Do you have an investment plan, or do you invest according to your feelings?

We have been dealing with extreme volatility in equity markets since the beginning of the year, locally as well as internationally. Fears of higher inflation, even before the war, are leading to higher interest rates across the globe. China’s Covid-19 outbreak has also worsened with rigorous restrictions implemented by its government. The uncertainty of how all these factors will play out has put a lot of pressure on equity markets over the last couple of months.

So, what do you do in times like these? Do you follow a “stop-loss” or “wait and see” strategy? If one watches the news flow, one might argue, at face value, that there is no light at the end of the tunnel and even further declines might be on the way in the coming months.

Who knows what will happen today, in a week’s time or in a year’s time? Nobody knows. But let’s say you’re selling and the market is falling further and so you were right in your “stop-loss” strategy, when will you return to the market? If your answer to this question is, “I will return to the markets when there is more certainty with no inflation fears or geopolitical tensions,” this strategy whereby you are trying to time the market will most probably lead to long term damage to your investment portfolio.

When there is no light at the end of the tunnel, you have to be in equity markets, because when the world comes out of the dark tunnel and you see more light, markets have started to rise a long time ago and you will be too late to return to the markets if you were sitting on the sidelines waiting for the “right time.”

Unfortunately, no one is going to ring the bell saying that the market now has reached its highs and you need to sell or it has reached its lows and you need to buy again.

So how or when do you decide to enter the market or know what to do with all this volatility and uncertainty the world is facing? The answer to all these questions is: do you have an investment plan? Warren Buffet said, “Success in investing doesn’t correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Therefore, the only way to get past the emotion of investing is to make sure you have a plan that aligns with your specific needs and to stay with it regardless of all the noise out there.

We know for example that an investment in shares is for the longer-term (typically seven years +), where one can expect growth well above inflation, notwithstanding the volatility and periods of negative growth over the shorter term.

Source: Schroders

“But why can you not with your knowledge and experience sell when markets are high, then wait a bit, and then buy back again when markets are low?” My answer to this question will be, “I cannot because I don’t know.”

Again, I am not in bad company. At one of Berkshire Hathaway’s AGM a few years ago, Buffet’s answer to a similar question was that, if his financial advisor took him out of the market at the top of the market in 2008 and at the low point in 2009 back in the markets, he would have fired the advisor because he would only be lucky to get it right.

It is therefore incredibly important to design the right plan and strategy and stick to it.

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Hennie Fourie

PSG Wealth Pretoria-East


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