‘Few aspects of human existence are more emotion-laden than our relationship with money’ – Warren Buffett
The definition of value: “principles or standards of behaviour; one’s judgement of what is important in life.” How do you define value? This is most probably an answer that some of us will need to think about for a moment – and one that will likely be different for all of us.
As I am writing this article, looking back on the past few months of this year, it feels like something out of a movie. The year of Covid-19 where the whole world came to a standstill. When planning the 2020 year, listing our New Year’s resolutions and setting many goals and exciting travel plans – perhaps a few bucket list items – little did any of us know what March would bring. Complete lockdown, market crashes we have not experienced since the great depression, alcohol and cigarette bans, many industries closing down completely, life as we know it coming to a standstill. As Ray Dalio refers to it in his latest book (still in progress) – The Changing World Order.
Looking at your investment portfolio in a life-changing year, how would you measure the value of your investment portfolio?
Let’s rewind a few hundred years back. The yellow metal has been a safe haven for investors during times of market volatility and uncertainty ever since financial assets have been tradeable.
Most investors are familiar with the fact that gold offers a hedge against inflation and a mechanism to reduce risk-adjusted returns for a given portfolio due to its negative correlation with the price actions of paper financial assets.
More granularly, this is because gold’s value holds constant over time, meaning gold is the vehicle that maintains value across time periods. It does so due to its innate scientific properties: it’s irreplaceable, virtually indestructible, does not weather over time, is resource-expensive to extract; is extremely rare; cannot be printed like fiat currency, and has a 6 000-year track record of storing economic value.
Its value thus remains constant and exempt from the factors that impact financial asset returns. A great real-world illustration is the fact that an ounce of gold could, during Roman times (27BC – 476AD), buy a Roman citizen a high-class outfit – a toga (suit), leather belt and a pair of sandals – and likewise today an ounce can buy you a similar executive uniform – business suit, shoes, tie and so on. This shows that gold has held its value for over 2 000 years.
Priced in Gold:
We have shown above that price = purchasing power. We have also shown above that gold’s value remains fairly constant over time. Perhaps we should determine our investment portfolio’s purchasing power as the price of the assets in the portfolio, priced in gold, at any given time.
Today, financial asset prices are quoted almost continuously on public exchanges and indices allow us to show standard baskets or portfolios of some of these financial assets. Herewith, however, some popular financial assets, and even some everyday goods, priced in gold:
Therefore – value has remained fairly consistent. So the question comes to mind, what does value mean to you? This will very much reflect back to our belief system of money – and what your expectations are:
- Is it about consistency – as with the value of gold and the security that comes with it?
- Do you wish to be protected against inflation?
- Is your portfolio perhaps structured to support your retirement income and ensure that your investment can provide you with an income for the next 30-odd years?
- Perhaps you are starting out this journey we call life and you just want to be wealthy? And preferably quickly?
- Do you enjoy the excitement of “easy” wins? How about the feeling of losses? Perhaps you fund value in just understanding these cycles better – and not being surprised.
- Do you want it to provide for you and your family? Or just be there to finance the new Porsche 911 GTS.
What does value mean to you? Defining what value means to you will help you to better define if you have the right portfolio in place – taking care of you and your family in times of crisis, in times of a changing world order.
The graph below compares the following portfolios:
- A multi-asset income fund;
- Money market cash fund;
- A well-diversified portfolio;
- Offshore funds – consisting of bonds, equities and cash – rand-denominated;
- Gold exposure – specifically Old Mutual Gold Fund.
Looking a little closer, the value of gold exposure, and of course offshore exposure, has proven to be exceptional. In the recent period, keeping in mind the bigger picture perspective, when looking at graph Number 1 – taking us back to 2013, the past seven years would have included a few cycles and some volatility meaning this would never have been a smooth ride. Recent changes in the market due to multiple interest rate cuts by the Reserve Bank have also changed the approach of cash completely – with yields dropping to around 5% and going down.
All of this is normal, markets move in cycles and this will not be the last crisis we live through, but it is certainly also not the first. This is where value and trust in your portfolio need to be defined very well. When times get tough sometimes just doing nothing and trusting the portfolio in place will be the greatest decision you can make for your future self. The following graph takes us back to 1995 – if you were to invest R1 000. Just missing a few of the best days in the market would have ensured a completely different outcome:
Yes, looking at the worst outcome, losing the value of a R1 000 initial investment and only taking R418 home isn’t the end of the world. But what if you missed the 100 best days with your entire portfolio? This is the cost of market timing. It’s not about the timing but the time IN the market.
When times get tough, or uncertain the typical human reaction is, of course, to protect what you have in place. Referring to the crisis of 2009 – this typical behaviour of either moving to cash completely or trying to time the market by “climbing back in” at the right time proves over and over again to be detrimental:
Does your portfolio provide you with sufficient diversification and protection to weather these stormy seas? As Ray Dalio refers to – an ‘all-weather portfolio’ – I believe it is imperative to be as diversified as possible.
- Diversifying your asset classes – and by this, I mean including all of them in your portfolio – don’t try to time the market.
- Diversifying with currency, and geographically. Offshore exposure is imperative.
- Lastly, with fund managers by following a multi-manager approach. A combination of different views and investment styles will protect you most.
- Ensuring you understand what portfolio you have in place – this will make it much easier to understand what is happening in times of crisis, making you feel safer.
In conclusion, before setting up your portfolio or choosing your partnered portfolio manager (which is quite similar to getting married), define what value means to you and what you would want your money to do for you, your family and your business.
Don’t forget to see the bigger picture. Bruce Whitfield’s latest book (exceptional read) – The Upside of Down – How chaos and uncertainty Breed Opportunity in South-Africa refers to the principle that we tend to have a more negative outlook on our country than what is factually necessary. Referring to a study Hans Rosling did in his book Factfulness, he proved the global principle that our own cognitive biases, which are oftenformed subconsciously, show that we believe the world (and specifically our country) is becoming worse and worse, which is not the case at all.
As in life, investing in the market will never just be one smooth ride. There will be some easy days, but also exceptionally difficult times of uncertainty. This principle will apply to all markets – not just locally. The history of the JSE dating back to 1900:
When we stop looking through the microscope and rather start using a telescope, another universe opens up. Taking into account the great depression, multiple recessions, the global financial crisis and Covid-19, we are still in a better place, still moving forward.