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Emotional investing

Sticking to your guns in periods of mass volatility.

A little while ago I converted, via my discretionary foreign allowance, some rands into US dollars to ultimately invest in global equity unit trusts. Doing this regularly for my clients I knew, without having to think too much, which funds I would use and anticipated converting the currency at whatever the prevailing exchange rate was at the time all my paperwork was ready.

I always tell my clients that they should not get caught up in the exchange rate guessing-game and only in ten years’ time would it be appropriate to assess if the decision was reasonable. Foreign investing should typically have a long term horizon especially when considering the long duration of currency cycles. What actually happened was that I looked at the exchange rate every five minutes for about three days trying to time the conversion whilst considering Mr Zuma and Co, the EFF, US elections, Russian unrest, Turkish turmoil, growth in China, and where my children would be educated, to name but a few. I spoke to my wife about the aforementioned and she proceeded to ask me how I approach this with my clients. The very next morning I took my own, long–standing, advice and converted the currency.

In case you are wondering, I know I would be, I exchanged my funds at R15.31/USD and invested in the Investec Global Franchise Fund and the Nedgroup Global Equity Fund. Please do not take my investment choices as advice as they are particular to my needs, objectives and circumstances.

My personal investment story leads me in to two themes I would like to cover in this editorial:

1.     Tactical versus strategic allocations… and emotional investing

2.     Long term investment environments… and emotional investing

Tactical versus strategic allocations

A strategic allocation is the long term core allocation of a portfolio. This encompasses your split between rand and non-rand assets (local versus offshore) as well as your asset allocation: the allocation between cash, bonds, property, shares and alternative assets. These allocations will only vary slightly over time. In getting closer to retirement it may be that your portfolio requires you to start identifying between income and growth assets. 

The externalisation of my personal funds was a strategic decision; I needed to increase my non-rand exposure to get to my target rand versus non-rand exposure. When making strategic decisions you need to take emotion out of play and deploy your assets in accordance with your target allocations. Your investment portfolio is a long term (hopefully 15, 25 or even 50 years) relationship and over that amount of time your entry point should not make much difference. This does not mean you should invest blindly, ignorant of the current economic and political climate.  It does mean though that you need to be committed. For example, if you feel that currencies are out of kilter then you could convert in two or three tranches, but you must give yourself a timeline to do this in and stick to it. Trying to time markets often just leads to never doing anything and then going backwards in terms of the real value of your funds. 

A tactical allocation differs as here you could try and time markets when you believe an asset class is incorrectly priced. A tactical deployment in most instances would not account for much more than a 4-5% shift. An example here, again using currency as it remains topical, would be to have converted US dollars back to rand when the exchange rate was over R16 to a dollar and then back to dollars again at R14.50. If you do ever make changes like this, you may want to reverse the trade later on to bring your portfolio allocations back in line. As an aside you should also consider the tax consequences of these types of changes as they may outweigh any gains.

Getting proper and well thought out advice when formulating your strategic allocations is critical. Current markets conditions could quite easily lead even seasoned investors to have a sense of unease and steering towards a portfolio that is inappropriately biased (too cautious? too much offshore?). Rather than doing this you could phase your funds in, to rand-cost-average of a period over time, to get to your target allocations. Importantly, do not make any major changes to your portfolio due to sentiment, you are likely to get the timing wrong. Rather make changes when there is a fundamental shift in personal or investment circumstances.

A last point is that markets are, as are a lot of things in life, cyclical. The longer you invest for, the smoother these cycles are.

Long term investment environments  

Whilst I have spoken a lot around sticking to your guns there are drivers of change.  There could be, at times, a number of these drivers and I will touch on but a few.


Oil was around $100 dollars a barrel in late 2014 and since then we have seen prices drop to between $20 and $50. The current environment is one where we could see prices at or below current levels in the not too distant future (what will the impact of Tesla be?). There would be winners and losers if this happens and this could guide where and how we invest i.e. what was appropriate historically may not be in the future. One of the losers is Russia, which loses around $2 billion for every $1 fall in the oil price; oil and gas account for 70% of its exports. A winner here could be Europe where its struggling economy could use any help it can get; there are some studies that say for every 10% drop in the oil price there is a 0.1% increase in economic output. A long term structural change in the price of oil could change the profitability of certain companies, countries and currencies; this could necessitate a look at the inclusion or lack thereof of such counters in your portfolio

At the moment there is a lot, both locally and internationally, going on in the political and investment market environments. It is easy, as I did, to get caught up in the hype. The old adage of “sleep on it” is a good idea; take the time to mull over the persistency of the situation. If there is a shift that will be enduring or at least long term, then your portfolio may need to be adjusted accordingly. Most of you will invest in some type or types of managed solutions; thankfully in these instances most of the decision making around market shifts is left to the fund managers and their teams, and we in turn oversee them. 

To coincide with my personal long term strategic rand and non-rand allocation I chose to expose myself to funds that allocate largely to global blue chip equity, with a conservative bias, as I feel the long term investment environment for this broad sector is conducive to above inflation growth.

Be patient and try not rush in to any major portfolio adjustments when emotions are running high.  Good luck.


Stephen Katzenellenbogen

NFB Private Wealth Management

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