging.

You don’t have to use complex trading instruments such as derivatives, especially if you can’t afford to lose out. There are ways that you can offset losses by rethinking your investment strategy.

For instance, with the rand’s volatility, many investors want to be able to protect themselves against adverse movements in the currency.

One way to do this is to invest in good rand-hedge stocks — locally listed companies with a presence abroad. The benefit of these shares is that you’ve diversified your exposure across more than one market and the company will earn income in a foreign currency.

If, for instance, the company you’re invested in is based in the UK, the rand’s fall will translate into higher income for you as a shareholder. This is why when the rand falls, it’s almost always followed by a rise in the All Share or Top 40 — the indices are dominated by rand-hedge shares.

The trick to successful hedging is to be prepared. It’s pointless buying rand-hedged stocks when the currency is crashing. You can’t predict market movements, but you can position your portfolio so that it’s protected.

Study your portfolio carefully and identify the areas where you think you have the most risk. If you’re looking at a share or a specific industry, how can you offset that loss? Is there an industry you can invest in that can help hold up your portfolio in the event that your risky share or sector does as you predicted?

The opposite scenario also needs to hold. The aim of hedging isn’t so much to stop losses completely as it is to help you find a way to minimise the blow to your portfolio.

It’s also helpful to understand how various sectors of the markets interact with each other, such as: when the rand falls, the Top 40 index tends to rise. But what happens to the banks and non-bank financial services providers that also happen to be in the Top 40?

If you think back to the time when Nhlanhla Nene was dismissed as finance minister, the rand tanked, hitting R16.87 to the dollar in early January 2016, and between December 2015 and February 2016, banks’ shares struggled along with the rand.

Before you dust off your beach slops and put all your worries on hold, think about your portfolio placement and how best to structure it so that you can, at least, weather the uncertainty that awaits us at the beginning of 2018.

Tsamela is the founder of piggiebanker.com. You can follow her on Twitter @PiggieBanker