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Dealing with war

Coming out of an incredible 2021 in the markets both locally and offshore where we enjoyed double-digit returns, absorbing the current volatility is difficult and uncertain.

Dear reader,

Never a dull moment in the times in which we live. After a positive start to the year, and the end of this pandemic in sight, we were all in high spirits. Life really felt like it was returning to normal, economically as well as socially.

Little did we expect the simmering geopolitical tensions in Ukraine to turn into something far more serious and worrying – and the ripple effects it would have in store for us. Not only did it affect fuel prices, but seemingly every other supply chain, too. Unfortunately, it has also impacted financial markets and your investment portfolio. Coming out of an incredible 2021 in the markets both locally and offshore where we enjoyed double-digit returns, absorbing the current volatility is difficult and uncertain.

I want to take you back down memory lane, looking at previous wars, as well as other major market impacts. The graph below highlights a few of them:

Source: PSG Wealth & Morningstar

In turbulent times, it’s easy to forget what our investment strategy is, and what the nature of each underlying asset class in our portfolio entails. Depending on your individual risk capacity, equity exposure, in terms of a diversified portfolio is imperative and extremely important in the longer term as it has historically offered the best returns with the best chance of beating inflation. Yes, we will experience times of volatility, corrections or even market corrections (as we experienced at the beginning of the Covid-19 pandemic).

The market, however, always recovers when viewed in the long run – and mostly quicker than anticipated. We are still investing in fundamentally great performing companies. Therefore, even if the market goes through cycles, most of the companies we invest in will remain operational and will remain a good investment in the long run.

We just need to allow our portfolios some time to recover. Equities are very volatile over short investment periods, however, the longer the investment period, the less volatile they have historically become. If you look at the history of the JSE (local) as well as the MSCI World (global), both markets have always recovered and grown over the longer term.

The most important decision you will make is not to act in these times.Yes, in certain circumstances some changes to a portfolio or an investment strategy are advised. But withdrawing funds during a downward market movement only locks in your losses. That is when you hurt your portfolio.

Should you need to restructure your portfolio, it is recommended to work with a financial advisor who can appropriately advise you on it, as well as how to manage risks around timing. Because of the changing current global interest rate environment and the prospect of global interest rates rising in the next 12 to 18 months, we have been recommending portfolio reweighting (and already before the onset of the conflict) where this is appropriate in specific client portfolios. However, the reason for the change is not because of the war, but rather because of a carefully considered change in how we view asset class returns going forward.

The graph below shows how investors mainly get the timing wrong when it comes to getting in and out of the market. Every time a fund has recovered and is earning an excellent return once again – that’s when investors withdraw. And vice versa, once the fund is starting its downturn – investors climb into the portfolio. The lesson here is that we cannot time the market. There are just too many variables and unknowns when it comes to exact market movement. It is never advised, and you will most likely end up with an unwanted outcome if trying to time it. It’s not about timing the market – but time IN the market.

Source: PSG Wealth

Just missing out on the recovery can have a life-changing end-result on your portfolio.

We need to remember that building an investment portfolio is a long-term strategy. Yes, even if you are 65 years old and retiring today your investment term can still be another 30 or 40 years. If you are younger than 65, it means your average investing timeframe can be anything from 70 to 80 years.

A two- or six-month market movement does not mean much if we keep in mind that for many of us our investment term is extremely long. That needs to be considered, bearing in mind funds that are designated to help meet shorter-term needs (e.g. 1 or 2 years) should not have equity exposure. It is very unlikely in any investment strategy followed that you will ever withdraw your entire portfolio. You will most likely start drawing an income monthly and earning a monthly income. But the bulk of your investment will normally remain invested over a longer period.

Looking at the market movement incurred specifically by geopolitical events in history, the recovery typically took place within a few months and positive returns followed again:

In volatile times I believe in the value of working with a financial advisor who can help you manage your underlying risks, and walk this journey with you. Understanding the market movements and how they will impact your portfolio makes it much easier to also walk through the fire in uncertain times. Ensuring you are making the right decisions to obtain the required outcomes in your personal portfolio. Let’s be patient – this too shall pass.

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This is on point, thank you Elke

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