Sweating it out is better than running for the hills….
It’s been a bumpy ride and not a comfortable one at that from an investment perspective if we look at the last two and a half years. Donald Trump, Jacob Zuma, Brexit, trade wars, etc. etc… all factors beyond our control. But what is within our control, is staying power.
A year or two years ago, we had the lowest interest rates since 1974. Then, cash (like money market accounts) was not the place to be and our equity market was showing double-digit returns. Fast forward to 2018 and of recent times, money market and bonds have outperformed equities over a 1-year period. The complete opposite of where we were in 1974.
We need to be careful about becoming rainbow chases, looking for the pot of gold at the end of the rainbow by chasing the ever-elusive quick returns. I find people often look at the short-term and make investment decisions based upon small timeframes, forgetting about long-term goals. If your goal is short term, then yes, invest short term and allocate your money to cash and bonds. Moreso cash than bonds, as bonds have their own volatility.
Historically, equities and property (the other two asset classes) have outperformed cash and bonds over periods exceeding 5 years. The longer the term, the more likely the return on equity will be higher in comparison.
Human behaviour and emotion are unfortunately factors that contribute to failure in the investment space. Logic and calculated risk sometimes come second to the aforementioned two factors, when the opposite should be true.
There are a few basic rules of investing that should be applied or taught to potential investors which I encourage you to live by.
1. Don’t buy high and sell low.
We lock in losses when we sell in low markets. Yet, as emotion and panic sets in, this is often the case. Again, chasing the rainbow, we buy high because everyone else made great returns on a particular stock or unit trust etc. Think Bitcoin for a moment. The craze reached a cumulative bubble back in Dec 2018 when media hype was at it’s highest and new investors bought in at an all-time high price, hoping to leverage the media momentum. As expected, the bubble burst with investors losing money and locking in their losses by withdrawing.
Warren Buffet made his success on the back of daring to invest where nobody else wanted to tread at the time, and sticking to his strategy for the long haul. He purchased his first shares in Cities Service at age 11. He has a habit of buying low and selling high to lock in profits.
He, himself, has a few rules he lives by. The first few rules he applies are:
“Rule No. 1: Never lose money.”
“Price is what you pay. Value is what you get.”
“Rule No. 2: Never forget rule No.1”
“listen to the experts rather than the pain”
“Rule No. 3: Understand your short and long term strategies in light of a global context”
“Risk comes from not knowing what you are doing.”
These rules above just highlight the fact that you need to remain calm and stay focused on the long-term goal rather than the noise in the short-term space. I am not saying be deaf to what is happening around you, but rather filter out the noise from the facts, and apply a long-term vision to what you are hearing.
2. listen to the experts rather than the pain.
My second rule when it comes to investing is to listen to sound advice. Long distance gold medal runners feel pain the closer they get to the finish line, but they don’t stop or pull out, they plough through and finish the race with grit. Sure, there will be times when the pain is a sign to stop, but a medical practitioner would be the one advising the gold medal runner when to stop. It is important to get advice before pulling the plug.
3. Goal-centred vision and Planning are key to a Successful outcome
One should be more conservative for short-term investing and possibly more aggressive for long-term goals. The objective and the risk profile go hand-in-hand. The problem we have as South African investors, is that we leave things too late. We don’t invest enough money when we can, and our timeline on our goals becomes too short for what we need to achieve.
The shorter the investment timeline and the higher the goal we need to reach, the more focused we become on
To give you an example of what I mean by the above, I use the Coronation Top 20 Fund. It is an aggressive fund, and this may be a bit on the extreme side as an example. In December 2015, the fund had a negative loss of 10% over a 1-year period. A year later, in December 2016, the annual return over 1 year was 18.3%; in December 2017 it was 18.1%, and now, as of the end of June 2018 it stands at 9.3% over a year.
The point is, that had you sold out in December 2015, you would have locked that loss in and lost out on the gain of 28%. (The 18% gain in December 2017 and the loss recovered of 10%).
I believe there is taking risk when it is applicable, but there is no reason why you can’t take calculated risks and a good advisor is key to steering you in the right direction.
The year ahead is unlikely to be less volatile, so the noise will still be there. Don’t run for the hills or stop being in the race, but rather focus on the end goal and finish the race. Just use the right coach.
Troy Laas [Key Individual at Stringfellow Advisory Services and Senior Financial Advisor]
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I am a new and very Proud Dad. I am also a financial advisor (FA) and in recent months have had many changes, some planned and many more unplanned, to weave my way through. My viewpoint in terms of life, finances, goals, and concerns has changed considerably. Let me share and give insight towards key decisions I am making, which I hope will guide and assist you too.
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